Which came first,CEO compensation or firm performance? The causality dilemma in European companies

This study uses both a functionalist paradigm of social theory and agency theory assumptions to examine whether CEO remuneration is performance sensitive and, vice versa, whether companies that pay their CEOs more perform better. Our analysis is based on the sample of 330 large European firms for the period from 2009 to 2013. The findings of panel data analysis confirm that CEO compensation is positively associated with corporate performance, and vice versa. The simultaneous estimation, in which we treat both compensation and firm performance as endogenous using a two-stage least squares method, shows that companies tie bonuses to accounting-based measures and this incentive pay enhances corporate internal performance. However, compensation linked to market-based measures does not improve firm performance.     

A stochastic frontier approach to modelling financial constraints in firms: An application to India

We propose the use of stochastic frontier approach to modelling financial constraints of firms. The main advantage of the stochastic frontier approach over the stylised approaches that use pooled OLS or fixed effects panel regression models is that we can not only decide whether or not the average firm is financially constrained, but also estimate a measure of the degree of the constraint for each firm and for each time period, and also the marginal impact of firm characteristics on this measure. We then apply the stochastic frontier approach to a panel of Indian manufacturing firms, for the 1997–2006 period. In our application, we highlight and discuss the aforementioned advantages, while also demonstrating that the stochastic frontier approach generates regression estimates that are consistent with the stylised intuition found in the literature on financial constraint and the wider literature on the Indian credit/capital market.     

Working capital as a firm performance savior? Evidence from Scandinavian countries

This study examined the relationship between working capital management (WCM) and firm performance in Scandinavian markets from 2007 to 2020. The initial data set comprised 8821 observations; only 5331 yearly observations remained after data filtration. The data are extracted from a reliable Bloomberg database. This empirical study adopts a multiple regression analysis for unbalanced panel data on Scandinavian markets, reporting an inverse relationship between WCM and firm performance measured through return on assets, gross operating income, and market-to-book value ratio. The control variables also showed a significant relationship order. To assess the robustness of our baseline regression results, we considered various indicators, (i) including alternative measures of firm performance, (ii) excluding the 2008 global financial crisis period, and (ii) running all countries in one equation as a group analysis. This study adds to the existing literature and outlines how efficient WCM can help managers to improve firm performance.     

On the determinants of SME capital structure in Central and Eastern Europe: A dynamic panel analysis

The purpose of this paper is to test how firm characteristics affect SMEs’ capital structure using a unique dataset of micro, small, and medium-sized firms (SMEs) in Central and Eastern Europe (CEE). We carry out a panel data analysis of 3175 SMEs from seven CEE countries during the period 2001–2005, modeling the leverage ratio as a function of firm specific characteristics hypothesized by capital structure theory. By using the cash flow as an explanatory variable, we test some of the predictions of the pecking order theory. According to this theory, firms with more available internal funds should use less external funding. We do find strong evidence in favor of the pecking order theory, given that there is a negative and significant correlation between profitability and leverage. When we control for other firm specific characteristics such as future growth opportunities, liquidity, sales growth, size and assets structure, the cash flow is found to be a strong determinant of firm leverage. We also argue that the determinants of firm leverage may be considerably different depending on firms’ size and age. The empirical results show that cash flow coefficient remains negative and statistically significant only for medium-sized firms, thus suggesting that larger firms with sufficient internal funds use less external funding than comparable smaller firms. We obtain similar results when we estimate the model by firm age; older firms demonstrate similar behavior as larger firms.     

Diversification and risk-adjusted performance: A quantile regression approach

The effect of diversification on firm performance has been debated. We reexamine the effect using a sample of 44,248 observations of non-financial US firms for the 1997–2009 period employing the quantile regression approach. Our empirical results show that the effect of diversification on firm performance is not homogeneous across various quantile levels: the diversification discount (premium) shows up in firms with high (low) RoE quantiles. Further, we find that diversification affects firm risk as well. Therefore, we consider a risk-adjusted performance measure and find that both diversification discount and premium disappear, which is consistent with the risk-return trade-off principle.     

The ‘competition–stability/fragility’ nexus: A comparative analysis of Islamic and conventional banks

The ‘competition–stability/fragility’ nexus is one of the more debated issues in the banking literature. However, while there is ample evidence concerning the relationship between competition and stability/fragility in different countries and regions, no prior study investigates this in the context of Islamic and conventional banks. We do this using data on both types of banks drawn from 16 developing economies over the period 2000–12. We measure the lack of competition using the Lerner index, and stability using both accounting-based measures, comprising the Z-score and the nonperforming loan ratio, and market-based measures, including Merton's distance to default. We employ panel vector autoregression and two-stage quantile regression to estimate the relationship. Our results lend support to the competition–fragility hypothesis in both Islamic and conventional banks. We also find the magnitude of the market power effect on stability is greater for conventional banks than Islamic banks. Lastly, banks in the median quantile of stability have a greater ability to reduce credit risk through gaining market power than banks in the lower and upper quantiles.     

An Investigation Into the Diversification–Performance Relationship in the U.S. Property–Liability Insurance Industry

This article investigates the relationship between product diversification and firm performance in the U.S. property–liability insurance industry using data over the 1994 through 2002 time period. Using various measures of product diversification and firm performance, we find that the extent of product diversification shares a complex and nonlinear relationship with firm performance. Our findings suggest that performance benefits associated with product diversification are contingent upon an insurer's degree of geographic diversification. Robustness tests using subsamples and market returns for public firms show consistent results.     

Economic value,competition and financial distress in the European banking system

In this paper we examine the impact of a large number of factors at the bank level (liquidity and credit risks, asset size, income diversification and market power), at the industry level (banking concentration) and macro-level (real GDP growth) on bank financial distress using an unbalanced panel of 308 European commercial banks between 1996 and 2009. The observations falling below a given threshold of the empirical distribution of the Shareholder Value Ratio proxy bank financial distress. We employ a panel probit regression and, given the presence of overlapping data giving rise to residual autocorrelation, we use the Bertschek and Lechner (1998) robust estimator of the covariance matrix of parameters. We show that credit risk, liquidity risk and bank market power are the most influential determinants of distressed Shareholder Value Ratio. Finally we evaluate the model out-sample forecasting performance over the 2008–2009 crisis period.     

Microstructures,financial reforms and informational efficiency in an emerging market

This paper investigates the effects of microstructures and financial reforms on time-varying informational efficiency in an emerging equity market setting. Our data comprises of firm level data from the Trinidad and Tobago Stock Exchange, over the period 1990–2013. Using a dynamic panel regression framework while controlling for firm size, we find that microstructures, specifically liquidity, volatility, automation and the number of shareholders have an important role in influencing the time-varying efficiency of this emerging market. The financial reforms, namely liberalisation and regulation are not found to have a notable influence. We also consider heterogeneity at the firm level, finding that the microstructures of the banking firms listed in this market have a greater impact on market efficiency, in relation to the other listed firms.     

The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand

This paper studies the dynamics of price discovery for markets with bilateral cross-listings. Using a sample of four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2007, we assess Hasbrouck (1995) information shares and Grammig et al. (2005) conditional information shares over time. We observe that in both cases the home market is dominant in terms of price discovery. However, when studying price discovery over time, we find that the importance of the Australian market (the larger of the two markets) is increasing for both Australian and New Zealand domiciled firms. Finally, using panel regression analysis, we find that the growth in the importance of the Australian market is positively related to the growth in the size of the firm and negatively related to the size of the percentage spread in the Australian market, implying that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative.     

Firm survival and financial development: Evidence from a panel of emerging Asian economies

Using a panel of five Asian economies - Indonesia, Korea, Malaysia, Singapore and Thailand - over the period 1995-2007 we analyze the links between firm survival and financial development. We find that traditionally used measures of financial development play an important role in influencing firm survival. When stock markets become larger or more liquid firms’ survival chances improve. On the contrary, we show that higher levels of financial intermediation can increase firm failures. We also find that the beneficial effects of stock market development are more pronounced during the later years of our sample, while the adverse effects of bank intermediation have declined over time. Finally, large firms are more likely to benefit from developments in financial markets compared to small firms.     

Endogeneity and the dynamics of internal corporate governance

We use a well-developed dynamic panel generalized method of moments (GMM) estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991 to 2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.     

Corporate social responsibility performance,financial distress and firm life cycle: evidence from Australia

This study examines the association between corporate social responsibility (CSR) performance and financial distress and additionally the moderating impact of firm life cycle stages on that association. Based on a sample of 651 publicly listed Australian firm‐years’ data covering the 2007–2013 period, our regression results show that positive CSR activity significantly reduces financial distress of the firm. In addition, the negative association between positive CSR performance and financial distress is more pronounced for firms in mature life cycle stages. Our results are robust to alternative proxy measures of financial distress, CSR performance and life cycle stages.     

Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance

This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivity parameters for physical assets and managerial input and corresponding variation in optimal compensation contract and firm size combine to deliver the well-known hump-shaped relation between Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to the endogeneity problem, we apply those remedies to panel data generated from the model. The unfortunate conclusion is that, at least in the ownership-performance context, proxy variables, fixed effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.     

Corporate efficiency,credit status and investment

This paper considers the relationship between financial frictions and investment. In an effort to clarify the role of cash flow in examining the impact of capital market imperfections, endogenous switching regression models are estimated for a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981–2009. Not only is the financial regime which the firm faces endogenous, we also allow the regime to change over time via modeling efficiency using stochastic frontier analysis. The results reveal that a firm's constrained credit status changes with the improvement of its efficiency. Furthermore, the analysis reveals that financially constrained firm's investment is comparatively more sensitive to its cash flow. Moreover, this sensitivity is statistically significant and is negatively related with corporate efficiency.     

Managerial talent and managerial practices: Are they complements?

We examine the role of managerial talent and its interaction with managerial practices in determining firm performance. We build a matched firm-director panel dataset for the universe of limited liability companies in Italy, tracking directors across different firms over time. We define managerial talent as the individual contribution to the variation of the firms’ total factor productivity, estimated using a two-way fixed effects model. Combining the data with survey information on a representative sample of firms, we then document that our measure of talent correlates with ex-ante and ex-post indicators of ability, i.e. managers’ educational attainment and their forecast precision with respect to the firm’s future performance. Most important, we leverage information on the adoption of managerial practices within the firm to examine potential synergies between managerial talent and structured managerial practices, thus bridging two separate strands of the literature. While talent and structured practices are positively associated with firm productivity on their own, there is evidence of complementarities between the two. These findings hold both in a cross-sectional setting and in a panel analysis that accounts for time-invariant firm heterogeneity. Overall, our results indicate that the effectiveness of managerial practices varies with managers’ ability to implement them.     

The value impact of strategic intent on firms engaged in information systems outsourcing

While information systems outsourcing has been on the rise in recent years, empirical evidence about whether IS outsourcing is value creating for shareholders is limited. Little is known about what factors influence the relation between information systems outsourcing and firm value. This study examines the effect of information systems outsourcing announcements on firm value by analyzing whether equity market reactions are associated with the management's strategic intent for outsourcing and firm characteristics of the outsourcing firm. After examining 103 IS outsourcing announcements made during the period from 1996 to 2003, results suggest that value is created for firms outsourcing with short-term operational intent rather than for longer term strategic reasons. In addition, the increase in firm value from an IS outsourcing announcement is positively associated with the firm's operating asset efficiency and the firm being in a service industry.     

CEO Pay-For-Performance Heterogeneity Using Quantile Regression

We provide some examples of how quantile regression can be used to investigate heterogeneity in pay‐firm size and pay‐performance relationships for U.S. CEOs. For example, do conditionally (predicted) high‐wage managers have a stronger relationship between pay and performance than conditionally low‐wage managers? Our results using data over a decade show, for some standard specifications, there is considerable heterogeneity in the returns‐to‐firm performance across the conditional distribution of wages. Quantile regression adds substantially to our understanding of the pay‐performance relationship. This heterogeneity is masked when using more standard empirical techniques.     

Slack heterogeneity and firm performance: Investigating the relationship in Indian context

The present study aims to investigate the impact of diverse forms of slack on firm performance in the Indian context: By investigating a panel data set of 426 non-financial Indian firms over a period of 5 years, the empirical results of both fixed effects model and generalized method of moments (GMM) reveal that different forms of slack have a negative impact on firm performance in Indian firms. The results of the study provide support for the agency view of the negative impact of slack resources on firm performance Moreover, the results remain robustly negative across alternative specifications and sub-samples.     

Disclosure of outsourcing in the annual report: Causes and market returns effects

Firms increasingly are utilizing outsourcing to enhance or maintain their competitiveness. Prior research shows that capital markets value a firm's decision to outsource. This study uses a sample of firms announcing outsourcing arrangements in a press release to examine which factors are associated with the subsequent decision to voluntarily provide or withhold information about outsourcing in their annual report. The paper also examines whether annual report disclosure is a reliable signal of future market performance. We find that underperforming firms, larger firms, and firms experiencing negative outsourcing announcement market returns and negative long-term market returns are more likely to disclose outsourcing in their annual reports. There is also evidence that firms' disclosure of outsourcing in the annual report signals an improvement in market performance that is credible to the capital markets. We contend that the disclosure and subsequent firm performance issues we investigate apply to any type of outsourcing arrangement, and therefore our results are relevant to future information systems research on this subject. Our findings also suggest that regulatory standards could reduce private information search costs for investors by providing a common disclosure methodology for outsourcing activities.