Turbulent firms, turbulent wages?

Has greater turbulence among firms fueled rising wage instability in the U.S.? We find strong support for the hypothesis that rising turbulence in the sales of large publicly-traded U.S. firms over the past three decades has raised their workers’ high-frequency wage volatility. Through controls and instrumental variable probes, we rule out straightforward compositional churning as an explanation for the link between firm sales and wage volatility. We also observe that the relationship between sales and wage volatility at the firm level is stronger since 1980, is present only in large companies and is stronger in services than in manufacturing companies.     

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.     

Real Earnings Management in Sales

We surveyed 1,638 sales executives across 40 countries regarding their companies’ likelihood of asking sales to perform real earnings management (REM) actions when earnings pressure exists. Using this information, which we refer to as companies’ REM propensities, we study how company characteristics and environmental conditions relate to the responses received. The use of cash‐flow incentives for sales personnel and the distribution of interfunctional power in favor of finance rather than sales are both associated with companies’ REM propensities. In addition, we show that sales executives preemptively change their behaviors in anticipation of top management's REM requests. Sales executives working for public companies and companies in the United States reported higher levels of REM propensity. The data also support an association between REM propensity and finance–sales conflict. These findings and others are compared and contrasted with existing empirical and survey‐based research on REM throughout the paper.     

Three Common Misconceptions About Markets (or Why Earnings Smoothing,Guidance, and Concern About Meeting Consensus Estimates are Likely to be Counterproductive)

Although many executives strive for stable earnings growth, finance theory and research have long suggested that the most sophisticated investors aren't especially concerned about “normal” levels of variability in reported earnings. More recent research by the authors and their McKinsey colleagues also suggests that extraordinary efforts to achieve steady growth in earnings per share quarter after quarter aren't worthwhile and may actually hurt the companies that undertake them. While such efforts to smooth earnings involve real costs, the research finds no meaningful relationship between earnings variability and valuation multiples or shareholder returns. Based on these findings, as well as considerable experience in advising companies, the authors offer the following advice to senior executives:

• Managers shouldn't shape their earnings targets or budgets just to meet consensus estimates. Companies that reduce spending on product development, sales and marketing, or other contributors to long‐term growth are sacrificing long‐term performance for the appearance of short‐term strength.
• As the year progresses, managers should likewise avoid costly, shortsighted actions to meet the consensus. Resist the temptation to offer customers end‐of‐year discounts to boost current‐year sales, or to resort to creative accounting with accruals. Investors recognize these for what they are: borrowing from next year's earnings.

Finally, companies should reconsider the practice of quarterly earnings guidance. Instead of providing frequent earnings guidance, companies should design their investor communication policies to help the market to understand their strategy, the underlying value drivers of their business, and the most important risks associated with the business—in short, to understand the long‐term health and value of the enterprise.     

Market Interest in Nonfinancial Information

During the past two decades, more and more companies have volunteered to provide “corporate social responsibility” or “sustainability” reports that include information about their environmental, social, and governance (ESG) policies and performance. Such reporting has come about largely in response to demands by a wide range of stakeholders for information about how the company's operations are affecting society in a number of different ways. But do investors really care about companies' ESG performance and policies? Using data from Bloomberg, the authors provide the first broadly based empirical evidence of investors' interest in ESG data. More specifically, the authors show how interest in the top 20 ESG metrics varies with geographical location (European vs. American), asset class (fixed income vs. equity), and firm type. At the aggregate market level, there is greater interest in environmental and governance information than in “social” information. U.S. investors are more interested than their European counterparts in governance and less interested in environmental information. Equity investors are interested in a wider range of nonfinancial information than are fixed income investors. And whereas sell‐side analysts are primarily interested in greenhouse gas emissions, money managers tend to focus on a broader set of metrics. Similarly, pension funds and hedge funds have shown interest in more nonfinancial metrics than insurance companies. The authors' bottom line: Companies need to recognize the growing market interest in nonfinancial information and ensure that they are providing it according to the specific information needs of market users.     

Political costs and an intraperiod accounting choice for export tax credits

This study examines the effects of political and debt contracting costs on an intraperiod accounting choice. Export tax credits that New Zealand companies receive may be credited to sales ot to income tax expense. Compared to the credit to sales method, the tax reduction method reduces a company's reported tax rate and interest coverage ratio, both of which could have adverse economic consequences. The results indicate the credit to sales method is preferred by large companies that attract political scrutiny because of their low tax rates. The level of a firm's interest coverage is also related to that accounting choice.     

The curious case of Canadian corporate emissions valuation

This study examines the relevance to investors of the greenhouse gas (GHG) emissions of publicly-traded Canadian firms over 2006–2018. Based on two independent datasets, we document that firm value varies positively in the level of emissions. This result suggests that the Canadian setting differs from those studied previously, notably because of low climate litigation risk and national and subnational expenditure policies to offset climate impacts on the economy. While national and subnational expenditures to mitigate emissions affect firms' on-balance-sheet costs and profits, investors price the future payoffs to these expenditures into firm value. Supporting this view, we find that the positive relation between emissions and firm value in Canada is amplified for high GHG-intensity firms (mainly energy firms in Alberta), whose future payoffs to environmental policies and spending exceed those of low GHG-intensity firms. Our results are consistent with investors’ recognition of the benefits to firm value of national and subnational policies to decarbonize the Canadian economy.     

An analysis of majority owner‐managed companies in the UK

This paper investigates the characteristics of 73 UK companies in which managers have an ownership stake of greater than 50 per cent. We find that majority owner‐managed companies make less use of alternative corporate control systems and are less likely to remove their chief executive officer or other board members following poor performance. However, our sample firms actually outperform diffusely held companies of similar size in the same industry. The determinants of majority control appear more closely related to the characteristics of the controlling shareholders rather than the firm's operating environment. Changes in the ownership structure of our sample companies owe more to changes in owner‐specific characteristics and security issuance than they are related to changes in the company's operating environment or company performance. We conclude that despite the obvious agency costs of managerial entrenchment for closely held companies, for the present sample at least the incentive alignment benefits of large director shareholdings are beneficial to outside shareholders.     

Corporate Social Responsibility: The Link Between Sustainability Disclosure and Sustainability Performance

This paper explores the relation between sustainability performance and sustainability disclosure within the Australian extractive industries. The study utilizes Ullmann's (1985) stakeholder framework, which depicts sustainability disclosure and performance as two components of management strategy for dealing with stakeholder demands. Consistent with this framework, we predict a positive performance–disclosure relation. Extending prior research that has utilized problematic environmental performance indices such as CEP indices or toxic emissions levels, we develop a sustainability performance index based on the International Finance Corporation's Measuring Sustainability Framework (2001). Using data from 339 mining and energy firms listed on the Australian Securities Exchange in 2006, we find that corporate sustainability performance is strongly associated with disclosure as expected. Sustainability disclosure is also greater for firms with a proactive communication strategy as manifested through press release activity. Finally, asset age and firm size are both positively associated with sustainability, consistent with predictions from the stakeholder framework.     

Asset sales and firm strategy: an analysis of divestitures by UK companies

This paper examines the financial causes and consequences of the decision to sell-off non-financial assets as part of a new or ongoing restructuring programme by UK non-financial companies between 1993 and 2000. We report that asset sales follow a period of declining operating returns and tend to occur in diversified companies with high levels of financial leverage. Stock prices respond positively to asset sale announcements. This arises due to improvements in operating returns and a decline in financial leverage and corporate diversification subsequent to the disposal. Our findings suggest that asset sales represent an effective operational response to a firm's poor financial condition. However, we also find that a manager's decision to sell assets is strongly influenced by the explicit threats to their control from lenders and competition from product, labour and takeover markets.     

VALUE MAXIMIZATION AND STAKEHOLDER THEORY: COMPATIBLE OR NOT?

Complicating the current corporate governance controversy is a major disagreement about the fundamental purpose of the corporation. There are two main views on what should constitute the principal goal of the firm. Most economists tend to endorse value maximization—that is, maximization of the value of the firm's debt plus equity—or a version of value maximization known as “value‐based management” (VBM) that aims to maximize shareholder value. The main challenger is “stakeholder theory,” which argues that the corporation exists to benefit not just investors but all its major constituencies—employees, customers, suppliers, the local community, and the federal government, as well as shareholders. Thus, whereas the success of a corporation under VBM could be assessed simply by its long‐run return to shareholders, under stakeholder theory a company's success would be judged by taking account of its contributions to all its stakeholders. Using statistical analysis of various measures of corporate success in satisfying non‐investor stakeholders, the author investigates whether a broader focus on multiple stakeholders is necessarily inconsistent with the pursuit of long‐term shareholder value. His main findings in fact suggest just the opposite—namely, that long‐term value creation appears to be a necessary condition for maintaining corporate investment in stakeholder relationships. More specifically, the author's study shows that companies with higher levels of value creation tend to have stronger reputations for treating stakeholders well while companies that create little value end up shortchanging not just their shareholders but all their constituencies. For profitable companies that have previously failed to devote the optimal level of resources to their non‐investor stakeholders, the message of this article is that investing in stakeholders can add value—and, in fact, it pays for companies to spend an additional dollar on stakeholder relationships as long as the present value of the expected (long‐run) return is at least a dollar.     

China Adopts EVA: An Essential Step in the Great Leap Forward*

At the start of 2010, the Central SASAC initiated a three‐year “Performance Assessment Policy” that has the potential to transform Chinese business practices. Since 2010, return on capital has been a major criterion in the performance evaluation and compensation of the senior managements of the 100 largest Chinese state‐owned enterprises. Although sales growth will still count for 60% of executive assessment, 40% will be determined by a simplified version of EVA, or Economic Value Added. The guiding principle behind the new policy is simple and straightforward: Executives of state‐owned enterprises are now being asked to manage capital more efficiently than they have in the past—and in much the same way that private enterprises are now expected to do. Observers might be inclined to downplay this change. The assessed cost for capital, at 5.5%, is well below the market's required rate of return. And SASAC may not allow the firms to close plants, make positions redundant, and lay off employees. Veteran managers may try to outlive the interest in EVA, expecting SASAC's new standards to be unenforced. But SASAC's leaders expect a few pioneering companies to take the framework farther than the guidelines demand. To the extent they succeed in creating value for their shareholders, these companies could help bring about important change at many other Chinese companies.     

Strategy and your stronger hand

There are two kinds of businesses in the world, says the author. Knowing what they are--and which one your company is--will guide you to the right strategic moves. One kind includes businesses that compete on a complex-systems model. These companies have large enterprises as their primary customers. They seek to grow a customer base in the thousands, with no more than a handful of transactions per customer per year (indeed, in some years there may be none), and the average price per transaction ranges from six to seven figures. In this model, 1,000 enterprises each paying dollar 1 million per year would generate dollar 1 billion in annual revenue. The other kind of business competes on a volume-operations model. Here, vendors seek to acquire millions of customers, with tens or even hundreds of transactions per customer per year, at an average price of relatively few dollars per transaction. Under this model, it would take 10 million customers each spending dollar 8 per month to generate nearly dollar 1 billion in revenue. An examination of both models shows that they could not be further apart in their approach to every step along the classic value chain. The problem, though, is that companies in one camp often attempt to create new value by venturing into the other. In doing so, they fail to realize how their managerial habits have been shaped by the model they've grown up with. By analogy, they have a "handedness"--the equivalent of a person's right- or left-hand dominance--that makes them as adroit in one mode as they are awkward in the other. Unless you are in an industry whose structure forces you to attempt ambidexterity (in which case, special efforts are required to manage the inevitable dropped balls), you'll be far more successful making moves that favor your stronger hand.     

Investment decisions: The trade-off between economic and environmental objectives

While there are broader socio-political, psychological, and structural factors that influence investment decisions (see Harris et al., 2016), in line with the critical approach, this study provides an empirical insight into the notion that financialization, specifically the tendency to prioritise economic over environmental objectives, has a strong bearing on how managers view investment trade-off decisions in relation to sustainability issues. The study empirically investigates this notion by examining the investment trade–off preferences of Australian managers in relation to three decision attributes – economic outcomes (i.e. financial returns), environmental impact (i.e. carbon emissions) and stakeholder pressure to consider environmental issues. We use the discrete choice experimental method to quantify the trade-offs between the above mentioned three attributes. In addition, we also investigate the potential effect of three contingency factors on individual's preferences. Specifically, at the organisational level, we explore the effects of financial and environmental rewards and at the individual level, we explore the effect of environmental consciousness. In line with the financialization hypotheses our results indicate that managers prioritise financial returns over carbon emissions and stakeholder pressures with the preference for financial returns found to be positively associated with rewards for financial performance. However, in line with the pragmatic approach and despite the overall dominance of financial returns, there is evidence that manager's focus on financial returns can be influenced, with the preference for financial returns negatively associated with rewards for environmental performance and environmental consciousness. In addition, while stakeholder pressure was not found to be associated with any of the three contingency factors and, manager's emphasis on carbon emissions was not associated with financial rewards, manager's emphasis on carbon emissions was found to be positively associated with both rewards for environmental performance and environmental consciousness. Therefore, our findings suggest that corporate management have an important role to play, both in respect to the design of performance rewards systems and the recruitment of environmentally conscious managers, in order to promote the sustainability agenda.     

Funding growth in an age of austerity

Everyone knows that corporate growth--true growth, not just agglomeration--springs from innovation. And the common wisdom is that companies must spend lavishly on R&D if they are to innovate at all. But in these fiscally cautious times, where every line item of every budget in every company is under intense scrutiny, many organizations are doing just the opposite. They tighten their belts, subject nascent product-development programs to rigorous screening, and train R&D staffers to think in business terms so the researchers will be better able to decide whether an idea for a product or service is worth pursuing in the first place. Such efficiency measures are commendable, say authors Gary Hamel and Gary Getz. But frugality is not a growth strategy, they point out, and, in truth, there is very little correlation between corporate performance and the amount spent on innovation. Companies like Southwest, Cemex, and Shell Chemicals have shown that businesses don't have to spend a fortune on R&D to reap the benefits of innovation. To produce more growth per dollar invested, companies must produce more innovation per dollar invested. Hamel and Getz explain how businesses can dramatically improve their innovation yields. They offer these five imperatives: Increase the number of innovators among existing employees (whatever their job titles) by involving them in innovation processes and events. Focus on developing truly radical ideas--ones that change customers' expectations and behaviors and industry economics--not just incremental ideas. Look for innovation sources outside the organization, as well as inside. Increase the learning from small, low-risk experiments. And commit to long-term, consistent development efforts.     

Value relevance of customer-related intangible assets

This study examines the stock market's valuation of customer-related intangible assets for a sample of publicly-traded U.S. firms. Customer-related intangible assets are found to be positively associated with equity prices, but valued at a discount relative to goodwill. These results suggest that value-relevant information is lost if customer-related intangible assets are subsumed into goodwill rather than being reported separately. This evidence can be useful to standard setters potentially considering extending to public companies a recent FASB Accounting Standards Update allowing private companies not to recognize separately from goodwill certain customer-related intangible assets.     

Market reactions to a cross-border carbon policy: Evidence from listed Chinese companies

The effects of cross-border carbon policy have attracted increasing attention worldwide. We investigate the reaction of the Chinese stock market to the announcements of 12 legislative events associated with the European Union Carbon Border Adjustment Mechanism (EU CBAM). Our results, based on all industrial companies listed on China's Shenzhen or Shanghai Stock Exchanges, show that Chinese companies that export their products to the EU experience a more negative cumulative abnormal return around EU CBAM events than their counterparts (non-export companies and non-EU export companies). A cross-sectional analysis reveals that negative stock market reactions to the legislative events are greater when companies have greater carbon emissions intensity. Our further analyses show that being listed in both A-share and H-share markets, participating in a carbon emissions trading scheme, and having intensive cross-border collaboration mitigate the adverse market reactions. Our results show that the Chinese market is sensitive to legislative announcements associated with this cross-border carbon policy.     

Politician as venture capitalist: Politically-connected VCs and IPO activity in China

This study examines the impact of venture capitalists' (VC) political connections on their portfolio companies. Specifically, we use a manually-collected dataset of VCs' political connection to investigate the potential benefits and costs that politically-connected VCs bring to their portfolio companies. On the benefit side, we find that companies backed by politically-connected VCs are more likely to obtain IPO approval from the Chinese Securities Regulatory Commission (CSRC, China's counterpart to the SEC in the US). On the other hand, these VCs are more likely to acquire equity in the company at a significant discount and to invest shortly before the IPO application. In addition, we find that politically-connected VC-backed companies do not experience greater improvements in financial performance, corporate governance, or innovation output subsequent to receiving venture financing. Our results further show that companies backed by VCs with political connections are less mature and experience more underpricing at their IPO than non-politically-connected VC-backed companies. Finally, we find that, compared to non-politically-connected VCs, politically-connected VCs exit earlier after a company's IPO and that their portfolio companies experience greater post-IPO underperformance and performance volatility.     

Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China

This study investigates whether good governance structures help constrain management's opportunistic behaviors (in the form of transfer pricing manipulations) in one of the world's most dynamic economies. Our data are a unique sample of 266 companies listed on the Shanghai stock exchange that disclose gross profit ratios on related-party transactions. We find that firms with a board that has a higher percentage of independent directors or a lower percentage of “parent” directors (i.e., directors who are representatives of the parent companies of the listed firms), or have different people occupying the chair and CEO positions, or have financial experts on their audit committees, are less likely to engage in transfer pricing manipulations. Overall, our research findings reveal that the quality of corporate governance is important in deterring the use of manipulated transfer prices in related-party sales transactions.     

Opportunistic disclosure in press release headlines

This paper examines managerial, self-serving, disclosure practices in the headlines of press releases announcing annual results. Headlines are a framing feature that can be used to capture and retain attention with the ultimate intention of affecting the thoughts and feelings of readers, thus influencing their opinions. Therefore, headlines have a key role in a company's communication strategy. Using a large sample of Spanish listed companies for the years 2005 and 2006, we provide evidence of persistent impression management in press release headlines. Companies, irrespective of whether they perform well or badly, are inclined to stress good news and downplay bad news. Companies with very small profits report surprising amounts of good news. We provide evidence that companies are selective in the performance figures they include in the headlines of press releases. In particular, the disclosure of profits or sales figures in press release headlines is also associated with earnings performance. Finally, we find that larger firms are more likely to issue press releases than smaller ones, consistent with the theory that highly visible firms face a greater demand for information transparency.