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.     

Business sustainability factors and stock price informativeness

This paper investigates whether and how business sustainability performance and disclosure factors affect stock price informativeness (SPI). We find that non-financial environmental, social, and governance (ESG) sustainability performance factors are positively associated with idiosyncratic volatility (our proxy for SPI) after controlling for financial-economic performance. We further show that the association between sustainability performance factors and SPI is stronger for firms with higher sustainability disclosure. We find that the association between ESG sustainability performance factors and SPI is stronger when economic performance is weaker, suggesting that investors tend to pay more attention to ESG performance factors when firms are financially underperforming. This study shows that investors pay attention to both firm economic performance (corporate profitability and growth prospect) and ESG sustainability performance and disclosure factors, which have implications for policymakers, regulators, investors, businesses, and researchers.     

Performance implications of strategic performance measurement in financial services firms

This study examines the relation between measurement system satisfaction, economic performance, and two general approaches to strategic performance measurement: greater measurement diversity and improved alignment with firm strategy and value drivers. We find consistent evidence that firms making more extensive use of a broad set of financial and (particularly) non-financial measures than firms with similar strategies or value drivers have higher measurement system satisfaction and stock market returns. However, we find little support for the alignment hypothesis that more or less extensive measurement than predicted by the firm's strategy or value drivers adversely affect performance. Instead, our results indicate that greater measurement emphasis and diversity than predicted by our benchmark model is associated with higher satisfaction and stock market performance. Our results also suggest that greater measurement diversity relative to firms with similar value drivers has a stronger relationship with stock market performance than greater measurement on an absolute scale. Finally, the balanced scorecard process, economic value measurement, and causal business modeling are associated with higher measurement system satisfaction, but exhibit almost no association with economic performance.     

The valuation relevance of environmental performance revisited: The moderating role of environmental provisions

This study attempts to broaden our understanding of the value relevance of environmental performance by providing empirical evidence on the moderating role of financial environmental reporting. Previous studies find that firms' environmental performance can be both positively and negatively associated with market value. Such contradictory findings can be attributed to the fact that environmental performance is associated with future economic benefits and costs. This study suggests that firms with recognized environmental provisions on their balance sheets enable investors to disentangle these opposite effects either by signaling strong future financial performance or by enhancing the reliability of environmental performance information. Regardless of the mechanism by which this moderation effect is invoked, it is hypothesized that capital market participants place a positive and significantly higher value on the environmental performance ratings of firms with recognized environmental provisions than on the ratings of firms without environmental provisions. Utilizing a sample of 692 firm-year observations of French listed firms and employing a linear price-level model that associates the market value of a firm's equity with its environmental performance, I provide empirical evidence to corroborate this thesis. In addition to contributing to the academic debate on the market valuation implications of environmental performance, this study intends to provide useful insights from a country that can be considered a pioneer of environmental reporting legislation; hence, it provides valuable lessons for other jurisdictions that are in the process of developing their sustainability reporting regulations. Finally, the findings of this study support the calls for more integrated reporting showing that the interaction of financial and non-financial information has market valuation implications.     

Customer-focused manufacturing strategy and the use of operations-based non-financial performance measures: A research note

This note follows and extends Abernethy and Lillis (Accounting, Organizations and Society, 1995) by examining: (i) whether firms which maintain a customer-focused manufacturing strategy also maintain an emphasis on non-financial (operations-based) measures in their performance measurement systems; and (ii) whether such an emphasis is associated with enhanced performance for those firms. Data are obtained via questionnaire survey of a random sample of manufacturing firms in Sydney, Australia. Support is found for the hypothesized association between customer-focus strategy and the use of non-financial performance measures (and hence for Abernethy and Lillis) but not for the link to organizational performance.     

National Culture and the Value Implications of Corporate Environmental and Social Performance

We examine why environmental and social (E/S) performance vary across countries and firms, and evaluate the value implications. Using a sample of 33,021 firm-year observations representing 4587 firms from 43 countries over the 2003–2015 period and applying hierarchical linear modeling, we find that individualism is positively associated with firm-level E/S performance. We show that two country-level channels—freedom of the press and protection of equal rights—and three firm-level channels—managerial discretion, board diversity, and corporate transparency—link individualism to E/S performance. We find a positive association between firm-level E/S performance and firm value, with three firm-level channels—cash flows, cash flow variability, and cost of equity—linking E/S performance to firm value. This positive association is stronger in more individualistic countries. Finally, we find that internationalization weakens the role of national culture; however, it accentuates the positive association between firm-level E/S performance and firm value.     

Is forward-looking financial disclosure really informative? Evidence from UK narrative statements

Forward-looking financial disclosure (FLFD) is potentially uninformative if it does not change from the previous year, especially after a significant change in firm performance. This study aims to examine whether and to what extent FLFD is changed in response to changes in firm performance. Then, it investigates the effect of such change in FLFD on firm value. The study uses a sample of UK narrative statements over the period from 2005 to 2011. It finds an association between change in FLFD and change in firm earnings performance. However, it finds weak evidence that firms with larger changes in earnings performance are likely to change their FLFD more than those with smaller performance changes. In addition, when we distinguish between well-performing and poorly performing firms, it finds that the change in FLFD is more positively associated with poorly performing firms compared to well-performing firms. Finally, the change in FLFD has no effect on the value of well-performing firms, while, it negatively affects poorly performing firms. The results suggest that forward-looking financial information in UK narratives contains some relevant information about firm performance. However, it neither affects the value of well-performing firms nor enhances investors' valuation of poorly performing firms.     

Revisiting carbon disclosure and performance: Legitimacy and management views

With corporate disclosure of carbon emissions rapidly increasing, the long-standing question remains whether carbon disclosure has any influence on the improvement of carbon performance. Previous studies of environmental disclosure and performance have predominantly focused on whether disclosure is a substitute for poor performance. Little attention has been devoted to the more important question about how changes in disclosure may lead to subsequent changes in performance over time. Following the rationales taken by the legitimacy and management perspectives, we revisit the relationship between carbon disclosure and performance, with a focus on changes that disclosure may (or may not) create. Using a change analysis of Global 500 companies and their carbon emission and disclosure data released between 2008 and 2012, this study finds that the change in carbon disclosure levels is positively associated with a subsequent change in carbon performance (examined through direct and indirect carbon emission intensities). Thus, regardless of whether disclosure has been used as a legitimising tool for prior poor performance, this study confirms that carbon disclosure motivates companies and creates an ‘outside-in’ driven effect for subsequent change and improvement in carbon performance. However, the association between changes in carbon disclosure and performance is relatively weaker in high energy-intensive firms.     

Corporate governance,SFAS 157 and cost of equity capital: evidence from US financial institutions

This study examines the association between fair value measurements and the cost of equity capital under different fair value valuation methods, and assesses the impact of corporate governance on this relationship for US financial firms. We find that firms’ cost of equity capital is negatively associated with more verifiable fair value assets and positively related to less verifiable fair value assets. Furthermore, the positive association between less verifiable fair value assets and the cost of equity capital is mitigated under better corporate governance. The differential impact between more and less verifiable assets becomes smaller for firms with stronger governance. Our findings contribute to the ongoing debate on fair value regulation by investigating the economic consequences of adopting Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) and the importance of audit committee financial expertise on fair value reporting. We also provide evidence on the importance of board independence, internal control strength, auditor industry specialists, and audit committee financial experts in fair value reporting.     

Real Earnings Management,Institutional Environment,and Future Operating Performance: An International Study

This paper investigates the association between firms' engagement in real activities manipulation (hereafter REM) on future firm performance in an international setting, and whether the association is conditional upon country-level institutional factor. Our inquiry is motivated by a paucity of research on the consequences of REM in an international setting. Using a large sample over the period of 2001 to 2015, we find that current-period REM is positively associated with future performance: a finding that is consistent with Gunny (2010) in the US. Importantly, we find that the positive performance effect is driven by firms operating in countries with strong institutional environments. Finally, we find that future operating performance improves when REM is undertaken by firms in strong institutional environments only during a non-economic crisis period, but not during an economic crisis period. The paper adds to the existing REM literature by showing a non-monotonic effect of REM on future performance that is conditional on the strength of a country's institution. We also contribute to the accounting information and crisis literature by documenting a time-variant effect of REM on future performance.     

Directors skill and financial reporting quality

Motivated by theoretical models in economics which show that there is matching between CEO skill and firm size, we introduce a new measure of director skill which is based on the aggregate size of firms on which the director serves as an independent director. We validate our measure by showing that it is positively associated with director experience, financial expertise, industry expertise and managerial experience. We then examine whether our average measure of skill across board members is positively associated with monitoring quality. Controlling for the endogenous relationships between board composition and financial reporting quality, we find a positive association between our board measure for skill and monitoring quality, and we show that directors have a causal impact on monitoring effort and outcomes. Furthermore, consistent with the enhanced monitoring provided by skilled directors, we document a positive association between the level of and changes in our measure and firm value.     

Corporate board and board committee independence,firm performance,and family ownership concentration: An analysis based on Hong Kong firms

This study examines whether the relationship between corporate board and board committee independence and firm performance is moderated by the concentration of family ownership. Based on a sample of Hong Kong firms, we find no significant association between the independence of corporate boards or board committees and firm performance in family firms, whereas board independence is positively associated with firm performance in non-family firms. Additionally, our findings show that the proportion of independent directors on the corporate boards of family firms is lower than that of non-family firms, but we find no significant difference in the representation of independent directors on the key committees of corporate boards between family and non-family firms. Overall, these results suggest that the “one size fits all” approach required by the regulatory authorities for appointing independent directors on corporate boards may not necessarily enhance firm performance, especially for family firms. Thus, the requirement to appoint independent directors to the corporate boards of family firms needs to be reconsidered.     

Do investors find carbon information useful? Evidence from Italian firms

The usefulness of carbon disclosures has been questioned in the literature because they do not truly reflect firm’s carbon performance, suggesting that they may not be useful for risk evaluation and investment decisions. This study empirically tests the usefulness of carbon information voluntarily disclosed by the Italian firms. Our results based on the price model show that there is a positive association between the stock price and carbon disclosures, suggesting that investors find carbon information useful for their investment decisions. We find similar results based on the market valuation model. Additionally, the results reveal that the positive association is especially strong for firms that have established environmental committees on a voluntary basis and also for firms from the highly polluting industries defined by the EU_ETS program, confirming that investors’ positive response is especially strong to carbon disclosures by firms from the highly polluting industries. We also find that the market reacts positively to carbon disclosures by firms with a higher percentage of independent directors on their corporate boards, but the positive association is marginally significant.     

Are boards' risk management committees associated with firms’ environmental performance?

We examine the relationship between board of director committees tasked with risk management and environmental performance, based on a sample of 1466 firm-year observations from 2007 to 2015. We find that the presence of board committees dedicated only to risk management is associated with better environmental performance. The human capital of risk committees (measured by board tenure, committee tenure, experience, and qualifications) is also positively related to environmental performance. Our findings suggest that the benefits of risk management committees extend to non-financial matters, such as environmental performance. Our findings further suggest that environmental performance is now managed through the regular governance mechanisms within firms. This supports the notion that environmental performance is managed for economic reasons and for the benefit of investors, rather than for the aggrandisement of individual managers. Our findings should be of interest to boards, CEOs, and CFOs who are interested in risk management, as well as to investors, lenders, and auditors who are interested in assessing risk.     

The effect of corporate culture on firm performance: Evidence from China

This study examines whether corporate culture promotion affects firm performance in China in terms of firm market value, firm financial performance and innovation output. We find consistent evidence that corporate culture promotion is negatively related to firm market value, positively related to innovation output and not significantly related to firm financial performance. In addition, the negative effect of corporate culture promotion on firm market value is driven by small firms and firms located in less developed provinces. Furthermore, we find that some specific corporate culture promotions, such as innovation culture promotion and integrity culture promotion, are not related to firm value or financial performance. However, innovation culture promotion is positively associated with innovation output.     

Strategy, performance-measurement systems, and performance: A study of Chinese firms

Numerous studies in developed Western countries have shown that firms' strategic choices are responsive to attributes of their external environment. In turn, performance-measurement systems are used to support strategy implementation, which then affect firm performance. However, institutional factors may limit the extent to which these linkages exist in the transitional Chinese economy. We analyze survey and publicly available data for 104 listed Chinese manufacturing firms and find that, despite a number of identifiable impediments, these firms' strategic emphasis on growth is responsive to the competition and uncertainty that they face. In the case of uncertainty, the relationship goes in the opposite direction to that found in Western firms. Like their Western counterparts, Chinese firms with greater emphasis on growth also tend to make greater use of balanced/integrated performance measurement systems, and, in turn, they perform at a higher level.     

When the Japanese stock market meets COVID-19: Impact of ownership,China and US exposure,and ESG channels

We identify factors affecting the Japanese stock market during the COVID-19 pandemic period. First, we focus on the ownership structure. We find that indirect ownership through the exchange-traded fund purchasing program by the Bank of Japan has a positive impact on abnormal returns. Foreign ownership is negatively associated with abnormal returns, whereas ownership by traditional business groups is positively associated with abnormal returns. Second, we examine the impact of global value chains and find that stock returns are lower for companies with China and U.S. exposure. Third, in terms of environmental, social, and governance (ESG) engagement, there is no evidence that firms that have highly rated ESG scores have higher abnormal returns, but firms with ESG funds outperform those without.     

The Relation between Stakeholder Management,Firm Value,and CEO Compensation: A Test of Enlightened Value Maximization

Whether firms pursue shareholder value maximization or the maximization of stakeholder welfare is a controversial issue whose outcomes seem irreconcilable. We propose that firms are likely to compensate their executives for pursuing the firm's goal be it shareholder value maximization or the maximization of stakeholder welfare. In this paper, we examine the correlation between firm value, stakeholder management, and compensation. We find that stakeholder management is positively related to firm value. However, firms do not compensate managers for having good relationships with its stakeholders. These results do not support stakeholder theory. We also find an endogenous association between compensation and firm value. Our results are consistent with Jensen's (2001) enlightened value maximization theory. Managers are compensated for achieving the firm's ultimate goal, value maximization. However, managers optimize interaction with stakeholders to accomplish this objective.     

A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction

We posit that information about CEO pay ratios is important to investors because employees' perceived fairness of their firm’s CEO pay ratio has consequences for firm performance. We use path analysis to examine the association between firm performance and (1) the predicted CEO pay ratio as determined by economic factors (the fair component of CEO pay ratio) and (2) the predicted CEO pay ratio as determined by non-economic factors (the unfair component of CEO pay ratio). We test for the existence and relative importance of direct and indirect paths using two measures of employee satisfaction and two measures of firm performance. We find that pay equity, a larger CEO pay ratio driven by economic factors, is associated with employee contributions to better firm performance. Conversely, we show that pay inequity, a larger CEO pay ratio driven by non-economic factors, is associated with employees' contributions to poorer firm performance. Consistent with the view that managerial entrenchment may amplify the negative effects of the CEO pay ratio, we find that the negative indirect path between pay inequity and firm performance, mediated by employee satisfaction, is more pronounced in firms with entrenched CEOs. Our findings contribute to the accounting compensation literature because they are consistent with CEO pay ratio information having economic consequences.     

Employment quality and 10-K report readability

This study examines the relationship between firms’ employment quality and annual report readability. Using 9,366 U.S. firm-year observations from 1994 to 2018, we find that a favorable employment quality is positively associated with a more readable 10-K report. Such a positive relationship can be observed when firms recruit industry-specialist auditors and when employees are considered important stakeholders to the firm. However, we find a negative association between employment quality and 10-K report readability when there is a presence of firm-level unionization. Our findings inform policymakers that initiatives to promote disclosure readability may be undermined by firms that place less emphasis on employment quality. Further, firm-level unionization can reduce the incentive for firms with a favorable employment quality to provide readable disclosures.