Is this the right time to come out? Case study

In this fictional case study, Adam Lawson is a promising young associate at Kirkham McDowell Securities, a St. Louis underwriting and financial advisory firm. Recently, Adam helped to bring in an extremely lucrative deal, and soon he and a few other associates will be honored for their efforts at the firm's silver anniversary dinner. George Campbell, vice president in mergers and acquisitions, is caught unprepared when Adam tells him that, after serious reflection, he has decided to bring his partner, Robert Collins, to the banquet. George is one of Adam's biggest supporters at the firm, and he personally has no problem with Adam being gay. But it is one thing for Adam to come out of the closet at the office. It is quite another to do so at a public company-client event. After all, Kirkham McDowell's client roster includes some very conservative companies--one of the country's largest defense contractors, for example. George is concerned with how Adam's openness about his sexual orientation will play with their clients and, as a result, how senior management will react. Adam has not come to George for permission to bring Robert to the dinner. But clearly Adam wants some sort of response. George has never faced sexual diversity issues in the workplace before, and there is no company policy to guide him. Just how negative an effect could Robert have on Adam's career with the firm and the firm's relationship with its clients? Isn't it possible that even the firm's most conservative clients will simply decide that Adam's choice of guest is a personal matter--not a business one?(ABSTRACT TRUNCATED AT 250 WORDS)     

How much cash does your company need?

In late 2001, the directors of Pfizer asked that very question. And with good reason. After its 2000 merger with rival Warner-Lambert, the New York-based pharmaceutical giant found itself sitting on a net cash position of $8 billion, which seemed extraordinarily conservative for a company whose products generated $30 billion in revenues. Most large companies with revenues that healthy would increase leverage, thereby unlocking tremendous value for shareholders. But knowledge-intensive companies like Pfizer, this author argues, are in a class apart. Because their largely intangible assets (like R&D) are highly volatile and cannot easily be valued, they are more vulnerable to financial distress than are firms with a preponderance of tangible assets. To insure against that risk, they need to maintain large positive cash balances. These companies' decisions to run large cash balances is one of the key reasons their shares sustain consistent premiums. Only by investing in their intangible assets can knowledge-based companies hope to preserve the value of those assets. A company that finds itself unable to do so because unfavorable market conditions reduce its operating cash flows will see its share price suffer almost as much as if it were to default on its debts. By the same token, with the right balance sheet, knowledge companies can profitably insure against the risk of failing to sustain value-added investments in difficult times. An optimal capital structure that calls for significant cash balances is certainly at odds with the results of a traditional capital structure analysis, the author demonstrates, but it explains the financial policies of many well-run companies, from Pfizer to Intel to ChevronTexaco.     

Is a share buyback right for your company?

Contrary to popular wisdom, buybacks don't create value by raising earnings per share. But they do indeed create value, and in two very different ways. First, a buyback sends signals about the company's prospects to the market--hopefully, that prospects are so good that the best investment managers can make right now is in their own company. But investors won't see it that way if other, negative, signals are coming from the company, and it's rarely a good idea for companies in high-growth industries, where investors expect that money to be spent pursuing new opportunities. Second, when financed as a debt issue, a buyback is essentially an exchange of equity for debt, conferring the traditional benefits of leverage--a tax shield and a discipline for managers. For such a buyback to make sense, a company would need to have taxable profits in need of shielding, of course, and be able to predict its future cash flows fairly accurately. Justin Pettit has found that managers routinely underestimate how many shares they need to buy to send a credible signal to the markets, and he offers a way to calculate that number. He also goes through the iterative steps involved in working out how many shares must be purchased to reach a target level of debt. Then he takes a look at the advantages and disadvantages of the three most common ways that companies make the actual purchases--open-market purchases, fixed-price tender offers, and auction-based tender offers. When a company's performance is lagging, a share buyback can look attractive. Unfortunately, a buyback can backfire--unless executives understand why, when, and how to use this powerful and risky tool.     

Does decentralized decision making increase company performance through its Information Technology infrastructure investment?

A company's Information Technology (IT) infrastructure is a key factor in its sustainability and ongoing success and profitability. This paper explores the relationship between a company's investment in IT and its performance. Performance is measured, with the help of a Balanced Scorecard (BSC), in four ways; financial, internal business processes, innovation & learning and customer perspective. The relationship between each BSC category serves as indicators of the effect of IT investment on a company's performance. This will help establish the benefits of both financial and non-financial indicators. We focus on the Electrical and Electronic manufacturing performance of companies Malaysia. System Resource Theory (SRT) is used as the background theory to explain the concepts of organizational effectiveness, efficiency, productivity and multidimensional performance measurements and to link the variables used in this study. We conduct an empirical study in order to confirm the moderating effects of decentralized decision making. The results suggest that IT investment produces a significant relationship with all BSC perspectives, but the moderating effect is only significant only from a customer perspective.     

Does Firing a CEO Pay Off?

We examine whether involuntary chief executive officer (CEO) replacements pay off by improving firm prospects. We find CEO successors’ acquisition investments to be associated with significantly higher shareholder gains relative to their predecessors and the average CEO. This improvement in postturnover acquisition performance appears to be a function of board independence, hedge fund ownership, and the new CEO's relative experience. CEO successors also create sizable shareholder value by reversing prior investments through asset disposals and discontinuing operations and by employing more efficient investment strategies. Our evidence suggests that firing a CEO pays off.     

Is Polaris a HOG? A Case Study*

The main usefulness of a general purpose financial statement centers on its comparability to the financials produced by an entity's competition. This case works for both undergraduate and graduate students because it offers comparisons between two well known recreation industry companies. Financial statement analysis is a lesson which serves as an appropriate capstone to financial accounting education. Analyzing the financial statements of competing entities explains “why” accountants must implement the intricate “how” which produces the statements and the resulting decision models such as ratios and common‐sized statements. Compared to previous generations, current students will be more responsible for managing their own retirement funds. This case can help students start to appreciate investment analysis by providing enough detail for any level student to conduct financial statement evaluations that make comparisons to find successful fundamental business strategies.     

Does the exchange rate follow a random walk? A Monte Carlo study of four tests for a random walk

Several authors have urged that real and nominal exchange rates follow a random walk. Conditions under which the exchange rate follows a random walk are reviewed in this paper. Many of these do not appear to hold. Therefore, the empirical evidence presents a puzzle : some evidence suggets the exchange rate follows a random walk, while other evidence suggests the opposite should be true. This paper attempts to reconcile the evidence. It is argued that the tests for a random walk have low power. Monte Carlo evidence on four tests for a random walk, is presented that suppors this claim.     

Does inequality lead to a financial crisis?

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.     

Does a change in dividend tax rates in the U.S. affect equity prices of non-U.S. stocks?

Review of Accounting Studies - I investigate the link between dividend taxes and stock prices in a global setting. Based on findings from an open-economy after-tax capital asset pricing model, I...     

When times get tough, what happens to TQM? Case study

When Mueller Chemical Company's biggest customer, Ameriton, demanded that MCC install a total quality management system five years ago, the effort seemed worth it. Morale improved dramatically at the German company, as did quality and productivity. But now, in this fictional case study, Ameriton has gone bankrupt. As a result, MCC has had to cut its work force, and senior managers are meeting to decide whether TQM should be part of the downsized MCC. Horst Koblitz, director of TQM, and Division Manager Eva Stichen both vote yes. Stichen's division, which never supplied Ameriton, has turned its process-control system into the company's best thanks to TQM. The division is more cost-efficient, product defects are nearly nonexistent, and its safety record is spotless. As Koblitz notes, Ameriton's failure is no reason to abandon all that MCC has built. Furthermore, shareholders and customers would think that MCC was panicking. MCC just needs to tailor its TQM program to a smaller organization. But CFO Georg Becker doesn't think MCC has the time or resources for fine-tuning. And as he sees it, that might be just as well. The distractions that came with TQM took MCC away from its goal of becoming the chemicals market leader in Europe. While the company organized teams, developed measurement systems, and filled out quality reports, its competitors took away much of the market share MCC was after. TQM was a good long-term approach, but it didn't come with a plan for MCC's current situation. And CEO and Chairman Dieter Mueller won't compromise; TQM must either stay or go.(ABSTRACT TRUNCATED AT 250 WORDS)     

Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany

This study examines whether accounting quality changed following a switch from U.S. GAAP to IFRS. Using a sample of German high tech firms that transitioned to IFRS from U.S. GAAP in 2005, we find that accounting numbers under IFRS generally exhibit more earnings management, less timely loss recognition, and less value relevance compared to those under U.S. GAAP. In addition, after analyzing the accounting quality of firms that applied IFRS throughout the entire sample period, we find that, for the metrics suggesting a decline in accounting quality for both groups of firms, the change is significantly more pronounced for firms switching to IFRS from U.S. GAAP. Overall, our findings indicate that the application of U.S. GAAP generally resulted in higher accounting quality than application of IFRS, and a transition from U.S. GAAP to IFRS reduced accounting quality. Our findings provide the first evidence on the potential consequences of a switch from U.S. GAAP to IFRS.     

Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG

We study the stock and audit market effects associated with a widely publicized accounting scandal involving a public company (ComROAD AG) and a large, reputable audit firm (KPMG) in a country (Germany) that has long provided auditors with substantial protection from shareholder legal liability. We use this event to study whether an auditor's reputation helps to ensure audit quality, a rationale for which recent literature and events provide scant support. Given the absence of a strong insurance rationale for audit quality, Germany permits a relatively clean test of whether auditor reputation matters. We find that KPMG's clients sustain negative abnormal returns of 3% at events pertaining to ComROAD, and that these returns are more negative for companies that are likely to have higher demands for audit quality. We also find an increase in the number of clients that drop KPMG in the year of the ComROAD scandal (mostly smaller, recently public companies that are similar to ComROAD). Overall, our results provide support for the reputation rationale for audit quality.     

Regimes of risk management in corporate annual reports: a case‐study of one globalizing Australian company

An approach to the study of the ‘risks’ of ‘globalization’ that are increasingly the focus of global protest is outlined. By enrolling a blend of Mary Douglas' cultural approach to ‘risk’ and Ulrich Beck's theory of the ‘risk society,’ it is argued that three distinct ‘regimes of risk management’ are evident in corporate activity. After showing that corporate annual reports are useful for analysis of those effects, the argument is tested/illustrated through a case‐study of the reports of Amcor, a typically internationalizing Australian company. It is concluded that disputes over the ‘risks’ of ‘globalization’ are likely to become even more intense.     

Does Global Liquidity Help to Forecast U.S. Inflation?

We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of U.S. inflation that are significantly more accurate than the forecasts based on U.S. money growth, Phillips curve, and autoregressive and moving average models. The marginal predictive power of global liquidity is strong at 3-year horizons. Results are robust to alternative measures of inflation.     

Does a national industrial policy promote financial market stability? A study based on stock price crash risk

Whether the implementation of a national industrial policy can maintain stability in the financial market is a question of theoretical and practical significance. Using data from China’s non-financial listed firms from 2007 to 2020, we find that a national industrial policy lowers stock price crash risk. We find that the effect of an industrial policy on lowering stock price crash risk is more pronounced in regions with low levels of regional marketization and if firms have high external uncertainty, low total asset turnover, greater earnings management and receive small increments of long-term loans and fewer government subsidies, suggesting that industrial policies lower stock price crash risk by improving firm fundamentals and reducing external uncertainty, agency costs and information asymmetry.     

Does short selling affect a firm's financial constraints?

Using a sample of Chinese A-share listed firms from 2007‐2017, we examine the impact of short sales on a firm's financial constraints. We develop three conceptual frameworks, the negative information effect, the undervaluation effect, and the deterrent effect, based on the prevailing theories and conduct an in-depth empirical analysis using the difference-in-differences, propensity score matching, and instrumental variable methods. Our findings suggest that: (1) Short sales generally worsen a firm's financial constraints by reducing its ability of raising cheap and overvalued external capital. (2) A shortable firm's financial constraints deteriorate more seriously in the case of higher credit risk or information asymmetry. (3) When a firm becomes shortable, its negative media coverage increases, external financing cost rises, and the amount of new external financing decreases. (4) The adverse impact of short sales on financial constraints is more pronounced for inefficient state-owned firms and mainly concentrates in the short term. Collectively, these results support the underlying logic of the negative information effect. However, further analysis shows that: (1) The deterrent effect also exists but is much weaker than the negative information effect. (2) The strength of the two effects will “wan and wax” with time or circumstances. Thus, the deterrent effect may outweigh the negative information effect by easing a firm's financial constraints in some cases, such as in the long term after short sales deregulation and when short sales magnitude is low or the managers are more sensitive to the decline of stock price. Our paper provides new insights into the impact of shorts sales on financial constraints, revealing some unique Chinese features compared to the US market and offering valuable lessons to other emerging markets.     

Is There a Case for Industrial Policy? A Critical Survey

What are the underlying rationales for industrial policy? Doesempirical evidence support the use of industrial policy forcorrecting market failures that plague the process of industrialization?This article addresses these questions through a critical surveyof the analytical literature on industrial policy. It also reviewssome recent industry successes and argues that public interventionshave played only a limited role. Moreover, the recent ascendanceand dominance of international production networks in the sectorsin which developing countries once had considerable successimplies a further limitation on the potential role of industrialpolicies as traditionally understood. Overall, there appearsto be little empirical support for an activist government policyeven though market failures exist that can, in principle, justifythe use of industrial policy.