Modeling the performance of US direct investment in Japan: Some empirical estimates

Foreign firms' direct investments in Japan increased from about $930 million in 1984 to $2.2 billion in 1987, and are still increasing at a rapid rate. Most of these investments come from the United States and Europe. In this paper a short-run model for the performance of a foreign parent firm's subsidiary in Japan is presented. The model is based on theories presented by Hymer, Caves, Buckley and Casson, among others, and consists of two equations: one for profitability and the other for growth. Duality is used to relate a parent firm's activities to its subsidiary firm's profitability. The model is estimated using data for US firms' subsidiaries in the Japanese chemical industry. We find that for jointly owned subsidiaries (joint ventures), imports from US parent firms and the R&D spending by both US and Japanese parent firms are major determinants of profitability and growth. US firms' fully owned subsidiaries, however, exhibit considerably different profit and growth behavior than their jointly owned counterparts. Because of the small sample sizes used, it is not possible to ascertain the sources of the observed differences.     

R&D investment as a signal in corporate takeovers

The purpose of this paper is to analyze the effects that takeover threats have on firms' preacquisition R&D intensity. Critics of takeovers usually argue that takeover threats may reduce target firms' R&D investments. However, I find that target firms may increase R&D investment in order to signal their compatibility with the acquiring firm. The identity of the acquired firm depends on the market size and target firms' efficiency and compatibility. Through R&D investments, target firms may affect this result, signaling potential outsiders the kind of competition they may face, and forcing them to accept lower takeover offers. Copyright © 2009 John Wiley & Sons, Ltd.     

The effect of R&D novelty and openness decision on firms' catch-up performance: Empirical evidence from China

This paper explores the strategic dimensions of R&D decisions toward novelty and openness in explaining the performance of latecomer firms in a developing economy. A structural equation model of R&D decision-making is formulated using survey data from 279 Chinese firms. The dimension of R&D novelty is defined as the degree of technological newness found in firms' R&D projects, while R&D openness describes the degree to which technologies are acquired from external sources. Our results indicate that firms' R&D decisions regarding novelty and openness are associated with demand opportunities, market competition, technological capability, and external networks. Greater R&D novelty contributes positively to innovative output but does not affect sales growth. Greater R&D openness contributes positively to sales growth but negatively to innovative output.     

AN INVESTIGATION OF INDUSTRY AND FIRM STRUCTURAL CHARACTERISTICS IN CORPORATE TURNAROUNDS*

This article uses the structure/conduct/performance framework as an underpinning to investigate the attributes of turnaround firms. Turnaround is defined as a substantial improvement of the firms's return on assets relative to the average return of its industry. Industry and firm structural characteristics including concentration, industry growth, R&D, advertising, market share, size, diversification, capital intensity and margins are identified. The results of a series of univariate and multivariate tests run on a sample of turnaround and non-turnaround firms indicate that size, R&D, and an interaction between operating margin and advertising can be helpful in explaining some turnaround situations.     

Corporate commitment to climate change action,carbon risk exposure,and a firm's debt financing policy

Motivated by the rising consensus that corporate engagement in climate change actions holds the key for society's transition into environmentally resilient economy, the study examines whether a firm's commitment to climate change action and its carbon risk exposure shape the firm's debt financing policy. Based on insights drawn from signaling, corporate reputation, and agency theories, we develop models that link corporate commitment to climate change actions and a firm's carbon risk exposure with its debt financing decisions. Using data drawn from S&P 500 companies, for years 2015 to 2019, we find a robust evidence that firms that engage in higher levels of commitment to climate change actions issue a higher proportion of debt with longer terms to maturity, even after controlling for their carbon risk exposure. However, we do not find a robust evidence corroborating an association between firms' carbon risk exposure and their debt financing policy. These findings are consistent with arguments that high-commitment firms enjoy positive reputation, better credit rating, and reduced agency and information asymmetry costs, allowing them to gain easier access to long-term debt markets.     

Competition and innovation: The tango of the market and technology in the competitive landscape

Technology innovation can be a double‐edged sword in helping a firm to address competitive pressures. We explore the relationships among market competition, technology competition, and firms' advancement to a higher generation of production technology. Though market competition drives technology advancement as firms attempt to escape competition and technology competition also drives technology advancement as firms try to stay in the technology race, concurrent high market and technology competition lead a firm to defer advancement. We find supportive evidence with data on global flat panel display makers. Our findings shed light on how competition interacts with a firm's technology advancement decision and, in general, a firm's technology strategy.     

Flow Signals: Evidence from Patent and Alliance Portfolios in the US Biopharmaceutical Industry

Integrating signalling theory and the portfolio diversity literature, we theorize that diversity in a firm's patent and alliance portfolios sends contrasting flow signals impacting its market value in a nuanced way. Diversity in an alliance portfolio mediates the patent portfolio diversity – market value relationship by suppressing the negative effect of patent portfolio diversity creating an overall positive effect. We test our mediation model on a longitudinal set of 225 US biopharmaceutical firms that were awarded 17,078 patents and participated in 37,744 alliances between 1990 and 2006. Our theory and findings contribute three novel insights. First, we demonstrate the value of a temporal lens in explaining why diversity in a firm's patent and alliance portfolios send flow signals that establish expectations among market observers and have performance implications. Second, establishing that patent and alliance portfolio diversity are temporally sequenced provides compelling evidence for the value of studying multiple types of portfolios, their temporal relationships and effects on firm outcomes. Third, since diversity in a firm's portfolios can send contrasting flow signals conditioned on the cognitive demands and proximity involved in interpreting the signals, firms that do not maintain a ‘signalling fit’ with market observers increase the probability of unintentional negative signalling effects.     

Private Equity Investments and Disclosure Policy

In the current study, we dynamically analyze unlisted firms' voluntary disclosure decisions around private equity (PE) participation. First, we disentangle the role of disclosure in attracting PE investments. In addition, we examine the extent to which a firm's disclosure policy is affected by the changing corporate setting and intensified corporate governance after having received PE. We find no evidence that firms would employ increased disclosure to signal their quality in the years preceding the PE financing. However, we document a significant switch to increased financial disclosure from the PE investment year onwards, consistent with the hypothesis that PE investor presence positively affects portfolio firms' disclosure decisions. Further, we show that the proportional PE ownership stake is positively related to increased disclosure, but only at very high ownership levels. We explain these results in that both internal and external information demands call for higher public disclosure in PE firms. We conclude that the changing information environment resulting from a PE investment stimulates increased public financial disclosure. Our results contribute to illustrate how an indisputable change in governance resulting from a PE investment affects inter-temporal corporate disclosure decisions in unlisted firms.     

Absorptive capacity—one size fits all? A firm‐level analysis of absorptive capacity for different kinds of knowledge

This paper empirically analyzes the effect of R&D activities, human resource and knowledge management, and the organization of knowledge sharing within a firm on the absorptive capacity of innovative firms for three different types of knowledge, namely absorptive capacity to use knowledge from a firm's own industry, knowledge from other industries and knowledge from research institutions. Using data from the German innovation survey, we investigate how firms are able to exploit knowledge from external partners for successful innovation activities. The estimation results show that the determinants of absorptive capacity differ with respect to the type of knowledge absorbed for innovation activities. In particular, we find that the R&D intensity does not significantly influence absorptive capacity for intra‐ and inter‐industry knowledge. Additionally, our results suggest that absorptive capacity is path dependent and firms can influence their ability to exploit external knowledge by encouraging individuals' involvement in a firm's innovation projects. Copyright © 2009 John Wiley & Sons, Ltd.     

Explaining Firms’ Export Behaviour: R&D,Spillovers and the Destination Market*

We examine the importance of a firm's own R&D activity and intra‐sectoral spillovers on the decision to export and the export intensity using firm level panel data for Spain for the period 1990–98. Own R&D activity is found to be an important determinant of export activity. There is little evidence to suggest that Spanish firms benefit from spillovers of the exporting activity of others. However, there is evidence that R&D spillovers exert positive effects on firms’ export ratios. We find a larger marginal impact of R&D spillovers on export intensity of firms exporting to other OECD countries than those exporting to non‐OECD nations.     

Integrated thinking and sustainability reporting assurance: International evidence

Recently, there has been increasing demand by stakeholders for firms to demonstrate how they create value within the context of their operating environment. Consequently, a new reporting approach, integrated reporting (IR), was conceptualised with its development linked to the firm's integrated thinking (IT). Yet very little is known about the effects of IT on firms' reporting decisions. Hence, we investigate whether IT influences firms' decision to publish an assured sustainability report. Using an international dataset, we find that IT is positively associated with sustainability reporting assurance. We also find that this association is moderated by the type of legal system such that for firms in code law countries, the IT effects are reduced. Nevertheless, the effects of IT remain strong, indicating that IT is important for reporting decisions regardless of the firm's contextual setting. These findings have implications for policymakers and organisations interested in promoting high-quality sustainability reporting.     

Capitalizing Research & Development: Signaling or Earnings Management?

This paper analyzes the capitalization of Research & Development (R&D) expenditures under International Financial Reporting Standards (IFRS). Discretionary R&D capitalization can be exercised by managers to signal private information on future economic benefits to the market. It can, however, also serve as opportunistic earnings management. We analyze a unique, hand-collected sample of highly R&D intensive German IFRS firms during 1998–2012. We find that market values are not associated with capitalized R&D for the overall sample, indicating that earnings management may be a concern. We identify firm-years for which R&D capitalization is possibly used for pushing their earnings above a specific threshold (e.g. analysts' forecasted earnings, prior year's earnings). Our results show that both the decision to capitalize and how much to capitalize are strongly associated with benchmark beating. Consistently, we find that market values are negatively associated with capitalized R&D for firms who are likely to use capitalization for benchmark beating (about one third of the overall sample). On the other hand, the market values R&D capitalization positively for well-performing firms, for which capitalizing does not matter to beat an earnings benchmark (about half of the overall sample). This finding is robust to controls for endogeneity, various deflators, and different measures for earnings management.     

Myth or reality? Assessing the moderating role of CEO compensation on the momentum of innovation in R&D

This study researches the influences of CEO compensation on firm behavior to examine the interactive relationship between the behavioral momentum of innovation in R&D and CEO compensation. The models presented in this study are based on evolutionary, institutional, and agency theories to test hypotheses using data from 107 companies in the high-technology sectors in the United States. The results indicate that the pre-succession innovative behavior of these high-technology firms on R&D can positively affect these firms' post-succession innovative behavior towards R&D. That is, positive momentum in R&D innovation prevails in a firm across a change of the CEO. However, for the role of CEO compensation, short- and long-term compensation does not positively moderate this behavioral momentum in R&D. Hence, the moderating impact of short- and long-term CEO compensation to enhance the momentum of innovation in R&D can be romanticized. These findings provide boards of directors with evidence as to how a CEO succession matters to a firm's behavioral momentum in R&D, and whether CEO compensation can be strategized to change a firm's innovation and momentous behavior.     

Capitalization of R&D and the Informativeness of Stock Prices

Abstract

This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the R&D context. We investigate the effect of firms' decision to capitalize R&D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between current-year returns and future earnings (FERC). We use a sample of UK firms, which includes both R&D capitalizers and expensers. An important feature of our tests is our use of a two-equation system to control for the endogeneity of the accounting choice (i.e. self-selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.     

Technology ladders and R&D in dynamic Cournot markets

Motivated by dramatic and unpredictable technological advances in energy production (for instance drilling and extraction of shale oil), we extend Cournot models of competition to incorporate research and development (R&D) that can lead to (stochastic) drops in production costs. Our model combines features of patent racing with dynamic market structure, capturing the interplay between the immediate competition in terms of production rates and the long-term competition in R&D. The resulting Markov Nash equilibrium is found from a sequence of one-step static games arising between R&D successes, and several numerical examples and extensive analysis of the emerging comparative statics are presented. Analyzing the relationship between current market dominance and the level of R&D investments, we find that market leaders tend to invest more, which in some sense makes oligopoly dynamically unstable. We show that anticipated market transitions have long-term impact; for example the potential of future monopoly can spur R&D investment now, even if the firm is presently uncompetitive and not actively producing. We also show that, surprisingly, random innovations have an ambiguous effect on R&D. This feature, which is driven by the Cournot framework, contrasts with the common situation whereby uncertainty lowers innovation and delays R&D investments. Finally, we demonstrate that increased competition may actually increase efforts to innovate through higher desire to achieve dominance. This would match the anecdotal evidence that the threat of market entrants forces incumbents to maintain high R&D.     

Does going abroad lead to going green? Firm outward foreign direct investment and domestic environmental performance

This study examines whether and how outward foreign direct investment (OFDI) affects firms' domestic environmental performance. We use both the reverse knowledge transfer and resource crowding perspectives to predict the association. Using a sample of Chinese firms, we find that firms' environmental performance improves after the initiation of OFDI, which is consistent with the reverse knowledge transfer perspective. Furthermore, we find that when the host countries of OFDI are developed countries, have stricter environmental regulations, and are characterized by higher values for the long-term orientation and masculinity dimensions of national culture, firms enjoy a further improvement in environmental performance. Our channel tests show that firms' domestic green patent applications and their investment in research and development increase after the initiation of OFDI.     

External stakeholder engagement: Complementary and substitutive effects on firms' eco-innovation

In this paper, we investigate whether firms' engagements in collaboration agreements with different types of external stakeholders produce complementary effects on the likelihood of eco-innovation. Although collaboration network and open eco-innovation theories affirm that the combination of external partners such as scientific partners, suppliers and customers produces complementary effects on the firm's likelihood of eco-innovation, several empirical studies found the existence of substitutive effects between them. To bridge this gap in the literature, we shape the nature of the interaction between different external partners, analysing an unbalanced panel sample of 10,918 innovative Spanish firms, covering the period 2008–2016. Consequently, we can show how firms benefit the most from collaboration with external partners. Our results show that firms that simultaneously collaborate with scientific partners, suppliers and customers generate partial complementary effects, which increase the firm's likelihood to eco-innovate the most, and that the combination of customer-collaboration with scientific partners, or supplier-collaboration, produces partial substitutive effects. Taking this in account, our results also confirm that engaging with scientific partners, suppliers or customers, independent of one another, increases firms' likelihood of eco-innovation more than noncollaboration. These results have important implications for managers, researchers and policy designers. For managers, this study provides a correct understanding of the benefits that they can expect to obtain from multi-partner external collaboration. For researchers, it introduces the marginal analysis to estimate interaction on nonlinear models. Finally, for policy designers, it shows the need for sponsored R&D collaboration to encourage coordinated ecosystems in which sustainability goals are pursued together.     

Effects of Firm R&D Investment and Environment on Acquisition Likelihood*

abstract R&D investments contribute to the development of firm technology resources, and the possession of such resources often increases a firm's attractiveness as a potential acquisition target. However, the value ascribed to a firm's technology resources by would‐be acquirers may be moderated by its industry's environmental characteristics. Using data from 2886 firms, we find that investments in R&D predict acquisition likelihood and that R&D investments are most strongly associated with acquisition of firms under conditions of high environmental munificence and dynamism. Theoretical and managerial implications are discussed.     

Labor market reputation and the value of the firm

This study examines the stock market reaction to announcements that should contribute to the positive reputation of firms' human resource management practices. Announcements consist of the annual release of the list of 'best' employers by Working Mother magazine. We hypothesize that these announcements positively contribute to the firms' labor market reputation, thereby improving a firm's ability to attract, retain and motivate good employees. We find a small but statistically significant increase in firms' stock prices following the release of the list. The effect is larger, the first time a firm appears on the list relative to subsequent appearances.     

Global Market Segmentation and Patterns in Stock Market Reaction to US Earnings Announcements: Further Evidence

The purpose of this study is to investigate why the information content of US earnings announcements of non‐US firms cross‐listing in the US varies with the degree of capital market segmentation in the cross‐listing firms' countries of domicile. My evidence shows that indirect barriers to investing (i.e., accounting rules and liquidity differences) rather than direct investment barriers (i.e., investment restrictions) mainly account for this difference. After controlling for the level of accounting disclosure in a firm's country of domicile, I do not observe a systematic difference in the size of market's reaction to earnings announcements depending on the degree of market segmentation in the firm's country of domicile. This study contributes to the literature by providing evidence that accounting disclosure plays an important role in the integration of global capital markets.