Managerial Empire Building and Firm Disclosure

This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, make self‐maximizing decisions that may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such nondisclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that nondisclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post–SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre–SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.     

ISO certification,financial constraints,and firm performance in Latin American and Caribbean countries

We employ World Bank Enterprise Survey data collected in 2006–2010 for 21,852 firms from 31 Latin American and Caribbean countries to investigate determinants of the adoption of International Organization for Standardization (ISO) certification, the relation between ISO certification and firm financial constraints, and the effect of ISO certification on firm performance. We find that ISO accreditation is positively related to firm size and firm age. Exporters and foreign firms are more likely to adopt ISO certification. We document that ISO-certified firms exhibit significantly lower level of financial constraints and higher labor productivity and lower cost of sales than non-certified firms.     

Are Multinational Corporate Tax Rules as Important as Tax Rates?

Previous research has documented the influence of statutory tax rates on international firms' effective tax rates, or ETRs. We add to this body of research by examining common factors of the income tax base, which affects ETRs. Specifically, this study examines the determinants of effective tax rates for publicly traded companies based in European Union (EU) countries. The time period examined is after 2004, when all EU firms were required to use standardized accounting principles under International Financial Reporting Standards (IFRS). We find that, across EU countries, such factors are relatively consistent with factors found in studies of U.S. companies' effective tax rates, which include inventory, leverage, depreciation tax shield, and R&D intensity. We also find that the presence of country book-tax conformity rules increases effective rates. Importantly, our finding that such tax base (or rule) effects are at least as important as rate effects adds to the international debate about uneven tax structures around the globe.     

Investor Protection and the Role of Firm‐Level Financial Transparency in Attracting Foreign Investment

We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across 51 countries outside the United States, we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm‐level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection, the positive association between transparency and foreign ownership is stronger following a country's adoption of the International Financial Reporting Standards.     

Foreign ownership and the financing constraints of firms operating in a multinational environment

We examine the effects of foreign ownership as well as other firm-specific variables on enterprises' access to credit in 135 underdeveloped nations using micro survey data from the World Bank's Enterprise Surveys. The analysis takes into consideration the role of the multinational environment in the structure and operation of firms. The findings demonstrate that foreign ownership is a strong predictor of a company's ability to acquire financing, but with restrictions. Government ownership and local private owners tend to be significant in line with the control criteria in the research, but foreign ownership and often dominating investors are highly predictive of financing limitations. Whether the firm is a foreign subsidiary and operates separately from its mother company significantly mitigates the foreign ownership effect. Firm-specific traits including size, industry of operation, export status, and accounting auditing represent significant indicators as well. In addition, the caliber of institutions of governance, cultural and social circumstances, and overall measures of financial, political, and human development all seem to be important determinants of access to financing and greatly lessen the impact of ownership structure in various nations.     

Escape from New York: The market impact of loosening disclosure requirements

We examine the first significant deregulation of U.S. disclosure requirements since the passage of the 1933/1934 Exchange and Securities Acts: the 2007 Securities and Exchange Commission (SEC) Rule 12h-6. Rule 12h-6 has made it easier for foreign firms to deregister with the SEC and thereby terminate their U.S. disclosure obligations. We show that the market reacted negatively to the announcement by the SEC that firms from countries with weak disclosure and governance regimes could more easily opt out of the stringent U.S. reporting and legal environment. We also find that since the rule's passage, an unprecedented number of firms have deregistered, and these firms often had been previous targets of U.S. class action securities lawsuits or SEC enforcement actions. Our findings suggest that shareholders of non-U.S firms place significant value on U.S. securities regulations, especially when the home country investor protections are weak.     

Do SMEs Benefit from Unconventional Monetary Policy and How? Microevidence from the Eurozone

We study the impact of the announcement of the European Central Bank's (ECB's) Outright Monetary Transactions Program on small firms’ access to finance using a matched firm‐bank data set from eight Eurozone countries. We find that following the announcement, credit access improved relatively more for firms borrowing from banks with high balance sheet exposures to impaired sovereign debt, with such firms less likely to be refused a loan or to be price rationed. Loan terms also improved as manifested by lengthening of loan maturities. Unconventional monetary policy has a positive impact on firms’ investment and profitability, while its effect on firm innovation is weaker.     

Stock market reaction to COVID-19: Evidence from U.S. Firms’ International exposure

We examine the U.S. stock market reaction to the World Health Organization's announcement declaring COVID-19 a global health emergency, with a focus on firms' international exposure. We find that while international exposure through foreign sales, foreign assets, imports and exports are significant and negatively associated with standardized cumulative abnormal returns in the short-run, the effect reverses in the long-run. In the long-run, internationalization contributes to multinational firms being more resilient to economic shocks caused by COVID-19.     

The economic consequences of increased disclosure: Evidence from international cross-listings

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.     

Change in value relevance of quarterly foreign sales data of U.S. multinational corporations after adopting SFAS 131

This paper investigates the change in value relevance of quarterly foreign sales data of U.S.-based multinational enterprises after adopting Statement of Financial Accounting Standards No. 131 (SFAS 131). First, I examine whether the interim foreign sales data of all sample firms are valued at a higher rate by equity investors after the firms adopt SFAS 131. My empirical findings indicate that for all sample firms the value relevance of quarterly foreign sales data increases after the firms adopt SFAS 131. I then examine whether the valuation consequence of firms that change their geographic segment definition after they adopt SFAS 131—segment change firms—changes after those firms adopt SFAS 131. Based on the empirical results, I conclude that quarterly foreign sales data of segment change firms are priced at a relatively higher rate after SFAS 131 is adopted.

Geographic earnings disclosure and trading volume

Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, most US multinational firms no longer disclose geographic earnings in their annual reports. Given the recent growth in foreign operations of US firms and the varying operating environments around the world, information (or lack thereof) related to geographical performance can affect investors’ information set. Using empirical tests that closely follow the [Kim, O., Verrecchia, R., 1997. Pre-announcement and event-period private information. Journal of Accounting and Economics 24, 395–419] model, we find results consistent with their predictions. Specifically, using a sample of firms with substantial foreign operations, we find evidence of a decrease in event period private information following adoption of SFAS 131 for firms that no longer disclose geographic earnings. These results suggest that decreased public information (i.e., non-disclosure of geographic earnings) reduces the ability of investors to utilize or generate private information in conjunction with the public announcement of quarterly earnings, which dampens trading. We also find evidence of a decrease in pre-announcement private information following adoption of SFAS 131. This is consistent with an overall improvement in public disclosures that has the effect of reducing differences in the precision of private information across investors in the period prior to the earnings announcement. However, such an effect is observed for both firms which no longer disclose geographic earnings and for firms that continue to disclose geographic earnings.     

Subsidiary divestiture and acquisition in a financial crisis: Operational focus, financial constraints, and ownership

We exploit parent- and subsidiary-level data for publicly listed firms in Thailand before, during, and after the 1997 Asian Financial Crisis to investigate the extent to which firms with different types of ownership restructure their business portfolios, in terms of divestitures and acquisitions. We compare restructuring choices made by firms mostly owned by (a) domestic individuals with block shares (family firms), (b) domestic firms and/or institutions (DI firms), and (c) foreign investors (foreign firms). We show that following the crisis (1) foreign firms' restructuring behavior is the least affected; (2) domestic firms owned by families and domestic institutions (DI) behave similarly to one another; (3) domestic firms do not increase divestiture in their peripheral segments to improve operational focus or to obtain cash in a credit crunch; they actually reduce divestiture in core segments; and (4) domestic firms also significantly reduce the acquisition of new subsidiaries. Our results challenge traditional explanations for divestiture such as corporate governance, operational refocus, and financial constraints. They indicate that in the great uncertainty of a crisis, domestic firms are able to hold onto their core assets to avoid fire-sale. In essence, they act more conservatively in churning their business portfolios.     

Geographical diversification using ETFs: Multinational evidence from COVID-19 pandemic

We examine the relations between dollar flows of U.S. listed ETFs with exposure to the U.S., Europe, Asia, and the rest of the world following an emergency like the COVID-19 crisis. Using a Markov Switching Model (MSVAR), we find evidence that investors use ETFs to gain exposure to foreign markets and swiftly adjust their portfolio's allocation in response to the change in the number of COVID-19 infected people in every location. We further extend our study to ETFs listed in the U.S., Europe, and Asia and investigate the change in foreign and domestic money flow, before and after the pandemic. We show that investors around the world rebalance their portfolios by monitoring the countries’ performance in controlling the pandemic. Our findings show that while investors in the U.S. and Asian countries direct their money to domestic funds and reduce their foreign investment following the pandemic, European investors increase foreign investment and reduce home bias. This is consistent with the flight-to-safety effect when investors shift their asset allocation away from riskier investments (here riskier locations) and into safer ones during the adverse economic shock.     

What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)

A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or instead depend on country and firm characteristics. We report evidence that supports the second view. We first conduct a case study of Brazil, in which we survey Brazilian firms' governance practices at year-end 2004, construct a corporate governance index, and show that the index, as well as subindices for ownership structure, board procedure, and minority shareholder rights, predicts higher lagged Tobin's q. In contrast to other studies, greater board independence predicts lower Tobin's q. Firm characteristics also matter: governance predicts market value for nonmanufacturing (but not manufacturing) firms, small (but not large) firms, and high-growth (but not low-growth) firms. We then extend prior studies of India, Korea, and Russia, and compare those countries to Brazil, to assess which aspects of governance matter in which countries, and for which types of firms. Our “multi-country” results suggest that country characteristics strongly influence both which aspects of governance predict firm market value, and at which firms that association is found. They support a flexible approach to governance, with ample room for firm choice.     

The colors of investors’ money: The role of institutional investors around the world

We study the role of institutional investors around the world using a comprehensive data set of equity holdings from 27 countries. We find that all institutional investors have a strong preference for the stock of large firms and firms with good governance, while foreign institutions tend to overweight firms that are cross-listed in the U.S. and members of the Morgan Stanley Capital International World Index. Firms with higher ownership by foreign and independent institutions have higher firm valuations, better operating performance, and lower capital expenditures. Our results indicate that foreign and independent institutions, with potentially fewer business ties to firms, are involved in monitoring corporations worldwide.     

LEGAL ENVIRONMENT,INTERNALIZATION, AND U.S. ACQUIRER GAINS IN FOREIGN TAKEOVERS

In examining takeovers of foreign targets by U.S. firms, we investigate the effect of the target country's legal environment on acquiring firm value. Our results indicate that acquirers of target firms located in civil law countries experience significant positive abnormal returns, especially when the acquirer possesses a high level of intangibles. Furthermore, we find that acquirers with high levels of intangibles are more likely to acquire target firms in civil law countries. These findings suggest that the transfer of intangibles overseas provides relatively larger efficiency benefits for multinational corporations in cases where the alternative, contracting in external markets, is more difficult.     

Determinants of Profit Reinvestment by Small Businesses in Emerging Economies

We investigate the cross‐country key factors of profit reinvestment decisions using data compiled by the World Bank from over 7,000 businesses in 36 developing countries. We find that, compared to the security of property rights, it is a firm's access to external financing that plays an important role in a firm's reinvestment decision in emerging economies. The extent of private ownership and the firm's competitiveness are additional significant factors correlated with its reinvestment decision. Furthermore, we uncover a firm size effect in that the above factors driving firm reinvestment decisions appears to impact small firms more than relatively larger firms.     

Investment,leverage and political risk: Evidence from project-level FDI

Does capital structure influence firms' FDI capital expenditure decisions into countries with varying degrees of political risk? We explore this question using a novel dataset that matches 10,000 unique outward foreign direct investment (OFDI) projects with 1135 distinct U.S. firms over the period 2003–2014. We find that capital expenditures allocated to FDI projects are significantly lower for highly leveraged firms, in particular for firms with low growth opportunities. Firms also commit lower capital amounts to investments located in countries characterized by higher political risk. Furthermore, leverage and political risk interact with one another in determining the financial commitment of the FDI, with leverage exerting a significantly stronger negative effect on capital expenditures in countries where political risk is elevated. Our findings are consistent with the monitoring role of debt in curbing exposure to political risk in multinational firms' foreign operations, and corroborate the disciplinary role of leverage on firms' investment decisions.     

THE EFFECT OF CROSS‐LISTING ON TRADING VOLUME: REDUCING SEGMENTATION VERSUS SIGNALING INVESTOR PROTECTION

We examine the relation between cross‐listing on the U.S. and UK regulated and unregulated exchanges and trading volume for a sample of 500 foreign firms from 34 countries. We find that the increase in trading volume is a function of both reducing segmentation and signaling investor protection. In addition, we find that home market trading volume, firm size, firm returns, and analyst forecast accuracy are the major determinants of a firm's trading volume. We also show that U.S. and UK investors trade foreign securities that originate from low‐investor‐protection countries more than they trade those from high‐investor‐protection countries, which is consistent with the bonding hypothesis.     

Corruption and valuation of multinational corporations

This paper examines the relationship between U.S. MNCs' valuation and corruption in countries where the MNCs' foreign subsidiaries are located. We uncover that country-level corruption has a multi-dimensional impact on MNCs' valuation. We find that the impact of intangibles is less pronounced for MNCs operating primarily in corrupt countries, consistent with the view that the lack of property rights protection and information asymmetry problems are more prevalent in corrupt environments. We also find that the expansion of a MNC network dominated by corrupt countries negatively affects MNCs' valuation, suggesting that investors may recognize it as an additional risk. However, more importantly, we find that geographic diversification in corrupt countries significantly increases firm value if the MNC has high levels of intangibles such as technological know-how and marketing expertise. Assuming that transactions costs in corrupt countries are higher, our findings are consistent with the notion that the advantages from internalizing the cross-border transfer of intangibles are greater in the presence of corruption. Our findings remain unchanged when we account for endogeneity at the country-and firm-level, when we use alternative corruption measures, and when we re-estimate models by omitting MNCs with operations in locations with big “negative” shocks during the sample period. Moreover, we show that firms with expertise in dealing with corruption enjoy greater benefits from internalization.