Capital structure,product market competition and firm performance: Evidence from South Africa

This paper investigates the relationship between capital structure and firm performance, paying particular attention to the degree of industry competition. The paper applies a novel measure of competition, the Boone indicator, to the leverage-performance relationship. Using panel data consisting of 257 South African firms over the period 1998–2009, this paper examines the effect of capital structure on firm performance and investigates the extent to which the relationship depends on the level of product market competition. The results suggest that financial leverage has a positive and significant effect on firm performance. It is also found that product market competition enhances the performance effect of leverage. The results are robust to alternative measures of competition and leverage.     

An empirical investigation of environmental performance and the market value of the firm

This paper analyzes the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. We examine the market reaction to two categories of environmental performance. The first category includes 417 announcements of Corporate Environmental Initiatives (CEIs) that provide information about self-reported corporate efforts to avoid, mitigate, or offset the environmental impacts of the firm's products, services, or processes. The second category includes 363 announcements of Environmental Awards and Certifications (EACs) that provide information about recognition granted by third-parties specifically for environmental performance. Although the market does not react significantly to the aggregated CEI and EAC announcements, we find statistically significant market reactions for certain CEI and EAC subcategories. Specifically, announcements of philanthropic gifts for environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction. The difference between the market reactions to the CEI and EAC categories is statistically insignificant. Overall, the market is selective in reacting to announcements of environmental performance with certain types of announcements even valued negatively.     

Dynamic contracting under imperfect public information and asymmetric beliefs

We develop a dynamic principal–agent model to show how imperfect public information and asymmetric beliefs about payoff-relevant parameters, agency conflicts, and the agent's implicit incentives to influence the principal's posterior beliefs through his unobservable actions interact to affect optimal dynamic contracts. We make a methodological contribution to the literature by solving the continuous-time contracting problem using a discrete-time approximation approach. We obtain a simple characterization of optimal renegotiation-proof contracts in terms of the solution to a nonlinear ordinary differential equation (ODE). We then exploit the properties of the ODE to derive a number of novel implications for the dynamics of long-term contracts that alter the intuition gleaned from the previous literature. Optimism has a first-order impact on incentives, investment and output that could reconcile the “private equity” puzzle. Consistent with empirical evidence, the interaction between asymmetric beliefs, risk-sharing and adverse selection costs could cause the time-paths of the agent's incentive intensities to be increasing or decreasing. Our results also suggest that the incorporation of imperfect public information and asymmetric beliefs could potentially reconcile empirical evidence of an ambiguous relation between risk and incentives, and a non-monotonic relation between firm value and incentives. Permanent and transitory components of risk have differing effects on incentives, which suggest that empirical investigations of the link between risk and incentives should appropriately account for different components of risk.     

The competitive firm under price uncertainty: the role of information and hedging

We study the impact of transparency in a commodity market on the decision problem of a competitive firm under price uncertainty and hedging opportunities. Market transparency is modeled by means of the informational content of publicly observable signals which are correlated with the random price. We find that the impact of more transparency on labor employment and production depends on the firm’s technology. In particular, more transparency may result in lower average output even though on average more labor has been used in the production process. We also analyze the link between market transparency and the welfare of the firm. We are grateful to two anonymous referees who made extremely useful comments and suggestions.     

CEO duality,information costs,and firm performance

This study investigates the effects of CEO duality on firm performance and the moderating effect of information costs on the relationship between CEO duality and firm performance in Taiwan. By analyzing listed companies during the period from 2000 to 2012, our empirical results show that a lack of evidence for the links between leadership style and firm performance; however, this relationship is associated with information costs estimated by analysts’ earnings forecasts. Specifically, we find that CEO duality has statistically significant negative impacts on firm performance when information costs are high. This result provides evidence for the coexistence of the agency hypothesis and stewardship hypothesis as determined by the extent of the information costs, and it tends to underscore the importance of corporate governance on the relationship between CEO duality and firm performance.     

Enhancing firm performance through internal market orientation and employee organizational commitment

Considering the importance of retaining key staff and managing the negative impact of high labor turnover on firm performance, this study investigates the notion of internal market orientation (IMO) as an employee management tool for helping companies retain employees and leverage performance via their organizational commitment. Drawing on data from three different managerial respondents in 275 companies based in China, the findings demonstrate the precedential effect of IMO on corporate performance through employees’ organizational commitment and retention. Interdepartmental relationship and interdepartmental communication, together with ownership types are identified as potential moderating variables, which may vary IMO’s effectiveness in the framework. This study provides scholars and practitioners with empirical evidence of IMO’s contribution to different industries and markets. Building on a western perspective, this study extends the literature in an emerging market context and specifically has implications for managing Chinese employees.     

Corporate sustainability and financial performance: Collective reputation as moderator of the relationship between environmental performance and firm market value

Markets value superior corporate sustainability performance in part because investors use a firm's environmental performance as a signal of desirable but difficult-to-observe attributes, such as the firm's integrity capacity. Yet a signaling conflict can arise when a firm belongs to an organizational form that has a collective reputation for being unethical. In such circumstances, the firm's environmental performance may no longer credibly signal its underlying integrity capacity, leading markets to adjust downward the value they would otherwise place on the firm's environmental performance. Using longitudinal data on South Korean firms, we find that improvements in firm environmental performance lead to smaller increases in market values for firms belonging to a poorly reputed organizational form. However, firms can partially recover lost value by adopting firm features that reduce the signaling conflict, thereby restoring the notion of corporate sustainability performance driving firm market values.     

Institutional investors and firm performance: Evidence from IPOs

We investigate the post-IPO evolution of institutional investor holdings and the manner in which operating performance is related to these holdings. During the first year after the IPO, average institutional holdings increase from 24% to 36% of shares outstanding and stabilize at about 42% by the end of the second year. We document that post-IPO operating performance is positively related to institutional holdings, but this relation subsides in the third year after the IPO. Overall, our findings indicate that institutional ownership is a valid indicator of the firm’s operating performance in its initial years as a public company.     

Valuation effects of capital inflows: Evidence from emerging market economies

This paper studies valuation changes of capital inflows in 19 emerging market economies (EMEs). In most of the EMEs, we find that there are significant valuation changes and a positive rate of return on external liabilities by foreigners. Furthermore, the nonlinear effects of exchange rate movements on valuation changes are investigated using panel smooth transition regression models. Empirical results show that the transition is centered at approximately −22.3% of exchange rate change, which implies that when the exchange rate appreciates more than this level, foreign investment value gains increase considerably.     

Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance

This paper examines auditor liability rules under imperfect information, costly litigation and risk-averse auditors. A negligence rule fails in such a setting, because in equilibrium auditors will deviate with positive probability from any given standard. It is shown that strict liability outperforms negligence with respect to risk allocation and the probability that a desired level of care is met by the auditor if competitive liability insurance markets exist. Furthermore, our model explains the existence of insurance contracts containing obligations a type of contract often observed in liability insurance markets.     

Pay dispersion and the financial performance of the firm: evidence from Korea

Pay dispersion has been found in prior research to negatively affect both individual and workplace performance. In this study, we examine whether the relationship between horizontal pay dispersion and firm financial performance is curvilinear in nature, with moderate levels of dispersion leading to more positive outcomes than either low or high levels. Using data from a government-sponsored survey of Korean firms, we find support for the hypothesized curvilinear relationship between pay dispersion and firm financial performance. We further find that this curvilinear relationship is moderated by firm and human resource system characteristics. Where the firm had more incumbents in the rank being examined, where pay level was higher, and where there was greater organizational investment in performance evaluation and feedback, the positive slope (within the curvilinear relationship) inverted at a higher level of dispersion.     

Unionisation structures, productivity and firm performance: New insights from a heterogeneous firm model

This paper introduces collective bargaining at the firm and at the sector level into the heterogeneous firm model of Melitz and Ottaviano (Melitz, M. J., Ottaviano, G. I. P., 2008. Market size, trade, and productivity. Review of Economic Studies 75 (1), 295-316). It then analyses how the two bargaining regimes change aggregate industry productivity and firm performance relative to a competitive labour market. While sector-level bargaining forces the least productive firms to exit and thus increases average productivity relative to the competitive benchmark, firm-level bargaining allows less productive firms to stay in the market and thus reduces average productivity. Sector-level bargaining also results in higher average output and profit levels than either firm-level bargaining or a competitive labour market. The paper also shows that the choice between sector- and firm-level bargaining can involve a trade-off between product variety and product prices: Not only the average price level but also product variety tends to be lower under sector-level bargaining than under firm-level bargaining.     

Valuation of R&D investment under technological,market, and rival preemption uncertainty

We develop a real options model for evaluating and optimizing a research and development (R&D) project. The model captures key features of R&D, including research duration, growth opportunity, debt financing, and uncertainty of technology, demand market, and rival preemption. In the model, we unveil the interactions of key R&D features. The effect of duration on investment depends on whether there is rival preemption. Higher uncertainty of research duration speeds up investment in the presence of rival preemption. Higher uncertainty of technological success, combined with a growth opportunity, accelerates investment. Debt financing greatly decreases time lag between the first stage project and growth project.     

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.     

Ownership structure and firm performance: Some empirical evidence from Spain

The ‘managerial’ and the ‘contractual’ theories of the firm imply different causes and consequences for the relationship between ownership and performance of firms. This paper provides a test of the two conflicting theories, using ownership and performance data from a sample of Spanish family- and non-family-controlled firms. We find evidence in support of the contractual theory of the firm, according to which firms choose their ownership structure maximizing economic value, net of contractual costs.     

An analysis of firm and market volatility

In this paper, using time series data for the period 2 January 1998 to 31 December 2008 for 560 firms listed on the NYSE, we examine whether firm volatility is related to market volatility. The main contribution of this paper is that we develop an analytical framework motivating the firm-market volatility relationship. We present three new findings on volatility. First, we discover significant evidence of common volatility; for 12 out of 14 sectors, market volatility has a statistically significant effect on firm volatility for at least 50 percent of firms. Second, we discover significant evidence of size effects: for small-sized firms, there is weak evidence of commonality in volatility, while for large-sized firms there is high evidence (for as much as 75 percent of firms) of commonality in volatility. Third, we find that market volatility predicts firm volatility for firms belonging to five of the 14 sectors.     

Gender diversity and firm performance: evidence from Dutch and Danish boardrooms

Drawing on the business case for gender diversity, this article examines whether board gender diversity has a positive effect on firm performance, based on evidence from the Netherlands and Denmark. We use empirical data on 186 listed firms observed in 2007. Almost 40% have at least one woman in the boardroom. Within boards, the average share of women is only 5.4%. To investigate the impact of board gender diversity, two-stage least-squares estimation is applied, using Tobin’s Q as a measure of performance. Our findings indicate that on the basis of this data-set, there is no relation between board diversity and firm performance.     

Houses and schools: Valuation of school quality through the housing market

This paper offers a critical appraisal of the now sizable empirical literature that values school quality and performance through housing valuations. This literature consistently finds housing valuations to be significantly higher in places where measured school quality is higher, implying a strong parental willingness to pay to get their children educated in better performing schools. This conclusion emerges from studies undertaken in a number of countries, using a variety of identification strategies, and at different parts of the education sequence that children follow.     

The effect of human resource management practices on the perceptions of organizational and market performance of the firm

The purpose of our study is to extend the emerging empirical literature on the firm‐level impact of human resource management practices. Results based on a national sample of organizations from private and public sectors in Israel indicate that these practices have a significant impact on both the perceived organizational and market performance of the organization. The single independent variable found to be statistically significant in affecting perceived organizational performance was training practices. In the case of perceived market performance, we found that, in addition to training practices, employee selection practices also significantly affected the perceived market performance.¹ © 1999 John Wiley & Sons, Inc.     

The product‐market performance benefits of environmental policy: Why customer awareness and firm innovativeness matter

Researchers have widely studied the nexus between corporate environmental (“green”) policy and its green performance and firm financial performance, but with mixed findings. A potential explanation for these mixed findings is the focus of extant studies on the direct and immediate impact of environmental performance on financial performance to the exclusion of firm‐specific boundary conditions. Furthermore, all prior research study the effect of environmental performance on either stock market‐based performance measures (i.e., stock return) or accounting‐based performance measures (i.e., return on assets). A missing third dimension of firm performance, product–market‐based performance (i.e., market share), has so far remained unexplored despite representing a crucial objective when innovating. Using Newsweek's annual green ranking as a novel measure of environmental performance for a panel of U.S. firms from 2010 to 2015, this paper attempts to fill these voids in the literature. The results show a positive relationship between firms' environmental performance and market share as a measure of product–market‐based performance. The findings further demonstrate that this relationship is positively moderated by the level of customer awareness and innovativeness of the firm: The higher the level of awareness of a firm's environmental credentials and innovativeness, the stronger the effects of environmental performance on market share. Our results are robust against endogeneity concerns and alternative measures of firm financial and environmental performance.