The long-run performance of diversifying firms

The corporate diversification literature presents a puzzle. Short-horizon event studies report positive abnormal returns around the announcement of a diversifying event, while studies that examine diversified firms find evidence that diversified firms are worth less than specialized firms (a diversification discount). If diversification is value destroying, perhaps the destruction occurs over longer periods than have been previously tested. This paper tests the hypothesis that diversifying firms have negative long-run abnormal performance following diversification by examining a sample of specialized firms that have a diversifying event from 1978 through 1998. The firms are tracked for up to five years past their diversification year. There is evidence that value is destroyed for small firms that diversify but enhanced for larger firms that diversify.

Low-Tech, innovation and state aid: the Austrian case

This paper analyses innovation patterns of Austrian Low- and Medium Tech (LMT-) SMEs and how these companies are supported by public policy. It adds evidence to the claim that Low-Tech SMEs are actually more innovative than commonly thought and that supporting these industries might yield positive effects. The Austrian innovation system is diversified, yet programmes that aim at LMT innovations are scarce. LMT SMEs are surprisingly innovative, but rarely use available support measures, indicating that these measures may be too High-Tech-oriented. Relatively high additionality effects and impacts can be achieved, if innovative LMT projects are fostered.

Firms and universities—do spillovers enhance firm’s performance?

This paper aims to assess if geographic proximity from universities enhances small firms’ performance, by means of knowledge spillovers. A sample of micro data is used on 390 manufacturing firms and 11 public universities in Portugal. Performance is measured by labour productivity. The estimation was made using OLS as well as Quantile Regression. Results seem to confirm that both domains of knowledge do produce distinct effects, but there is no evidence that a firm’s performance improves with the proximity to a university. Likewise, the quality of universities does not seem to influence the labour productivity of firms.

The effect of marketing regulations on efficiency: LeChatelier versus coordination effects

Government regulations designed to promote social welfare can have unintended consequences on efficiency. According to the LeChatelier Principle, regulations that effectively limit substitution possibilities among inputs will reduce firm and industry-wide efficiency. In imperfectly competitive markets, however, government constraints on a strategic variable can facilitate coordination. An advertising restriction, for example, would improve efficiency if it enables firms to produce the same level of sales with less advertising spending. We use data envelopment analysis to estimate the effect of marketing regulations on efficiency in the U.S. cigarette industry. Unlike previous studies, we do not assume that marketing and production technologies are separable. Our results demonstrate that coordination effects dominate LeChatelier effects. Cigarette producers have benefited from advertising restrictions, a result consistent with the capture theory of regulation.

Legitimating behaviors and firm emergence: a resource dependence perspective

This study makes an attempt to understand some of the reasons why some nascent firms make the transition to new operational firms (a process called “firm emergence”) while others do not. Because of liabilities-of-newness, nascent firms face the daunting task of acquiring legitimacy from their immediate audience in order to emerge as new operational firm. This study claims and finds empirical evidence that through certain legitimating behaviors nascent firms can acquire legitimacy from their immediate audience and thus succeed in becoming new operational firms. The study will put forward more general propositions for future testing, and will draw implications for practitioners and entrepreneurship scholars.

The Neuer Markt as an institution of creation and destruction

The market for publicly traded equity is the heart of a modern capitalist system. In particular, the market for newly listed firms is in turn a bellwether for the public equity market because the entry gives firms expanded access to capital, allowing them to emerge and grow. On the other hand, stock markets also serve as an institution to reallocate productive resources from non-surviving to surviving firms. We describe the Neuer Markt—a special segment of the Frankfurt Stock Exchange in Germany—as an institution to foster the creation of new firms and their destruction.

A generalized procedure to recover the first derivatives of a production function when the firm is a profit maximizer

Partial derivatives of production functions are necessary in many instances to characterize the technology of firms. We present here a general method to recover the first derivatives of the production function of a profit maximizing firm. The method is systematic and applies even when the optimization problem of the firm is subject to additional constraints. It allows researcher to recover returns to scale and technological progress in complex situations.

How useful are signals? A micro-structure analysis

We analyze how the market processes a signaling event by studying a sample of self-tender offers, events often viewed as signals of firm value. By examining changes in the degree of informed trading, we find asymmetric information costs fall at announcement, remain low throughout the event, and increase at offer expiration. By 1 month following expiration, informed trading returns to a level not significantly different from that prior to the offer. Higher risk firms have significantly larger declines in information asymmetry during the offer. Increases in information asymmetry persist 1 month following expiration for firms with lower pre-offer informed trading.

Stochastic productivity measurement

Stochastic productivity indicators are defined, and superlative measures of these indicators are derived. It is shown that, in the presence of complete markets or a common-expectations equilibrium, differences in the market values of firms are superlative indicators of cross-sectional productivity differences. Exactness results are used to decompose nonstochastic productivity indicators into a measure of true productivity change and a measure of ‘luck’. The decomposition is illustrated empirically.

The cost implications of waste reduction: factor demand, competitiveness and policy implications

Manufacturing produces both good and “bad” outputs, such as waste, which have negative environmental effects. Economic (e.g., tax) and non-economic (e.g., reputation) incentives encourage firms to reduce waste. However, such practices are costly because decreases in output produced or increases in inputs used may accompany waste reduction. We employ a cost function approach to evaluate patterns of output and waste production and capital, labor, and materials use, for UK manufacturing plants. We find that costs of waste reduction generally imply increasing materials use and capital and labor input saving, but vary by county, region, and industry.

Market reactions to announcements to expense options

The joint hypotheses of informationally efficient markets, transparent financial statements, and adequate accounting disclosure suggest that announcements of changes in the accounting treatment of employee stock options from footnote disclosure to expense recognition should not trigger stock price reactions because free-cash-flows will not change. Event study results from a sample of 241 firms that announce such changes reveal statistically significant negative price changes followed by positive price changes about equal in magnitude. We propose the learning, sophisticated investor, neglected firm, and firm size hypotheses to explain the observed announcement-period stock price reaction.

Market entry of firms with different legal forms: an empirical test of the influence of institutional factors

Drawing upon institutional theory we develop a conceptual model and investigate the determinants of market entry for worker cooperatives, publicly traded and limited-liability companies. Our results show that formal institutional conditions (i.e., mercantile legislation) influence the start-up choice of entrepreneurs regarding the legal form of their new venture. In addition, we take into account the influence of informal institutional conditions (i.e., local corporate culture) on the market entry rate of firms with different legal structures. Findings show that, while market entry is sensitive to the general economic climate, entry rates of firms with a different legal structure respond differently to the same economic conditions.

The determinants and survival of reverse mergers vs IPOs

This study examines the motivation for using a reverse merger (RM) rather than an IPO to take a private firm public and analyzes the survival of RMs and IPOs in the aftermarket. Private firms using the RM technique are smaller, younger, and have poorer ex ante performance on average than those using IPOs. For private firms using RMs, 1.4% do not meet any listing requirements while all IPOs meet at least one requirement of the listing exchange. Forty-two percent of RMs are delisted compared with 27% of matched IPOs within 3 years of listing on an exchange.

Succession in family firms from a multistaged perspective

Succession in family-owned businesses has been revealed to be a multi-staged phenomenon with trigger events distinguishing one stage from the other. Our aim is to apply change management theory to this process to improve our understanding and to identify the key factors that should be taken into account when implementing it. To achieve this goal, we will review the existing literature about organizational change and will adapt it to succession in family firms. We will end with a case study, concluding that a good succession process is not the one which avoids conflict, but the one which successfully manages it.

Relatedness and entry mode choice in the context of entrepreneurial business entries

In this research we aim to study how established firms develop new entrepreneurial business entry. We based our hypotheses on the theoretical propositions arising from the entrepreneurship strategic management interface. Specifically, we analyse which factors influence the entry mode choice in entrepreneurial business entries. We consider three groups of determinant factors: industry, firm and transaction-related factors. We test our hypothesis in a Spanish firm sample of 197 entrepreneurial business entries. Our results allow us to describe in which circumstances firms are more likely to perform entrepreneurial business entries by low resource commitment and control modes, such as strategic alliances. As a result, a theoretical model is proposed to assess the entry mode choice in this type of entry. Thus, this study contributes to generating debate in this topic.

Barriers to innovation and public policy in Catalonia

The present paper analyses the link between firms’ decisions to innovate and the barriers that prevent them from being innovative. The aim is twofold. First, it analyses three groups of barriers to innovation: the cost of innovation projects, lack of knowledge and market conditions. Second, it presents the main steps taken by Catalan Government to promote the creation of new firms and to reduce barriers to innovation. The data set used is based on the 2004 official innovation survey of Catalonia which was taken from the Spanish CIS4 sample. This sample includes individual information on 2,954 Catalan firms in manufacturing industries and knowledge-intensive services (KIS). The empirical analysis reveals pronounced differences regarding a firm’s propensity to innovate and its perception of barriers. Moreover, the results show that cost and knowledge barriers seem to be the most important and that there are substantial sectoral differences in the way that firms react to barriers. The results of this paper have important implications for the design of future public policy to promote entrepreneurship and innovation together.

The cost of strikes in the Spanish mining sector: modelling an undesirable input with a distance function

In some contexts, firms have to deal with certain elements or factors that affect the production outcome but which are non-market in nature and therefore do not have a price. In this paper we propose a new use of a production economics tool, the input distance function, to empirically measure the effects of these factors. Although we suggest a general use of this methodology, it has been developed in the context of measuring the effects of labor disputes in a particular declining industry, that of Spanish coal mining. We have estimated an equation system comprising an input distance function and cost share equations to calculate the cost generated by strikes.

Is competition really bad news for cooperatives? Some empirical evidence for Italian producers’ cooperatives

In this paper, we analyse the nature of the relationship between market power and technical efficiency for producers’ cooperatives. More specifically we test two hypotheses: first, we evaluate the extent to which increasing market pressure may help producers’ cooperatives to improve technical efficiency to guarantee positive profits; second, we test whether higher technical efficiency induces producers’ cooperatives to have a larger market share. These hypotheses are tested on a sample of Italian conventional and cooperative firms for the Wine Production and Processing sector, using both frontier analysis and dynamic panel techniques. The results support the hypothesis that increasing market pressure can affect positively the cooperatives′ efficiency, while gains in technical efficiency do not seem to have any impact on the cooperatives’ market share.

Potential targets: An analysis of stock price reactions to acquisition program announcements

Stockholders of potential targets experience a statistically significant wealth gain of 0.59% over the 3-day window surrounding the acquisition program announcement. Potential targets are defined as those firms that subsequently receive bids. Using alternative definitions, such as a portfolio of all firms in the industry of the target or firms within the target industry with a higher probability of receiving a bid as predicted by a maximum likelihood logit model, yield qualitatively similar results. These findings suggest that events, such as program announcements, release significant merger related information well before a target is formally approached with implications for wealth effects at subsequent bids. As with normal targets, the likelihood of receiving a bid for targets that are part of a broad-based program of acquisitions increases in the level of agency problems, managerial inefficiency and in the proportion of tangible assets in the target.

Inter-industry differences in layoff announcement effects for financial institutions

This study expands the examination of workforce layoffs by banks to include non-bank financial institutions and explores inter-industry differences in market reactions to layoff announcements. In examining inter-industry differences, we control for variables that influence the market’s reaction to a layoff announcement, such as firm size, the size of the layoff, the reason given for the layoff, and the governance structure of the firm. We provide evidence of inter-industry differences in market reaction to layoff announcements by financial institutions, with banks experiencing more favorable stock-price reactions than other types of regulated firms. These results provide evidence that bank regulation reduces asymmetric information surrounding managerial announcements to a greater degree than the regulation of other types of financial institutions.