Managerial compensation and corporate spinoffs

Research summary : This article investigates how corporate spinoffs affect managerial compensation. These deals are found to improve the alignment of spinoff firm managers' incentive compensation with stock market performance, especially among spinoff firm managers that used to be divisional managers of the spun‐off subsidiary, and particularly when the spun‐off subsidiary performs better than or is unrelated to its parent firm's remaining businesses. By contrast, incentive alignment does not improve for the parent firm managers running the divesting companies. This finding appears to be driven by a significant post‐spinoff increase in these managers' incentive compensation, the magnitude of which is inversely related to governance quality in their firms. Together, these results elucidate how spinoffs influence managerial compensation in diversified firms and the companies they divest. Managerial summary : This article explores how spinoffs affect incentive alignment: the correlation between incentive compensation and stock market performance. The incentive alignment of spinoff firm managers improves following these deals. These gains are the largest when spinoff firm managers used to be divisional managers of the spun‐off subsidiary and when the spun‐off subsidiary performs better than or is unrelated to the other businesses in the parent firm. By contrast, incentive alignment does not improve for parent firm managers. Instead, the level of these managers' incentive compensation rises significantly post‐spinoff, and the magnitude of this increase is inversely related to governance quality in these firms. Together, these results shed light on the ways in which spinoffs influence managerial compensation in diversified firms and in the companies they divest. Copyright © 2015 John Wiley & Sons, Ltd.     

The contingent effects of differentiation and integration on corporate entrepreneurship

This paper develops a contingency view regarding the effects of structural differentiation and integration on levels of corporate entrepreneurship. Integrating notions of benefits and costs resulting from integration with structural contingency theory, we argue that the joint effects of structural differentiation and integration on corporate entrepreneurship levels are moderated by organizational size and environmental dynamism. Our findings from a time‐separated sample demonstrate that in smaller organizations and more dynamic environments, the positive effects of integration on the structural differentiation‐corporate entrepreneurship relationship strongly diminish. As such, with this research we begin to identify contingencies that influence the corporate entrepreneurship levels observed among firms striving to balance the needs for structural differentiation and integration. Copyright © 2014 John Wiley & Sons, Ltd.     

Reaching through the fog: Institutional environment and cross‐border giving of corporate foundations

Research Summary : Corporate philanthropy has long been recognized as an important part of multinational strategy, yet we know relatively little how charitable giving is allocated across countries. Using a sample of 208 U.S.‐based corporate foundations from 1993 to 2008, we find that the foundations give more in countries with opaque institutional environments, but they do so through international intermediaries. They also give more when the funding firms have new entries in countries with weak institutions—hence greater needs for the social license to operate—or when their operations require stronger connections with local suppliers or customers. These findings point to the use of corporate philanthropy as part of corporate diplomacy when the local institutions are ineffective and the importance of reaching out to local constituents is high. Managerial Summary : Corporate foundations play an important role in firms' charitable giving across countries. This article analyzes how foundation giving is associated with the funding firm's need to navigate the local business environments. Using a sample of 208 U.S.‐based corporate foundations from 1993 to 2008, we find that foundations give more in countries characterized by weak rule of law and high levels of corruption, and when the funding firms have newly established subsidiaries or stronger need to connect with local stakeholders there. However, donations to countries with weak institutions are more likely to go through international intermediaries to avoid potential liabilities. The results are consistent with the view that corporate foundations support corporate diplomacy and help obtain the social license to operate in the host countries.     

When the role fits: How firm status differentials affect corporate takeovers

This study explores the implications of interfirm status differentials for firm behaviors in corporate takeover transactions. We argue that the more the status differential between two firms is aligned with expectations of their roles embedded in the specific economic activity, the easier it is for them to agree on the appropriate means to reach consensus on the transaction. Using the empirical context of the U.S. corporate takeover market, we found that the greater the status differential between an acquirer and a target, the more positively the market reacts to both the acquirer and the target upon the announcement of the acquisition deal, the more likely it is for the deal to be completed, and the more likely the acquirer is to achieve better post‐acquisition performance. Copyright © 2013 John Wiley & Sons, Ltd.     

The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity

Corporate venture capital (CVC) activity exposes firms to new technologies and markets. An important but as yet unexplored question is the relationship of the industry diversification profile of the portfolio of venture companies to corporate value creation. Insights from options and diversification perspectives support our hypothesis that diversification of a corporate investor's portfolio of venture companies is related to corporate wealth creation in a U‐shaped relationship. We also propose that a corporate investor's financial constraints moderate the relationship between the diversification profile of its CVC portfolio and value creation. When we tested our hypotheses using a sample of CVC investments across multiple industries, we found support for them, and these findings may inform the CVC activities of corporate investors. Copyright © 2013 John Wiley & Sons, Ltd.     

Mind the gap: The interplay between external and internal actions in the case of corporate social responsibility

Research summary : We explore the effect of the interplay between a firm's external and internal actions on market value in the context of corporate social responsibility (CSR). Specifically, drawing from the neo‐institutional theory, we distinguish between external and internal CSR actions and argue that they jointly contribute to the accumulation of intangible firm resources and are therefore associated with better market value. Importantly, though, we find that, on average, firms undertake more internal than external CSR actions, and we theorize that a wider gap between external and internal actions is negatively associated with market value. We confirm our hypotheses empirically, using the market‐value equation and a sample comprising 1,492 firms in 33 countries from 2002 to 2008. Finally, we discuss implications for future research and practice. Managerial summary : Companies often accumulate intangible assets by taking internally and externally oriented CSR actions. Contrary to popular beliefs, the data show that they undertake more internal than external ones: firms do more and communicate less. How does a potential gap (i.e., a misalignment) between internal and external CSR actions affect a firm's market value? We find that although together (the sum of) internal and external actions are positively associated with market value, a wider gap has negative implications. In other words, firms do not realize the full benefits of their internal actions when such actions are not externally communicated to key stakeholders, and to the investment community in particular. This negative association with market value is particularly salient in CSR‐intensive and the natural resources and extractives industries. Copyright © 2015 John Wiley & Sons, Ltd.     

Getting beyond relatedness as a driver of corporate value

Our paper scrutinizes how corporate value derives from redeployability of firms' resources to new product markets. We focus on the underexplored determinant of redeployability, inducements, defined as advantages in returns in new over existing markets. We assemble separate dimensions of inducements from research on corporate diversification and real options and consider inducements in their entirety. A simulation model casts redeployability as a real option to switch the use of resources across markets and explicates important interdependences among the dimensions of inducements. The model also demonstrates that inducements modify the effect of relatedness on corporate value. Our theoretical arguments amend existing theory and have important implications for corporate diversification research. Copyright © 2014 John Wiley & Sons, Ltd.     

Organizing for knowledge generation: internal knowledge networks and the contingent effect of external knowledge sourcing

Research summary : When faced with a new technological paradigm, incumbent firms can opt for internal development and/or external sourcing to obtain the necessary new knowledge. We explain how the effectiveness of external knowledge sourcing depends on the properties of internal knowledge production. We apply a social network lens to delineate interpersonal, intra‐firm knowledge networks and capture the emergence of two important firm‐level properties: the incumbent's internal potential for knowledge recombination and the level of knowledge coordination costs. We rely on firm‐level internal knowledge networks to dynamically track the emergence of these properties across 106 global pharmaceutical companies over a 25‐year time period. We find that a firm's success in developing knowledge in a new technological paradigm using external knowledge sourcing is contingent on these internal knowledge properties . Managerial summary : Incumbent firms in high‐tech industries often face competence‐destroying technological change. In their effort to adapt and develop new knowledge in a novel paradigm, incumbent firms have several corporate strategy options available to them: internal knowledge development and a wide array of external knowledge sourcing strategies, including alliances and acquisitions. In this study, we make an effort to address a critical question: How effective is external knowledge sourcing under different internal knowledge generation regimes? We find that external sourcing strategies are less effective when firms can already internally generate new knowledge or if they have high internal coordination costs. Therefore, when considering external sourcing, managers must carefully weigh the benefits of it vis‐à‐vis its commensurate costs as the benefits of external sourcing may be overstated . Copyright © 2015 John Wiley & Sons, Ltd.     

Red,blue, and purple firms: Organizational political ideology and corporate social responsibility

Research summary : Why do firms vary so much in their stances toward corporate social responsibility (CSR )? Prior research has emphasized the role of external pressures, as well as CEO preferences, while little attention has been paid to the possibility that CSR may also stem from prevailing beliefs among the body politic of the firm. We introduce the concept of organizational political ideology to explain how political beliefs of organizational members shape corporate advances in CSR . Using a novel measure based on the political contributions by employees of Fortune 500 firms, we find that ideology predicts advances in CSR . This effect appears stronger when CSR is rare in the firm's industry, when firms are high in human capital intensity, and when the CEO has had long organizational tenure . Managerial summary : Why do firms vary in their stances toward corporate social responsibility (CSR )? Prior research suggests that companies engage in CSR when under pressure to do so, or when their CEOs have liberal values. We introduce the concept of organizational political ideology, and argue that CSR may also result from the values of the larger employee population. Introducing a novel measure of organizational political ideology, based on employees' donations to the two major political parties in the United States, we find that liberal‐leaning companies engage in more CSR than conservative‐leaning companies, and even more so when other firms in the industry have weaker CSR records, when the company relies heavily on human resources and when the company's CEO has a long organizational tenure . Copyright © 2016 John Wiley & Sons, Ltd.     

Do analysts add value when they most can? Evidence from corporate spin‐offs

This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin‐offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts' research about these companies is associated with improved forecast accuracy, the value of their research about the spun‐off subsidiaries is more limited. For both diversified firms and their spun‐off subsidiaries, analysts' research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts' research enables investors to overcome asymmetric information. Copyright © 2013 John Wiley & Sons, Ltd.     

The impact of corporate social responsibility on investment recommendations: Analysts' perceptions and shifting institutional logics

We explore the impact of corporate social responsibility (CSR) ratings on sell‐side analysts' assessments of firms' future financial performance. We suggest that when analysts perceive CSR as an agency cost they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that, over time, the emergence of a stakeholder focus shifts the analysts' perceptions of CSR. Using a large sample of publicly traded U.S. firms over 15 years, we confirm that, in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, analysts progressively assess these firms more optimistically over time. Furthermore, we find that analysts of highest status are the first to shift the relation between CSR ratings and investment recommendation optimism. Copyright © 2014 John Wiley & Sons, Ltd.     

Examining a key corporate role: The influence of capital allocation competency on business unit performance

Research on the role of the corporate office in firm performance has focused on establishing how much performance variance can be attributed to a “corporate effect,” with little attention devoted to understanding how this influence occurs. In this study, we model capital allocation competency as a dynamic managerial capability and find that lower levels of allocation competency in the form of excess investment to business units with relatively poorer future prospects reduce business unit performance. We also find that market conditions affect performance implications of capital allocation—allocation competency is more salient in more competitive markets. These results enhance our understanding of how the corporate office influences business unit performance through its role in allocating capital across business units. Copyright © 2014 John Wiley & Sons, Ltd.     

Learning to let go: Social influence,learning, and the abandonment of corporate venture capital practices

Research summary: This study examines the abandonment of organizational practices. We argue that firm choices in implementing practices affect how firms experience a practice and their subsequent likelihood of abandonment. We focus on utilization of the practice and staffing (i.e. career backgrounds of managers), as two important implementation choices that firms make. The findings demonstrate that practice utilization and staffing choices not only affect abandonment likelihood directly but also condition firms' susceptibility to pressures to abandon when social referents do. Our study contributes to diffusion research by examining practice abandonment—a relatively unexplored area in diffusion research—and by incorporating specific aspects of firms' post‐adoption choices into diffusion theory. Managerial summary: When do firms shut down practices? Prior research has shown that firms learn from the actions of other firms, both adopting and abandoning practices when their peers do. But unlike adoption decisions, abandonment decisions need to account for firms' own experiences with the practice. We study the abandonment of corporate venture capital (CVC) practices in the U.S. IT industry, which has experienced waves of adoption and abandonment. We find that firms that make more CVC investments are less likely to abandon the practice, and are less likely to learn vicariously from other firms' abandonment decisions, such that they are less likely to exit CVC when other firms do. Staffing choices also matter: hiring former venture capitalists makes firms less likely to abandon CVC practices, while hiring internally makes abandonment more likely. Plus, staffing choices affect how firms learn from the environment, as CVC managers pay attention to and learn more from the actions of firms that match their work backgrounds; i.e., firms that staff CVC units with former venture capitalists are more likely to follow exit decisions of VC firms, while those that staff with internal hires are more likely to follow their industry peers. Our results suggest that firms wanting to retain CVC practices should think carefully about the implementation choices they make, as they may be inadvertently sowing seeds of abandonment. Copyright © 2015 John Wiley & Sons, Ltd.     

Government's green grip: Multifaceted state influence on corporate environmental actions in China

Research summary: Emerging economies such as China enjoy economic expansion, but also face dramatic environmental challenges. China's government is a central actor in both stimulating economic activities and pursuing environmental protection. Drawing on panel data and in‐depth interviews, we examined the influence of the Chinese state at multiple levels on the environmental actions of publicly listed firms. The results show that corporate environmental actions follow an inverted U‐shape as control of environmental practices moves from the central government to the most decentral administrative level. This curvilinear relationship is positively moderated by the stringency of environmental regulation and negatively moderated by environmental monitoring capacity. We conclude that state influence on corporate environmental actions in China is multifaceted and subject to “policy‐policy decoupling.” Managerial summary: As China's environmental awareness is growing, the country's government is increasingly concerned with the question as to how it can improve the environmental performance of the firms it controls. Our evidence shows the concurrence of two contravening government influences on corporate environmental practices: a performance‐enhancing effect of the regulatory pressure by multiple authorities and a performance‐diminishing effect of the autonomy enjoyed by local governments. Both the most centrally and the most decentrally controlled firms in China show significantly weaker environmental performance than those controlled by intermediary levels of government. The stringency of sectorial environmental regulation and environmental monitoring capacity affect the strength of the Chinese government's green grip.     

Let chaos reign,then rein in chaos—repeatedly: managing strategic dynamics for corporate longevity

Combining longitudinal field research and executive experience, we propose that corporate longevity depends on matching cycles of autonomous and induced strategy processes to different forms of strategic dynamics, and that the role of alert strategic leadership is to appropriately balance the induced and autonomous processes throughout these cycles. We also propose that such strategic leadership is the means through which leadership style exerts its influence on corporate longevity. Our findings can be related to organizational research on structural inertia, learning and adaptation, as well as to formal theories of complex adaptive systems. They also contribute to resolving the seeming contradiction between a study of corporations that attributes exceptional long‐term success to leadership style, and the more common proposition that strategy is the determinant of long‐term performance. Copyright © 2007 John Wiley & Sons, Ltd.     

Does engagement in corporate social responsibility provide strategic insurance‐like effects?

Research summary : This study examines whether the stock and bond prices of firms engaging in corporate social responsibility (CSR) can benefit from insurance‐like effects during occurrences of negative events. Our results suggest that in the face of negative events, engagement in CSR on a continuous, long‐term basis provides insurance‐like effects on both the stock and bond prices of firms. Nevertheless, the effects are found to quickly disappear following the occurrence of a second, or subsequent, negative event. Although our results clearly indicate that firms need to allocate some of their available resources to long‐term strategic CSR activities, managers must also realize that in a crisis communication, they will probably be able to use their CSR claims on one occasion only. Managerial summary : The purpose of this article is to examine whether firms engaging in corporate social responsibility (CSR) can benefit from insurance‐like effects during occurrences of negative events. We find that on the occurrence of a negative event, long‐term CSR engagement does have insurance‐like effects. We also find that these insurance‐like effects may quickly disappear following the occurrence of a second negative event. Managers of firms with a long history of CSR activities need to realize that in a crisis communication, they can probably use their claims of adherence to CSR only once. Copyright © 2015 John Wiley & Sons, Ltd.     

Opportunity costs,industry dynamics,and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non‐scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre‐entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self‐selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.     

Social network contingency,symbolic management,and boundary stretching

A firm's structural position within corporate networks may affect the extent to which it engages in boundary stretching practices. Since social norms support low CEO compensation, offering high CEO compensation in China can be seen as a boundary stretching practice. Setting up a compensation committee (CC) may be viewed as a form of symbolic management in China. We argue that firms operating within central corporate network positions opt to pay higher CEO compensation without engaging in symbolic management. On the other hand, firms operating in structural hole positions tend to either pay lower CEO compensation or use CCs as a symbolic management tool in order to pay higher CEO compensation. Our hypotheses are largely supported based on 7,618 firm‐year observations in China. Copyright © 2013 John Wiley & Sons, Ltd.     

Positive and negative synergies between the CEO's and the corporate board's human and social capital: A study of biotechnology firms

This paper contributes to the corporate governance literature by developing and testing theory regarding positive and negative synergies between the CEO's and the board's human and social capital. Using a sample of 360 biotechnology firms that went public between 1995 and 2010, we demonstrate that accumulated public company board experiences of the CEO and the board have positive synergistic effects on IPO performance whereas the current board appointments have negative effects. While scientific educational backgrounds have positive synergies, industry‐specific experiences produce either positive or counterproductive effects depending on the age and profitability of the firm. Thus, our paper contributes to the corporate governance and human and social capital literatures by describing the costs and benefits of specific types and combinations of CEO and board capital. Copyright © 2013 John Wiley & Sons, Ltd.