Does managerial ability facilitate corporate innovative success?

This paper examines whether managerial ability facilitates corporate innovative success. First, we show that managerial ability is positively associated with innovative output. Second, we show that the positive association between managerial ability and innovative output is weaker for older CEOs and managers who stay in the same job for longer, suggesting a preference for a ‘quiet life’ by long serving CEOs. Third, we find that the equity market values patents generated by more able managers more positively, suggesting that equity holders deem better skilled managers more effective at converting innovative ideas into valuable new products. Finally, we show that managerial ability is positively associated with more ‘radical’ innovations, which are outside of the firm's knowledge base. Overall, our results suggest that managerial ability is an essential component of corporate innovative success.     

INSOL Europe's Proposals on Groups of Companies (in Cross‐Border Insolvency): A Critical Appraisal

International bodies have started addressing the problem of cross‐border insolvency of corporate groups fairly recently. The United Nations Commission on International Trade Law has adopted a set of recommendations and the European Commission may tackle the matter in the near future, in the process of revising the European Insolvency Regulation (the ‘Regulation’). It is, therefore, timely to evaluate major proposals for the Regulation's amendment regarding groups, suggested by INSOL Europe. The paper critically evaluates the proposals regarding coordination of group cases and the concept of substantive consolidation. This evaluation takes account of both the variety of possible group structures and the goals the insolvency regime would aim to achieve. Copyright © 2012 INSOL International and John Wiley & Sons, Ltd.     

Modigliani and Miller Again Revisited: The Cost of Capital with Unequal Borrowing and Lending Rates

The financial literature asserts that financial managers must borrow at least to some degree if they are to optimise the value of their companies. This result has been described in the literature as ‘perhaps the single most important result in the theory of corporate finance obtained in the last 30 years’ (Copeland and Weston, 1988, p. 443). Based on US tax systems, the value added to a company by debt has been estimated as high as 35 to 50% of the debt's market value. More recently in this journal, Ashton (1989b) has argued that under the present UK tax system, the theoretical tax advantage afforded by debt should be estimated at no more than 13% of the debt's market value. The contribution of this paper is to draw attention to an aspect of borrowing that has largely escaped attention, but which nevertheless affects the above conclusions: namely, that the market spread between borrowing and lending constitutes a ‘cost’ for corporate borrowing. This paper demonstrates that in the context of the present UK tax system, this ‘cost’ of borrowing is sufficient to nullify entirely the formerly perceived financial tax benefits of corporate borrowing. We conclude that, at present, corporate borrowing could imply a net disadvantage for the valuation of a company's equity by about 6 or 7% of the debt's market value.     

Does the effect of the annual year taboo exist? Empirical evidence from senior managers’ zodiac year and corporate inefficient investment

Based on the unique folk belief of the zodiac year, this study explores the effect of senior managers' zodiac year on corporate inefficient investment (CII) using data from Chinese A-share listed companies from 2006 to 2019. The study findings are as follows: (1) senior managers are more conservative and cautious in their zodiac year. Increasing risk aversion prevents blind investment and inhibits CII. (2) The restraining effect of the zodiac year on CII is more apparent in nonstate-owned enterprises, regions with low marketization levels, Central China, and Northeast China. This effect is attributed to the degree of superstitious belief of senior managers and becomes more pronounced with increasing age. The zodiac years of the Year of the Ox, Year of the Dragon, and Year of the Pig affect the Annual Year Taboo the most; meanwhile, the zodiac years of the CEO and the chairman exert a more significant effect than that of the vice-chairman. In addition, the restraining effect is only reflected in the zodiac year and draws a significantly negative market reaction. (3) The level of cash holdings is a potential channel for senior managers to improve corporate investment efficiency in managers’ zodiac year. By providing unique evidence from the Eastern cultural context, this study enriches the research literature on emerging market culture and business management.     

Top executive dismissal,ownership and corporate performance

This paper evaluates the empirical relationship between top executive turnover and firm performance. Based on a sample of the 460 largest UK listed companies during the period 1990–1998, we establish an inverse and robust statistical relation between the probability of a management change and a firm's performance: top executives are fired for poor performance. This can result from internal monitoring of management by the board or block share holders. Second, the data indicate that only very poor levels of performance affect significantly the turnover likelihood: corporate performance must fall dramatically to force a senior executive job separation. Third, the likelihood of managerial turnover for poor performance has not changed over time: today's senior managers face the same disciplining effects as those senior managers in earlier years. Finally, there seems to be no evidence that managerial stock ownership, measured as the proportion of ordinary shares owned by top managers, enables them to become entrenched.     

Cost Stickiness in Australia: Characteristics and Determinants

This study presents empirical evidence on cost stickiness using a large sample of Australian listed firms from 1990–2010. We find cost behaviour in Australian firms is sticky on average, with a lower degree of stickiness than in United States firms. Costs increase by 0.885% with a 1% increase in sales revenues, but decrease by only 0.797% for a 1% decrease in sales. The degree of cost stickiness demonstrates a ‘U’ shape over the period and increases after the adoption of International Financial Reporting Standards. Sticky cost behaviour, however, is not evidenced in the resources, construction and retail industries. We document evidence consistent with the argument of adjustment costs of employed resources, managerial incentives and agency costs. The degree of cost stickiness in Australia increases with a firm's asset and employee intensity, and when managers have strong incentives to avoid decreases in earnings or losses, but is less pronounced when revenues decline in the preceding period and in firms with strong governance mechanisms. Our results provide important implications for external stakeholders’ understanding of firm performance.     

Aptiv Becoming a More Sustainable Business

The President and CEO of Aptiv presents and then discusses his progress in carrying out his ‘long‐term plan’ to transform an automotive parts supplier that was once part of General Motors into a ‘global technology company.’ The company's mission is to maintain and strengthen its current position as ‘a partner of choice’ of the world's largest automakers in designing and manufacturing ‘the brain and the nervous system of the vehicle’—and in so doing, to make vehicle transportation ‘safer, greener, and more connected.’ With 15 major tech centers and 126 manufacturing sites spread across 44 countries, and with over 160,000 employees, including 18,600 engineers and scientists, the company has the scale and resources to carry out that mission. And attesting to the resilience of its business model, in 2018, a year in which the global number of cars sold actually went down, the company increased its revenue by 10% and its operating cash flow by 50%. In the area of safety, the company is helping its customers build vehicles that move the industry closer to its goal of zero traffic fatalities and accidents by delivering the building blocks of active safety systems—which include perception and vision systems, and the high‐speed and high‐reliability networks that connect them. (And promising even greater gains in safety, the company's advances in fully automated vehicles are helping make self‐driving cars a reality.) In terms of green initiatives, the company is focused on minimizing the vehicles' ‘total lifecycle impact on the environment’ by providing the high‐voltage distribution and connection systems for electric cars, while also using ‘smarter’ vehicle architectures to achieve significant reductions in weight and mass. Finally, the company is helping the industry incorporate the increased connectivity that aims to provide a seamless integration between the passenger, the vehicle, and the Internet of Things. The company's commitment to corporate social responsibility goes well beyond its products and solutions. As an important part of its disciplined approach to creating sustainable long‐term value for its shareholders, the company tracks a range of key performance indicators designed to ensure that ‘we devote the right amount of time and attention to each of our key stakeholders.’ Along with its stakeholder programs and ongoing investment in human capital, which have helped the company win the designation ‘one of the world's most ethical companies’ in seven consecutive years, the CEO also cites the important roles played by its highly collaborative and engaged board of directors, and by a long‐term incentive pay plan for its senior management team that, along with standard financial measures, uses a ‘strategic results modifier’ that reflects the company's success in meeting ‘non‐financial goals that are related to talent, culture, and product quality.’     

Transitions in environmental risk in a transitional economy: management capability and community trust in Russia

Following the collapse of the Soviet Union 10 years ago, the Russian Federation has undergone a radical social, political and economic transformation. This paper's focus is particularly on the consequences of this transformation for the natural environment. This is done by utilizing Beck's (Risk Society: Towards a New Modernity, London: Sage, 1992) concept of Risk Society to explore the interrelationships between managers, firms and communities in terms of transitions in capabilities, knowledge, trust, and even the very notion of community vis‐à‐vis pollution control and environmental protection. A qualitative study of managers in Russian manufacturing enterprises, environmental regulators and local communities, was undertaken in two provincial Oblasts in the Russian Federation, identifying a number of factors characteristic of Beck's (1992) treatise including ‘risk culture’, ‘organized irresponsibility’, ‘individualization’ and ‘subpolitics’. In so doing a deeper understanding is developed of the impact of economic transition on the environment, indicating a different risk society trajectory to that predicted for the West. The implications for continued, in‐depth research in focusing on economies in transition are also discussed.     

Price satisfaction and personnel efficiency as antecedents of overall satisfaction from consumer credit products and positive word of mouth

The paper aims to explore the potential impact of ‘bank personnel efficiency’ and ‘price satisfaction’ on overall customer satisfaction of consumer credit products and positive word of mouth (WOM). Furthermore it aims to provide bank managers with useful insights into the development of high quality relationships with customers. ‘Personnel efficiency’, is related to the human factor of service quality, while ‘price satisfaction’ refers to the customers’ subjective view of the bank's pricing policy. The research involved a review of the available literature on service quality dimensions and their effect on satisfaction and WOM. For the collection of data, a survey was designed and conducted in the greater area of Athens, Greece. The research questionnaire was administered by means of personal interviews to 750 bank customers. Data analysis, using structural equation modelling, suggests that ‘personnel efficiency’ and ‘price satisfaction’ are antecedents of overall ‘customer satisfaction’, which is a prerequisite for positive ‘word of mouth’.     

Narratives in managers’ corporate finance decisions

This article uses the extended case method to explore senior executives’ corporate finance decisions. We quantified firm’s finance practices using a mail survey, and then – to resolve puzzles in managers’ decision processes – conducted face‐to‐face interviews with chief finance officers of large listed firms. The interviews identified six themes as consistent influences on finance decisions: pressures imposed by clienteles; constraints on resources; risk management; heuristics; real options; and sustainability. We conclude that managers are logical and rational in their decisions, but employ a wider range of criteria than assumed in conventional finance theories.     

When is good news really good news?

The impression management literature suggests that managers often resort to biased disclosures. However, there is little systematic evidence on what types of strategies management uses to achieve this bias. Do managers simply lie? Or, do they use more subtle ways of introducing positive bias into corporate narratives, such as selecting specific information items which result in a more positive impression (‘selectivity’) or by keeping their narratives vague and general (‘vagueness’)? In order to differentiate between the two scenarios, I re-examine the positive forward-looking statements examined by Schleicher and Walker (2010) and compare, across firms with improving and deteriorating financial performance, the managerial choices made in relation to eight forecast attributes.

I make two observations. First, there are significant differences in the characteristics of good- and bad-news firms’ positive statements. In particular, bad-news firms’ positive statements involve more non-specific time horizons, more segmental forecasts, and more references to conditions and aims and objectives, but fewer directional forecasts, fewer numbers, and fewer reinforcing qualifiers. Second, the identified differences in good- and bad-news firms’ positive statements can be exploited for classification purposes: including into a classification model additional regressors that measure a positive forward-looking statement's level of selectivity and vagueness significantly increases the model's ability to separate firms with improving financial performance from firms with deteriorating financial performance. Overall, my results are consistent with (a) impression management operating predominantly through selectivity and vagueness and (b) selectivity and vagueness being an important signal for future financial performance.     

The impact of the corporate balanced scorecard on corporate control—A research note

The paper explores the adoption of the corporate balanced scorecard (CBSC) and its impact on corporate control of business units. Following interviews with senior corporate managers in 15 of Sweden's largest multinational companies, 8 were found to adopt CBSC. However, CBSC had little impact on control at the corporate level. Corporate control was financially focused in all the companies: mainly financial measures were important, standards were only set for financial measures and rewards were largely based on financial performance measures. Top management's need for simplicity and comparability internally, and capital market pressures motivated the financial focus.     

Elements of a talent strategy for effective relationship building: A study among bank sales and service providers

This study considers equity sensitivity, emotional labor and organizational commitment as three important variables that play a critical role among sales and service providers at a bank and the effect these variables ultimately have on corporate performance. Using an equity theory perspective, research hypotheses linking the various constructs are formulated. Data are collected from sales and service managers at a community bank and partial aggregation followed by structural equation modeling is used to test the hypotheses. Results are reported, implications to a bank’s talent strategy are drawn, limitations are noted and directions for future research are indicated.     

Why change programs don't produce change

Faced with changing markets and tougher competition, more and more companies realize that to compete effectively they must transform how they function. But while senior managers understand the necessity of change, they often misunderstand what it takes to bring it about. They assume that corporate renewal is the product of company-wide change programs and that in order to transform employee behavior, they must alter a company's formal structure and systems. Both these assumptions are wrong, say these authors. Using examples drawn from their four-year study of organizational change at six large corporations, they argue that change programs are, in fact, the greatest obstacle to successful revitalization and that formal structures and systems are the last thing a company should change, not the first. The most successful change efforts begin at the periphery of a corporation, in a single plant or division. Such efforts are led by general managers, not the CEO or corporate staff people. And these general managers concentrate not on changing formal structures and systems but on creating ad hoc organizational arrangements to solve concrete business problems. This focuses energy for change on the work itself, not on abstractions such as "participation" or "culture." Once general managers understand the importance of this grass-roots approach to change, they don't have to wait for senior management to start a process of corporate renewal. The authors describe a six-step change process they call the "critical path."     

Investor behaviour and reaching for yield: Evidence from the sterling corporate bond market

We provide evidence on how corporate bond investors react to a change in yields, and how this behaviour differs in times of market‐wide stress. We also investigate ‘reaching for yield’ across investor types, as well as providing insights into the structure of the corporate bond market. Using proprietary sterling corporate bond transaction data, we show that insurance companies, hedge funds and asset managers are typically net buyers when corporate bond yields rise. Dealer banks clear the market by being net sellers. However, we find evidence for this behaviour reversing in times of stress for some investors. During the 2013 ‘taper tantrum’, asset managers were net sellers of corporate bonds in response to a sharp rise in yields, potentially amplifying price changes. At the same time, dealer banks were net buyers. Finally, we provide evidence that insurers, hedge funds and asset managers tilt their portfolios towards higher risk bonds, consistent with ‘reaching for yield’ behaviour.     

A Fireside Chat with Raj Gupta: What It Takes to Create Long‐Term Value

The chairman of two public companies (and former chair and CEO of Rohm and Haas) draws on his experience as a director of five private and 15 public companies in discussing the challenges and opportunities facing today's corporate boards. Perhaps the most formidable challenge is the pace of technological change, which is making business models ‘in all industries and countries’ obsolete and forcing companies to adapt much more quickly than in the past. Along with the risk of obsolescence is the increase in ‘reputational risk’ associated with an ‘information age’ in which companies are forced to monitor the nearly continuous flow of fact, hearsay, and outright fabrication. The author recommends that public company boards adopt a new ‘partnership’ model. Besides ensuring an ‘ethical tone at the top,’ corporate directors should aim to become partners with the senior management team by playing more active roles in strategic planning, risk management, and the design of performance evaluation and incentive pay systems. In the most striking departure from current practice, the author urges directors to seize the opportunity created by the ‘reconcentration’ of ownership of U.S. public companies by actively engaging large institutional investors in a strategic dialogue about the companies' strengths and vulnerabilities. In so doing, proactive directors can help their management teams preempt shareholder activists and create long‐run value by creating a more effective two‐way channel of communication, one with the potential to give management more confidence when undertaking large strategic investments with longer‐run payoffs.     

ESG as a Value‐Creation Tool for Active Investors: A Profile of Inherent Group

A growing number of investment managers claim to integrate environmental, social, and governance considerations into their investment strategy and processes, but few have described how they do so in depth. Even fewer reinforce the importance of sustainability within their own firms by becoming a certified ‘B Corporation.’ This article offers a rare, inside look at how one such value‐oriented manager uses ESG as a tool for differentiated investment sourcing, underwriting, and corporate engagement with the aim of achieving superior risk‐adjusted returns. One of the main arguments of the article—and a key principle of the firm's investment approach—is that ESG, as applied to both corporate strategy and operations, is an important factor in determining a company's cost of capital. The authors present specific examples of their investment process at work, highlighting how active engagement with management on ESG issues can catalyze progress that becomes valued by the capital markets.     

Bancassurance in East Asia: Cultural impact on customers’ cross-buying behaviour

Amid rapid growth of bancassurance in East Asian countries, particularly in South Korea and Taiwan, the article examines the determinants of this growth in these two countries, by testing the influence of ‘collectivism’ as a proxy for national culture on the relationship between cross-buying determinants and customers’ cross-buying intentions. The interviews were conducted during 2011 and 2012 with 13 professional senior managers and academics engaged in customers’ cross-buying activities of bancassurance in South Korea and Taiwan. ‘Perceived value’, ‘trust’, ‘image’ and ‘satisfaction’ were found to be the key determinants of customers’ cross-buying intentions on bancassurance in South Korea and Taiwan, among which ‘trust’ and ‘satisfaction’ were significantly influenced by ‘collectivism’. The article confirms that, even between countries with similar levels of ‘collectivism’, the influence of ‘collectivism’ can differ because of the determinants of cross-buying intentions on bancassurance.     

Value Maximization,Stakeholder Theory,and the Corporate Objective Function

This paper examines the role of the corporate objective function in increasing corporate productivity, social welfare, and the accountability of managers and directors. Because it is logically impossible to maximize in more than one dimension, purposeful behavior requires a “single-valued” objective function. Two hundred years of work in economics and finance implies that, in the absence of externalities and monopoly, social welfare is maximized when each firm in an economy aims to maximize its total market value. The main contender to value maximization is stakeholder theory, which argues that managers should attempt to balance the interests of all corporate stakeholders, including not only financial claimants, but employees, customers, communities, and governmental officials. By refusing to specify how to make the necessary tradeoffs among these competing interests, the advocates of stakeholder theory leave managers with a theory that makes it impossible for them to make purposeful decisions. With no clear way to keep score, stakeholder theory effectively makes managers unaccountable for their actions (which helps explain the theory's popularity among many managers). But if value creation is the overarching corporate goal, the process of creating value involves much more than simply holding up value maximization as the organizational objective. As a statement of corporate purpose or vision, value maximization is not likely to tap into the energy and enthusiasm of employees and managers. Thus, in addition to setting up value maximization as the corporate scorecard, top management must provide a corporate vision, strategy, and tactics that will unite all the firm's constituencies in its efforts to compete and add value for investors.     

An Investor Perspective on the Black Box of Corporate Social Responsibility

In summarizing the findings of their recent study, the authors report findings that suggest that not all socially responsible corporate policies are likely to have the same effect on a company's ownership and value. Using environmental policy as their proxy for CSR activities, the authors classify corporate environmental practices into two categories: (1) actions that reduce the likelihood of harmful outcomes by reducing the corporate exposure to environmental risk; and (2) actions that enhance companies' perceived ‘greenness’ through investments that go beyond both legal requirements and any conceivable risk management rationale. Although both groups of environmental practices are likely to be viewed as socially beneficial, corporate expenditures that reduce a firm's environmental risk exposure are more likely to benefit shareholders by limiting the risk of losses arising from environmental accidents, lawsuits, and fines—and possibly thereby reducing the firm's cost of capital. By contrast, corporate expenditures that enhance the firm's perceived greenness by going beyond legal requirements and risk management rationales could actually reduce shareholder value. Consistent with this hypothesis, the authors find that institutional investors tend to own smaller than average percentages of both companies the authors identify as ‘toxic’ and make limited efforts to manage their environmental risk, and companies they label ‘green’ with low environmental risk exposure but relatively high CSR spending on the environment. At the same time, such investors hold larger‐than‐average positions in ‘neutral’ companies with relatively low, or effectively managed, environmental risk exposures and limited investment in ‘greenness’ programs. The authors also find that both toxic and green companies have lower (Tobin's Q) valuations than neutral companies, and that otherwise toxic companies that effectively manage their environmental risk exposures have higher valuations.