Disaggregating the group effect: Vertical and horizontal <Emphasis Type="Italic">keiretsu</Emphasis> in changing economic times

This paper examines the evolution of keiretsu group affiliation among members of horizontal and vertical keiretsu in Japan over two time periods: 1992–1997, and 1997–2002. We found that ties were more stable in the later time period and therefore restricted our empirical analysis to the 1992–1997 period. We also found differences in the response of vertically and horizontally linked groups to economic downturn and capital market change—vertically linked groups weakened their ties while horizontally linked groups showed more stability.     

Gibrat's Law: Are the Services Different?

Several noted surveys on intra-industry dynamics have reached the conclusion from a large body of evidence that Gibrat's Law does not hold. However, almost all of these studies have been based on manufacturing or large scale services such as banking and insurance industries. There are compelling reasons to doubt whether these findings hold for small scale services such as the hospitality industries. In this paper we examine whether the basic tenet underlying Gibrat's Law– that growth rates are independent of firm size – can be rejected for the services as it has been for manufacturing. Based on a large sample of Dutch firms in the hospitality industries the evidence suggests that in most cases growth rates are independent of firm size. Validation of Gibrat's Law in some sub-sectors of the small scale services suggests that the dynamics of industrial organization for services may not simply mirror that for manufacturing. The present paper includes a survey of nearly 60 empirical studies on firm growth rates.     

The Kigyo Keiretsu Organization and Opportunism in the Japanese Automobile Manufacturing Industry

This paper contends that the distinguishing feature of the subcontracting system for the manufacture and distribution of auto-parts in the Japanese automobile manufacturing industry can be explained by the opportunism hypothesis of transaction cost theory. Opportunism may arise when the parts-supplier uses its information advantage to obtain more favorable contract terms with the manufacturer. It is argued that in response to this kind of informational opportunism, the automobile manufacturer institutes a special form of vertical arrangement, called the kigyo keiretsu group. The kigyo keiretsu group consist of an association of vertically related parts-makers held together by a high degree of sales and technological interdependence, by partial stock ownership, by interlocking boards of directors and by long-term contract. This study raises the possibility of mitigating opportunism among the kigyo keiretsu group firms throughout the core automaker's shareholdings of its parts-supplier.     

The Sources and Advantages of Japanese Industrial Organization

Using agency theory, this paper investigates advantages linked to Japanese industrial organization. Three variables theoretically linked to keiretsu organization, ownership structure, inter-firm investment, and financing flexibility were able to correctly classify U.S. and Japanese firms. We detect polarization of U.S. and Japanese firms in terms of performance and strategic decisions.     

The Determinants of Survival of Spanish Manufacturing Firms

This paper analyses the factors determining Spanish manufacturing firms survival–and exit. The data are drawn from the survey Encuesta sobre Estrategias Empresariales for the period 1990–1999. The methodology includes both non-parametric techniques and the estimation of a Cox proportional hazards model (CPHM). Our results suggest that the probability of exit is higher for small firms and also for young and mature firms. Furthermore, exporting firms and firms performing R&D activities enjoy better survival prospects.     

Takeover defenses,innovation, and value creation: Evidence from acquisition decisions

The desirability of antitakeover provisions (ATPs) is a contentious issue. ATPs might enable managerial empire building by insulating managers from disciplinary takeovers. However, some companies, such as “hard‐to‐value” (HTV) companies, might trade at a discount due to valuation difficulties, thereby exposing HTV companies to opportunistic takeovers and creating agency conflicts of managerial risk aversion. ATPs might ameliorate such managerial risk aversion by inhibiting opportunistic takeovers. This paper analyzes acquisitions made by HTV firms, focusing on whether the acquirer (not the target) is entrenched in order to examine the impact of entrenchment managerial decision making. The results show that HTV firms that are entrenched make acquisitions that generate more shareholder wealth and are more likely to increase corporate innovation, suggesting that ATPs can be beneficial in some firms. Copyright © 2013 John Wiley & Sons, Ltd.     

Diversification Strategies and Corporate Coherence Evidence from Italian Leading Firms

This paper investigates the determinants of coherence and coherence change usinga sample of Italian leading firms in the period 1993–1996. Consistently with thehypotheses advanced by Teece et al. (1994), the econometric analysis highlightsthat relatedness between pairs of sectors and coherence of diversification strategiesare higher when firms are active in sectors sharing similar technological and marketingcharacteristics, and when they are positioned at different stages of the productive chain.Moreover, the findings that firms which enter the group of top 5 industry leaders aremore coherent than the average and that coherence is increasing for firms active insectors more sensitive to EU integration are consistent with the prediction that coherentfirms tend to outperform less coherent ones and that coherence is increasing in morecompetitive environments. Finally, the results show that a deepening of vertical integration strategies is good for coherence change, while an increase of diversification brings a reduction in coherence.     

The Impact of Product Market Competition on Employment Determination in Unionised and Non-Unionised Firms: Firm Level Evidence for the U.K.

In this paper we investigate the effect of increasedcompetition on employment inunionised andnon-unionised firms. We model product and labourmarket imperfections, and their interactions, in Nashequilibrium. The model predicts that employment lossin unionised firms in the face of increasedcompetition will be lower compared with non-unionisedfirms. This paradoxical outcome results from anoffsetting beneficial employment effect ofcompetition, which eliminates wage mark-ups inunionised firms. We find empirical support for thetheoretical prediction using U.K. firm level data overthe period 1985–1989.     

Independent boards and the institutional investors that prefer them: Drivers of institutional investor heterogeneity in governance preferences

Institutional investors report that they prefer to invest in firms with greater board independence despite the fact that researchers have been unable to demonstrate a link between board independence and firm performance. We investigate whether differences among institutional investors affect these preferences. We find that trading strategies have some effect but that mutual funds—facing the strongest institutional pressures—have significantly stronger preferences for firms with greater board independence than do other types of institutional investors. This suggests that institutional investor preferences for independent boards are at least partially driven by institutional pressures rather than anticipated reductions in agency costs. Copyright © 2013 John Wiley & Sons, Ltd.     

Firm litigation risk and the insurance value of corporate social performance

This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm's financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries. Copyright © 2013 John Wiley & Sons, Ltd.     

Risk abatement as a strategy for R&D investments in family firms

The behavioral agency model suggests family firms invest less in R&D than nonfamily firms to protect their socioemotional wealth. Studies support this contention but do not explain how family firms make R&D investments. We hypothesize that when performance exceeds aspirations, family firms manage socioemotional and economic objectives by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments that result in potentially higher but less reliable sales levels. Using a risk abatement model, our analyses of 847 firms over 10 years supports our hypotheses. Copyright © 2013 John Wiley & Sons, Ltd.     

Home Alone: The Effects of Lone‐Insider Boards on CEO Pay,Financial Misconduct,and Firm Performance

Research summary: Corporate scandals of the previous decade have heightened attention on board independence. Indeed, boards at many large firms are now so independent that the CEO is “home alone” as the lone inside member. We build upon “pro‐insider” research within agency theory to explain how the growing trend toward lone‐insider boards affects key outcomes and how external governance forces constrain their impact. We find evidence among S&P 1500 firms that having a lone‐insider board is associated with (a) excess CEO pay and a larger CEO‐top management team pay gap, (b) increased likelihood of financial misconduct, and (c) decreased firm performance, but that stock analysts and institutional investors reduce these negative effects. The findings raise important questions about the efficacy of leaving the CEO “home alone.” Managerial summary: Following concerns that insider‐dominated boards failed to protect shareholders, there has been a push for greater board independence. This push has been so successful that the CEO is now the only insider on the boards of more than half of S&P 1500 firms. We examine whether lone‐insider boards do in fact offer strong governance or whether they enable CEOs to benefit personally. We find that lone‐insider boards pay CEOs excessively, pay CEOs a disproportionately large amount relative to other top managers, have more instances of financial misconduct, and have lower performance than boards with more than one insider. Thus, it appears that lone‐insider boards do not function as intended and firms should reconsider whether the push towards lone‐insider boards is actually in shareholders' best interests. Copyright © 2017 John Wiley & Sons, Ltd.     

Comment on “fishing for sharks: Partner selection in biopharmaceutical R&D alliances” by diestre and rajagopalan

A recent study of R&D alliances between new biotechnology firms (NBFs) and pharmaceutical firms investigated how NBFs deal with the “swimming with sharks” dilemma involved in allying with firms capable of appropriating value. It concludes that NBFs are less likely to select alliance partners with related expertise because of greater appropriation risk. Based on our experience as NBF managers and a survey of NBF executives, we believe that such situations are uncommon, and that the study more likely shows pharmaceutical firms seeking diversification. Thousands of NBFs seek alliances with the top 100 pharmaceutical firms, and the larger company is much more likely to be the one to select among multiple potential partners. Copyright © 2013 John Wiley & Sons, Ltd.     

Unmixed signals: How reputation and status affect alliance formation

We analyze how incumbents in technology‐driven industries are influenced by founders' reputation and status when considering strategic alliances with newly emerging firms. We theorize that reputation and status represent two distinct components of perceived quality that exert independent and interdependent effects on alliance formation. Using literature on impression formation processes to derive predictions of signal congruence, we argue that the independent effects of reputation and status are amplified when the two are congruent, and that the effect of negative congruence (both reputation and status are low) is stronger than positive congruence (both are high). We find support for our arguments based on panel data on alliances between pharma and biotech firms, using data on biotech scientists' research output (reputation) and university attended (status). Copyright © 2013 John Wiley & Sons, Ltd.     

Risk sharing in supplier relations: an agency model for the Italian air‐conditioning industry

This study of risk sharing in the Italian high precision air conditioning (AC) industry confirms agency theory predictions that buyers absorb risk to a non‐negligible degree, and that they absorb more risk (a) the greater the supplier's environmental uncertainty, (b) the more risk averse the supplier, and (c) the less severe the supplier's moral hazard. The analyzed buyers accommodate for unforeseen and uncontracted‐for cost fluctuations, which is consistent with relational contract theory. The study clarifies the relationship between risk sharing and the supplier's size, technological capability, financial stability, and cost fluctuation. It also suggests how buyers may adjust their risk‐sharing strategy as suppliers grow, develop technological capabilities, and change financial structure. Copyright © 2007 John Wiley & Sons, Ltd.     

Bribery and investment: Firm‐level evidence from Africa and Latin America

Research summary : Using a unique database that measures firm‐level bribery in Africa and Latin America, we corroborate extant results in the literature that paying bribes deters firm investments in fixed assets. Our contribution is to explore four mechanisms. By adopting a reverse causality approach (Gelman and Imbens, 2013), we find evidence consistent with one of them: short‐term oriented firms prefer to bribe rather than invest in fixed assets, while the opposite is true for firms with a long‐term orientation. We rule out that bribe payments drain financial resources for investment, that firms that invest do not bribe because fixed assets make them less flexible and more vulnerable to future bribes, and that less efficient firms bribe rather than invest. Managerial summary : We ask whether, along with ethical issues, bribing affects the behavior and performance of firms in Africa and Latin America. Our statistical analysis shows that bribe payments do not reduce the short‐term performance of firms, but frustrate investments in fixed assets, which is the foundation of firms' long‐term growth. It is like seeking a job via nepotism or education. Nepotism makes it likely to find a job in the short term. However, the solid skills generated by education raise the odds of finding better jobs in the future. We rule out some common explanations for the trade‐off between bribing and investment (e.g., bribes drain resources to invest or that less efficient firms bribe and do not invest). Our analysis suggests that firms with short‐term orientations are more likely to bribe and firms with long‐term orientation are more likely to invest. Copyright © 2015 John Wiley & Sons, Ltd.     

Are founder CEOs more overconfident than professional CEOs? Evidence from S&P 1500 companies

Research summary : We provide evidence that founder chief executive officers (CEOs) of large S&P 1500 companies are more overconfident than their nonfounder counterparts (“professional CEOs”). We measure overconfidence via tone of CEO tweets, tone of CEO statements during earnings conference calls, management earnings forecasts, and CEO option‐exercise behavior. Compared with professional CEOs, founder CEOs use more optimistic language on Twitter and during earnings conference calls. In addition, founder CEOs are more likely to issue earnings forecasts that are too high; they are also more likely to perceive their firms to be undervalued, as implied by their option‐exercise behavior. We provide evidence that, to date, investors appear unaware of this “overconfidence bias” among founders. Managerial summary : This article helps to explain why firms managed by founder chief executive officers (CEOs) behave differently from those managed by professional CEOs. We study a sample of S&P 1500 firms and find strong evidence that founder CEOs are more overconfident than professional CEOs. To date, investors appear unaware of this overconfidence bias among founders. Our study should help firm stakeholders, including investors, employees, suppliers, and customers, put the statements and actions of founder CEOs in perspective. Our study should also help members of corporate boards make more informed decisions about whether to retain (or bring back) founder CEOs or hire professional CEOs. Copyright © 2016 John Wiley & Sons, Ltd.     

Whose Innovation Performance Benefits More from External Networks: Entrepreneurial or Conservative Firms?

The primary contribution of this research is positing and empirically supporting the proposition that learning through external networks disproportionately benefits conservative, risk‐averse firms. The construct, entrepreneurial orientation (EO), is used to discriminate conservative, risk‐averse firms from proactive, risk‐seeking firms. Organizational learning theory and social capital theory are employed to support our hypotheses. Based on a study of 1978 U.S. firms, the paper suggests that the utilization of external networks (i.e., the process of learning from information, perspectives, and insights embedded in external networks) may act as a primary driver for innovation for those firms that are either not inclined and/or do not have the capabilities to adopt entrepreneurial culture. Specifically, weak EO firms' innovation performance benefits from utilizing external networks more than strong EO firms'. This research also tests for the moderating role of firm size and finds that the negative moderating effect of EO on the external network utilization–innovation performance relationship is more pronounced in small and medium sized enterprises (SMEs) than large firms.     

Economies of Scope,Resource Relatedness,and the Dynamics of Corporate Diversification

Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter‐temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most‐related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more‐related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one‐stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most‐related businesses. Copyright © 2017 John Wiley & Sons, Ltd.     

Multinationality and downside risk: The roles of option portfolio and organization

Multinational operations confer firms a portfolio of switching options that offer potential operating flexibility in the context of input cost variability, helping firms reduce downside risk. We suggest that two conditions may shape the relationship between multinationality and downside risk. When subadditivity is present in a firm's option portfolio, such as when the firm operates affiliates in host countries with similar labor cost developments, multinationality is less likely to reduce downside risk since less valuable opportunities exist for shifting operations. Multinationality is more likely to reduce downside risk if a firm's organization facilitates the coordination of cross‐border activities, enabling the exploitation of the shifting opportunities. Analysis of a comprehensive panel dataset of Japanese manufacturing firms and their foreign manufacturing affiliates provides support for these conjectures. Copyright © 2013 John Wiley & Sons, Ltd.