Why do over-deviated firms from target leverage undertake foreign acquisitions?

This paper examines how deviation from firms’ target leverage influences their decisions on undertaking foreign acquisitions. Using a sample of 5746 completed bids by UK acquirers from 1987 to 2012, we observe that over-deviated firms are more likely to acquire foreign targets. Consistent with co-insurance theory, we find that over-deviated firms engage in foreign acquisition deals to relieve their financial constraints and to mitigate their financial distress risk. We also note that foreign acquisitions enhance over-deviated firms’ value and performance, measured by Tobin’s q and return on assets (ROA) respectively. These findings support the view that over-deviated firms pursue the most value-enhancing acquisitions. Overall, this paper suggests that co-insurance effects, value creation and performance improvements are the main incentives for over-deviated firms’ involvement in foreign acquisitions.     

Retailing and the period leading up to the Great Recession: a model and a 25-year financial ratio analysis of US retailing

Today, more than ever, retailers need to analyze the key solvency (liquidity) and efficiency financial ratio measures that affect how well their firms perform and to engage in long-term activities that will lead to improved results. Clearly, the recent ‘Great Recession’ has had a significant negative impact on retailers worldwide. Yet, an important question remains largely answered: Was the retail industry a major contributor to the events leading up to the economic crisis or was it an affected bystander shaken by the recession? This paper addresses the question for US retailing, the largest retail economy in the world. Although there has been considerable research on some aspects of the performance of the industry and individual firms, no prior studies exist that comprehensively examine the financial ratio performance of the totality of US retailing over time. Here, the financial performance of US retailers in 54 different sectors is analyzed for the 1982–2007 period using a model and data derived from Dun & Bradstreet's annual Industry Norms & Key Business Ratios. Results show that for many financial measures – such as the current ratio, liabilities to net worth, return on sales (profit margin), return on assets, financial leverage, and return on net worth – US retailing's financial performance has been in a steady decline for decades. The model introduced here is largely validated.     

The Effect of Audit Committee Characteristics on Financial Restatements in Malaysia

This study investigates the influence of audit committee characteristics on the likelihood of financial restatements by firms in Malaysia. Annual reports of 350 firms that have restated their financial statements in the year 2008 and 2009 are analyzed. An additional 350 firms that did not restate their financial statements are considered, resulting in a total of 700 observations. Regression analysis identifies audit committee characteristics such as its independence, size, expertise and activity as statistically significant in explaining the likelihood of financial restatements. This article highlights the important role of the audit committee in mitigating financial restatements by firms in Malaysia.     

Does franchising pay? Evidence from the restaurant industry

Franchising has taken a prominent position in service industries for several decades, but little is known about how franchising affects financial performance. Thus, we addressed the question of whether chains that franchise to some extent outperform those that are wholly owned. Then, among chains that franchise, we also addressed the question of whether more franchising is better – that is, whether the proportion of a chain's units that are franchised is associated with superior financial performance. To answer these questions, our study first compares the risk-adjusted performance of franchising vs. non-franchising restaurant firms. Second, it investigates the relationship between franchising propensity and firm financial performance. We considered five different measures of firm financial performance: the Sharpe ratio, the Treynor ratio, the Jensen index, the Sortino ratio, and the upside potential ratio. On comparison of franchising and wholly owned firms, all five measures indicated that franchising firms outperformed their non-franchising counterparts. When we focussed on just the franchising firms, however, the results were less clear. Among firms that franchise, the franchising–performance relationship was positive and significant only with respect to the Jensen index. Thus, we provide very robust evidence that franchising pays – that is, that some franchising is good – but among firms that franchise, it is unclear whether more franchising is better.     

Interaction effects of restructuring decisions on operating profit following performance shocks

This paper examines the interaction effects of restructuring activities for a sample of Australian firms experiencing significant declines in operating performance. Our sample firms respond to performance shocks with both financial and corporate restructuring and they achieve significant improvements in operating profits in each of the first 3 years following the shocks. We find that financial and corporate restructuring have both contemporaneous and lagged impact on operating performance. Most importantly, we show that the interaction of restructuring events has a strong influence on the corporate recovery process. We conclude that financial and corporate restructuring play complementary as well as interactive role in reversing a declining trend in operating profits.     

Government policy towards entrepreneurial finance: Innovation investment funds

This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982–2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government–private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.     

Human resource outsourcing: Market and operating performance effects of administrative HR functions

Using event study methodology and two-stage regression analysis on a sample of firms announcing human resource outsourcing (HRO) contracts, this study tests the association between administrative HRO and firm-level capital market and long run operating performance, with archival financial data controlling for endogeneity and outsourcing decision optimality. The results demonstrate that the equity capital market responds positively to client firms announcing administrative HRO, particularly service firms and those outsourcing transactional HR tasks. Additional statistical analysis shows that suboptimal outsourcing is negatively associated with long run operating performance measured as return on assets and operating return on assets. This study contributes to outsourcing literature by more precisely quantifying outsourcing performance through archival financial data and employing capital market empirical tests. Further, it controls for outsourcing decision optimality in examining long run operating performance effects. This research focuses on HR, a critical function within the firm and value enhancing to the firm.     

Where does ESG pay? The role of national culture in moderating the relationship between ESG performance and financial performance

This study investigates the moderating role of a country’s culture as an external contingency factor in the relationship between a firm’s environmental, social, and governance (ESG) performance and financial performance. Using ESG performance data of 4978 firms from 48 countries for 17 years, we argue that the financial return from engaging in ESG varies depending on the countries’ cultural aspects because stakeholder evaluations and appreciations for a firm’s ESG performance differ across nations. We find that a country that espouses a culture of high individualism or masculinity tends to appreciate and reflect on this more explicitly, strengthening the relationship between a firm’s ESG performance and financial performance. Contrastingly, in a country with a culture of high power distance or uncertainty avoidance, firms’ ESG efforts are less likely to be associated with financial performance. Our findings have important implications for multinational enterprises facing various cultural environments when dealing with heterogeneous stakeholder demands across countries.     

The Moderating Effect of Environmental Munificence and Dynamism on the Relationship Between Discretionary Social Responsibility and Firm Performance

This study examines the relationships between a company's emphasis on discretionary social responsibility, environment, and firm performance. It tests the proposition that environmental munificence and dynamism moderate the relationship between discretionary social responsibility and financial performance. Social responsibility was measured with a three-item scale in a sample of 62 firms using a questionnaire. Environmental munificence and dynamism were measured using archival sources as was financial performance (return on assets and return on sales). The results of moderated regression analyses and subgroup analyses found a significant moderating effect of environment on the social responsibility-firm performance relationship. Discretionary social responsibility contributes to firm performance in environments that are dynamic and munificent.     

The role of the audit committee in enhancing the credibility of CSR disclosure: Evidence from STOXX Europe 600 members

This study examines the influence of audit committee attributes, namely financial expertise, independence, meeting frequency and size, on the adoption of CSR assurance. The study also offers insight into the effect of audit committee attributes on the scope and level of CSR assurance and the selection of CSR assurance providers. Contextually, this is achieved using a sample of European companies listed on the STOXX 600 index over the period 2012–2018. The findings show that attributes related to audit committee financial expertise, audit committee independence and audit committee meeting frequency and the existence of a CSR committee, are positively linked with the adoption of CSR assurance. Moreover, our empirical analysis further highlights the critical role of audit committee financial expert members in enhancing the scope and level of CSR assurance. Furthermore, audit committee with more frequent meetings lead to higher assurance scopes. Our findings offer significant and multidimensional insights for regulators, policymakers and professionals, regarding the revision and establishment of regulations concerning the audit committee structure.     

Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

I use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.     

Co-operative wineries: Temporal solution or efficient firms? The Spanish case during late Francoism, 1970–1981

Part of economic theory has regarded co-operative firms as useful tools for dealing with market failures during periods of economic contraction, but also as suffering severe efficiency problems during periods of growth. The main aim of this article is to test this hypothesis in the case of Spanish co-operative wineries during the years of late Francoism. In order to do this, the balance sheets of 75 co-operative firms from the 1970s have been subject to financial-ratio analyses. The main conclusion is that these firms were inefficient due to their excessive financial debt. The Spanish Francoist government promoted their creation and granted financial aid – for their value as social and economic control systems – framing them within a rigid corporate system typical of authoritarian states. This involved limited autonomy and conditions conducive to free-riding behaviour, which is at the core of their inefficient performance.     

Financial conservatism of private firms

The aim of this paper is to analyze the factors that motivate private firms to follow a conservative financial policy. Using a new definition of financial conservatism, we investigate a sample of 21,959 Italian private firms for the 1998–2006 period and look for the determinants of financial conservatism according to the main theories of capital structure and financing policy. Our findings show that financially conservative firms are smaller, with more intangible and less tangible assets, lower effective tax rates and follow a pecking order style financial policy. As has been found for their public counterparts, financially conservative private firms seem to pile up cash and their leverage potential before undertaking future investments.     

The portrayal of women in Canadian corporate annual reports

We assess the inclusion of women in Canadian corporate annual report (CAR) photographs and on boards of directors at TSX100 firms and evaluate whether either is related to financial performance. We find that women are underrepresented in CAR photographs and on boards. In CAR photographs women are frequently portrayed as outsiders or less powerful organizational members than men. Higher return on equity (ROE) was found at companies that more frequently depicted women in their CAR photographs. However, no association was observed between the inclusion of women on the board and the ROE of the firm. The applied and theoretical implications of these results are discussed. Copyright © 2010 ASAC. Published by John Wiley & Sons, Ltd.     

The Canadian Hedge Fund Industry: Performance and Market Timing

We analyze the risk and return characteristics of Canadian hedge funds based on a comprehensive database we compiled. We find that Canadian hedge funds have higher risk‐adjusted performance and different distributional characteristics relative to the global hedge fund indices. We investigate market timing by Canadian hedge funds and find that they do not time the Canadian or global stock and bond markets, but hedge funds in the Managed Futures strategy group time the commodity market. These results are robust to parameter instability and structural changes in the model. We also illustrate the impact of using local and global risk factors to analyze the performance of local investment firms.     

Usefulness of SFAS no. 52 in controlling and evaluating overseas operations: An empirical analysis

This study investigates whether managers of multinational enterprises prefer financial statements prepared under the current-rate or temporal method of translating foreign-currency-based financial statements into U.S.-dollar financial statements. The article also reports on the managers’ preferences for various indicators (for example, profit) of performance that are used in evaluating and controlling overseas operations. A questionnaire was sent to each of the “Fortune 500” firms. One hundred sixty-five (33 percent) responded. The research extended prior research by finding that in the late 1980s managers maintained their preference for U.S.-dollar-based statements just as they did in the 1970s and early 1980s. Managers still consider profit to be the strongest measure of success. However, the comparison of budgeted performance to actual performance has replaced return on investment as the second most important performance indicator.     

Ethics and Disclosure: A Study of the Financial Performance of Firms in the Seasoned Equity Offerings Market

In this article, we examine the association between ethics and disclosure and the impact of this association on the long-term, post-issue performance of seasoned equity offerings (SEOs). We argue that firms with extensive disclosure are less likely to face information problems, and more likely to lead to an active shareholder monitoring, and therefore, engage in fewer unethical activities, such as aggressive earnings manipulation, and have better long-term, post-issue performance. Consistent with these predictions, this study presents evidence that disclosure is negatively related to unethical earnings manipulation and positively associated with long-term, post-issue performance. In particular, we find that long-term, post-issue SEO underperformance is significantly less for firms with extensive disclosure and conservative earnings management than firms with less disclosure and aggressive earnings management. We interpret this evidence to mean that over the long run, the capital market values ethical financial reporting and corporate efforts to incorporate social responsibility into their decision-making processes, for example, by enhancing information transparency through voluntary disclosure.      

Environmental management,nonmarket strategy,and firm performance in emerging markets: The case of ISO 14001

Firms use environmental management standards such as ISO 14001 to reduce the impact of business activity on the natural environment. Though these standards are widely celebrated on moral and ethical grounds, their implication for financial performance and competitiveness is equivocal. Drawing on neo-institutional theory, we conceptualize ISO 14001 as a nonmarket strategy and examine its impact on firm performance within the contexts of three highly polluted emerging markets – China, India, and Pakistan. Employing a rigorous event-study approach, we find that ISO 14001 certification has a negative impact on firms’ operating profitability and market value in both short and long runs. This negative impact appears to be stronger in contexts with weak institutions and poor environmental protection regimes. Further multivariate analyses show that the negative impact of ISO 14001 on firm performance is weaker among socially responsible firms and stronger among politically connected firms. These findings contribute to the environmental management literature. They also have practical implications for managers.     

Resilience: Lessons from banks that have braved the economic crisis—And from those that have not

Resilience – a firm's ability to adapt, endure, quickly bounce back, and then thrive despite a catastrophic event – addresses diverse managerial constructs including performance (Carmeli & Markman, 2011). Our exploratory study expands this line of research by making two contributions: first, we develop and test a new revelatory measure for resilience – VOLARE – combining financial performance measures with volatility data. Then, applying this new measure to the financial industry, from 2002 to 2011, we identify highly resilient international financial services firms (IFSFs; e.g., banks) and compare them with less resilient IFSFs. Second, we assess three factors – bank size, home-market solidity, and product and market complexity – that the literature has traditionally shown to be highly predictive of banks’ performance. Consistent with our expectations, the results corroborate that VOLARE is complementary to, but distinct from, traditional financial measures of firm performance. We explain these deviations from traditional studies and suggest further research topics.     

Outside directors, board interlocks and firm performance: Empirical evidence from Colombian business groups

We investigate the relation of board structure through the appointments of outside directors and the role of busy directors on firm return on assets within an environment of no regulation for privately held firms and voluntary adoption of corporate best practices for security issuers with family controlling blockholders. This study relies on a sample of an average of 335 firms per year for the 1996-2006 period, where 244 are private firms and 285 are affiliated to one of the seven largest non-financial business groups in the country. Five of these groups were, in 2006, still family-controlled. We find a positive relation between both the ratio of outside directors, and the degree of board interlocks, with firm return-on-assets. Outside busy directors turned out to be key drivers of improved firm performance. Appointments of outsiders are endogenous to firm ownership structure. Blockholder activism as well as contestability becomes an internal mechanism that improves director monitoring and ex-post firm valuation.