Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.     

Do VCs matter? the importance of owners on performance variance in start‐up firms

Adding to the corporate effect literature, we study the effect of owners on firm performance in a new context, that of venture capital firms (VCs) and the start‐up firms in which they invest. After discussing the effect that VC ownership can have on start‐ups, we estimate that start‐up‐specific, owner (VC), and year effects account for significant variance in performance (26.3 percent, 11.2 percent and 3.7 percent, respectively). The effects of industry and investment stage are not statistically different from zero. We also provide an analysis that separates the owner effect into two components: a selection component—which impacts investment—and a management component—which explains significant variance in performance. By examining the owner effect in a different institutionalized form of governance—that of the start‐up and its relationship to VC owners—our study also contributes to an understanding of the ‘ownership’ effect in the strategy literature more generally. Copyright © 2008 John Wiley & Sons, Ltd.     

Does subnational region matter? Foreign affiliate performance in the United states and China

This study examines the extent to which subnational regions can explain foreign affiliate performance in two host country settings, the United States and China, the world's two largest economies at polar ends of the economic spectrum (i.e., an advanced versus an emerging economy). Our results suggest that the subnational region is significant in explaining foreign affiliate performance, thus confirming its importance as an additional unit of analysis for firm performance. This study also shows that the effects of subnational region are far stronger in China than they are in the United States, thus suggesting that regional differences are more critical in their explanatory power for firm performance in emerging economies than they are in advanced economies. Copyright © 2010 John Wiley & Sons, Ltd.     

Do board chairs matter? The influence of board chairs on firm performance

Research summary : We use a variance decomposition methodology to assess the degree to which board chairs may influence their companies' performance. To isolate the board chair effect, we focus on firms in which the CEO and board chair positions are separated. Using a U.S. sample of 6,290 firm‐year observations representing 1,828 board chairs in 308 different industries, our results indicate that the board chair effect is substantial at about nine percent. Drawing on resource dependency theory, we also theorize and show how this board chair effect is contingent on the task environment in which firms operate. Our results add to the literature examining the role and influence of board chairs and the context in which chairs may have a greater impact on performance. Managerial summary : Following institutional and regulatory changes, more firms are separating the CEO and board chair positions. With an increasing number of individuals separate from the CEO serving as board chairs, a critical question becomes: What influence do these separate board chairs have on firm performance? Prior research suggests that separate board chairs can provide important resources—including advice and counsel, legitimacy, information linkages, and preferential access to external commitments and support—to their CEOs, other top managers, and overall firms. In turn, who the board chair is and the individual's ability (or lack thereof) to provide these resources may have a significant impact on firm performance. Offering support for this perspective, we find that separate board chairs explain nine percent of the variance in firm performance. Copyright © 2016 John Wiley & Sons, Ltd.     

Organizational innovativeness and firm performance: Does sales management matter?

Salespeople interact with individual customers to drive revenues by identifying and finding solutions for customer needs. The external knowledge salespeople acquire in conjunction with the network position they hold in their firm suggests that the sales force has great value in facilitating organizational innovativeness. Sales managers set the tone for sales operations, and an intellectually stimulating sales manager can create ripple effects of innovative thinking across the sales force and organization. In this paper, we propose that sales manager intellectual stimulation helps drive organizational innovativeness and, in turn, sales growth. Survey data collected from a cross-industry sample of business-to-business sales leaders are linked to an objective measure of firm sales growth. The results indicate that sales manager intellectual stimulation leads to organizational innovativeness. They also suggest that the degree to which the sales department is integrated within the firm strengthens this positive relationship. Finally, the relationship between organizational innovativeness and sales growth follows a non-linear U shape.     

Does corporate strategy matter?

A revisionist view that corporate strategy does not matter has gained considerable influence in recent years. This view largely stems from empirical results of early variance decomposition studies that found negligible corporate effects associated with profitability differences between businesses. Our analysis of the variance decomposition literature shows this view to be incorrect. Not only do the studies as a group show that factors at the corporate level of organizations contribute to profitability differences, but also evidence suggests that factors specifically associated with corporate strategy contribute to corporate effects. Corporate strategy in fact does matter. Copyright © 2001 John Wiley & Sons, Ltd.     

When does ownership matter? Board characteristics and behavior

We develop a contingency approach to explain how firm ownership influences the monitoring function of the board—measured as the magnitude of external audit fees contracted by the board—by extending agency theory to incorporate the resource dependence notion that boards have distinct incentives and abilities to monitor management. Analyses of data on Continental European companies reveal that while board independence and audit services are complementary when ownership is dispersed, this is not the case when ownership is concentrated—suggesting that ownership concentration and board composition become substitutes in terms of monitoring management. Additional analysis shows that the relationship between board composition and external audit fees is also contingent upon the type of the controlling shareholder. Copyright © 2013 John Wiley & Sons, Ltd.     

Does food security matter for transition in Arab countries?

Expectations are high that transition in Tunisia, Egypt, Libya, and Yemen will bring about more freedom, justice, and economic opportunities. However, experiences from other world regions show that countries in transition are at high risk of entering conflicts, which often come at large economic, social and political costs. In order to identify options on how conflict may be prevented in Arab transition countries, this paper assesses the key global drivers of conflicts based on a dataset from 1960 to 2010 and improved cross-country regression techniques. Results show that unlike in other studies where per capita incomes, inequality, and poor governance, among other factors, emerge as the major determinants of conflict, food security at macro and household-levels emerges as the main cause of conflicts in the Arab World. The high exposure of Arab countries to global food price variations proves to be an important source of vulnerability for a peaceful Arab transition. If history is also a guide to the future, improving food security is not only important for improving the lives of rural and urban people; it is also likely to be the key for a peaceful transition. The paper concludes with a set of policy options on how to improve food security at macro and household-levels, including safeguard mechanisms against excessive price volatility, export-led and pro-poor growth, the creation/expansion of social safety nets and targeted nutrition programs.     

Does knowledge management matter for information technology applications in China?

This study explores the role of knowledge management (KM) in mediating and moderating the relationship between information technology (IT) and firm performance based upon the data collected from 236 firms in China. Through a structural equation model and hierarchical regression analysis, we found that KM capability partially mediated the performance impact of IT resources. Furthermore, KM capability affected the strength of the IT-performance relationship. The theoretical contributions and managerial implications are discussed and limitations of the study are highlighted accordingly.

Does corporate ownership structure affect its strategy towards diversification?

We claim that there is a link between corporate control structure and managers’ strategy towards unrelated mergers and risk diversification. Companies with greater ownership concentration are less diversified. Evidence also shows that corporate diversification generally results in value loss while focussing is value increasing. This highlights the potentially detrimental effect of agency problems on corporate strategy. Copyright © 1999 John Wiley & Sons, Ltd.     

Export behavior of Italian food firms: Does product quality matter?

Using firm-level data we investigate the export behavior of Italian food firms, focusing on the link between total factor productivity (TFP), product quality, and export across heterogeneous destinations. We test the main predictions of an international trade model based on firm heterogeneity in product quality and non-homothetic preferences in consumption. In this setting, the firm’s export intensity should be increasing in the per-capita income of foreign destinations, and the effect should be largely driven by firms’ heterogeneity in product quality. Using different measures of revenue-TFP, and different proxies for product quality, we find strong support for the main model predictions. Moreover, consistent with the Alchian–Allen effect, we find a positive relationship between the quality of exported products and the distance of destination countries.     

Does Distance Matter Less Now? The Changing Role of Geography in Biotechnology Innovation

Using patent citation data for the U.S., we test whether knowledge spillovers in biotechnology are sensitive to distance, and whether that sensitivity has changed over time. Controlling for self-citation by inventor, assignee, and examiner, cohort-based regression analysis shows that physical distance is becoming less important for spillovers with time.     

Does experience matter? — A study of knowledge processes and uncertainty reduction in solution innovation

Solution innovation often exposes uncertainties that are addressed by corporate collaboration through networks. This paper examines the link between uncertainty reduction and knowledge processes. It focuses specifically on the role of company experience which some have argued to be a vital form of knowledge accumulation, whereas others assert that it is not always beneficial. Our central finding is that experience enhances knowledge transfer, yet contributes little to knowledge cross-fertilization activities. Knowledge transfer alone does not lead to uncertainty reduction. Drawing upon this we make the case for a more nuanced concept of knowledge cross-fertilization. Managers and innovators are therefore urged to look more closely at the question of experience if they are to harvest full value from network collaboration.     

Does distance matter for internationally-oriented small firms?

This paper assesses the contemporary relevance of distance and its key components in international business for young, internationally-oriented small firms. In doing so, it reconceptualizes the distance concept and investigates its relevance in American, British, and German firms' early foreign market selection. Economic, geographic, and cultural distance (based on Hofstede's and Schwartz's frameworks) for the three countries, along with psychic distance for the German firms, are considered. The results show that some components of distance still matter for internationally-oriented small firms and that cultural distance is sample source and concept sensitive. In addition, psychic distance acts as a mediator construct to the more objective, external distance measures of economic, geographic, and cultural distance, confirming the proposed distance framework.     

Advertising to businesses: Does creativity matter?

Business-to-business advertising research has long been grounded in rationality with a focus on factual, functional, benefit-laden messages. However, in consumer advertising, psychological differentiators, such creativity, are frequently used to increase advertising effectiveness. With growing evidence that consumer marketing concepts apply to business buyers, this research investigates the effect advertising creativity has on the organizational buying process. Using an online survey, we present actual advertisements to managers in the B2B environment. Our results provide strong evidence that message creativity influences business managers' response toward advertising for site selection. Creative ads generated stronger shifts in attitudes toward the ad, attitudes toward the brand, and behavioral intentions. The results extend previous research on the role of creativity in advertising to a business-to-business context. The results also challenge conventional wisdom and dominant practices in advertising to businesses.     

Does social capital matter for supply chain resilience? The role of absorptive capacity and marketing-supply chain management alignment

Marketing in an increasingly tumultuous marketplace requires resilience -the ability to withstand, adapt, and flourish despite turmoil and adverse change- that extends beyond firm boundaries. Although external resources are arguably essential to achieve resilience, little is known how and when firms' social capital derived from interorganizational relationships can lead to supply chain resilience. Therefore, we investigate the role of absorptive capacity and marketing-supply chain management alignment in realizing the potential impact of social capital on supply chain resilience. Using data obtained from dual respondents from 265 Turkish firms, we test the mediating role of absorptive capacity and the moderating role of marketing-supply chain management alignment. Our findings indicate absorptive capacity mediates the relationship between social capital and supply chain resilience, and the links between social capital and absorptive capacity and social capital and supply chain resilience are stronger when marketing-supply chain management alignment is high. We also find that supply chain resilience is positively associated with organizational performance, empirically supporting the proposed value of supply chain resilience for firm strategy. Accordingly, our paper highlights that both absorptive capacity and marketing-supply chain management alignment are necessary to realize the actual value of social capital for supply chain resilience and ensuing performance.     

Consumers’ valuation for food traceability in China: Does trust matter?

Food safety is a very important topic in China. We investigate Chinese consumers’ preferences and willingness to pay (WTP) for food traceability using a choice experiment. Given that consumers’ trust in the food system may affect their preferences and WTP, we also assess the interaction between consumers’ trust in government’s supervision of food safety and food labels and consumers’ preferences for traceable food products. Using data collected from a choice experiment on Fuji apples in a face-to-face survey in six Chinese cities, the results show that (i) consumers are willing to pay for traceable food but their valuations can differ upon the degree of their trust in government’s supervision of food safety and food labels; (ii) consumers are willing to pay for traceability with strong evidence of preference heterogeneity; (iii) government is not the most trusted safety inspection and certificate authority as found in prior studies using animal food products in China.     

Determinants of technological innovation success and failure: Does marketing innovation matter?

Innovation is attracting increasing attention from public authorities, enterprises, and academics. Although emerging evidence has indicated that marketing innovation should be regarded as critical as technological innovations for enhancing companies' competitiveness, few studies have considered this topic.This study aims to address this gap by examining the role of marketing innovation in the relationship between technological innovation and innovation success and failure. This study analyses the 2010–2012 Community Innovation Survey sample of German enterprises by using a double hurdle model and a probit model with sample selection. The results show that when enterprises undertake a technological innovation, introducing a marketing innovation is observed not to play a significant role regarding innovation success and failure. Notably, when the four types of marketing innovations are disentangled in the analysis, new findings emerge. Innovation in product packaging and design is positively related to innovation success. Innovation in product promotion is negatively related to innovation success and positively related to probability of innovation failure. Academics are called to study the role of marketing innovation, regarding innovation success and failure, by devoting their attention to the level of each marketing innovation. Enterprises should then carefully consider which marketing innovation should be introduced.     

Does firm performance reveal its own causes? the role of Bayesian inference

A central problem in strategic management is how the inference ‘sustainable competitive advantage generates sustainable superior performance’ can be put into practice. In this article we develop a theoretical framework to understand the causal relationships among (1) sustainable competitive advantage, (2) configuration, (3) dynamic capability, and (4) sustainable superior performance. We propose that a firm's competitive advantage, resource bundle configuration, and dynamic learning capability cannot be comprehended by outsiders. Its operational performance, however, can be captured by financial indicators. We promote an inductive Bayesian interpretation of the sustainable competitive advantage proposition. From this viewpoint, the presence or absence of competitive advantage may be reflected in the causal relationship between resource configuration, dynamic capability, and observable financial performance. We apply this theoretical framework to an example drawn from the global semiconductor industry, an area in which resource configuration and dynamic capability are essential to performance. The paper concludes with a summary of the proposed model and suggestions for future theoretical development of strategic management. Copyright © 2009 John Wiley & Sons, Ltd.