The R&D Investment–Uncertainty Relationship: Do Strategic Rivalry and Firm Size Matter?

This paper uses a real options perspective to augment a standard research and development (R&D) investment model and implement a firm‐level empirical analysis to assess the practical significance of market uncertainty and its interactions with strategic rivalry and firm size. We use a measure of firm‐relevant market uncertainty along with panel data and find that firms invest less in current R&D as uncertainty about market returns increases. The effect of firm‐specific uncertainty on R&D investment is smaller in markets where strategic rivalry is likely to be more intense. Furthermore, holding access to financing constant, the effect of uncertainty on R&D investment is attenuated for large firms. Copyright © 2012 John Wiley & Sons, Ltd.     

Attitude towards risk,uncertainty, and fixed investment

We explore the relevance of the risk attitude of managers to the investment-uncertainty relation. Higher moments of the distribution of net profits are used to measure the risk premium of the firm, from which we derive a proxy for the risk aversion of managers. Using an unbalanced panel of Dutch listed firms, we find that in general a low degree of risk aversion coincides with a positive impact of demand uncertainty on investment. More specifically, we find that risk-averse firms respond to demand uncertainty by cutting investment, while the investment undertaken by risk-taking firms responds to demand uncertainty positively.     

Investment timing decisions under threat of potential competition: Why firm size matters

We study the value of the option to wait when other firms are looking at similar opportunities and may enter while one firm is waiting for uncertainty resolution. There are two important results. First the value of an investment project is affected by a firm’s assets-in-place, giving some firms a comparative advantage in competitive situations. Second, when two firms with different sized assets-in-place are looking at similar investment decisions, in the unique sub-game perfect equilibrium, the smaller firm invests earlier and also exits before a competing firm with larger assets-in-place. This makes an otherwise identical investment more valuable for the smaller firm. The larger firm optimally foregoes first-mover advantage because of higher expected exit costs.     

The effect of oil price uncertainty on corporate investment in the presence of growth options: Evidence from listed companies in China (1998–2019)

We empirically investigate the effect of oil price uncertainty on corporate investment in the presence of growth options using the financial data of listed firms in China from 1998 to 2019. We reveal three key findings in this paper. First, we find that oil price uncertainty has a U-shaped nonlinear effect on corporate investment. In periods of low uncertainty, oil price uncertainty negatively influences corporate investment. However, in periods of high uncertainty, oil price uncertainty positively influences corporate investment. Second, research has found that the U-shaped nonlinear effect is moderated by the irreversibility and growth opportunities of investment decisions. Third, further analyses reveal that this U-shaped nonlinear effect can be changed by a firm’s characteristics. Specifically, this nonlinear effect can only be observed in non-state-owned enterprises and small firms. We test the robustness of our findings and propose several policy suggestions.     

The impact of uncertainty on firm investment: evidence from machinery industry in Liaoning province of China

We test the impact of uncertainty on investment of Chinese firms during market transition with a sample of 195 firms in the machinery industry in Liaoning province of China during 1993–1998. The system Generalized Method of Moments (GMM) estimates show that both demand and labor costs uncertainties do not affect investment of state enterprises, while labor costs uncertainty has a positive effect on investment of collective firms. This result suggests that managers of state enterprises have little incentive to respond to uncertainty probably due to the ex ante arrangements of the contract responsibility system, while collective firms show risk-taking behavior during market transition. We also find that sales growth is an insignificant signal for investment of both state and collective enterprises, violating the standard accelerator principle. We provide a few possible explanations to this result.     

The impact of lead time on capital investments

We study equilibrium investment strategies of firms competing in stochastic dynamic market settings and facing two types of investment structures: investment with significant lead time (or time-to-build) and investment without (or minor) lead time. We investigate how investment behavior changes when investment is subject to time-to-build versus when it is not. We characterize equilibrium investment strategies under several information structures and compare results to the social optimum. We offer some new results. The model predicts that, controlling for demand, and production and investment costs, investments and outputs can be higher in progressive industries (which often exhibit time-to-build) than in fast-paced industries (where time-to-build is insignificant). Furthermore, for both investment types (investment with or without time-to-build) we offer a novel equilibrium in which firms incrementally invest. This behavior is driven by demand uncertainty and capacity constraints. Also, expected outputs are lower than Cournot outputs as firms face uncertainty. Moreover, the amount of uncertainty has different effects over investment types.     

How do technological innovations affect corporate investment and hiring?

In this paper, we study the relation between technological advancement, and corporate investment and hiring. We build a corporate investment model with dynamic technology conditions, and we find the optimal investment and labor inputs increase in response to technological innovation shocks. Consistent with the model predictions, we empirically show that corporate investment and hiring increase following technological advancements, using various measures of technological innovation. Further, we find the effect is stronger for firms in more innovative industry, firms with higher capital intensity and firms with higher market-to-book ratio. Our findings provide evidence for the endogenous growth theory, i.e., firms with successful innovations tend to expand in capital investment and employment, suggesting technological innovations are, to some extent, Hicks-neutral.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Economic policy uncertainty and capital structure choice: Evidence from China

This paper studies how economic policy uncertainty affects corporate capital structure for Chinese listed firms from 2003 to 2013. We show that as the degree of economic policy uncertainty increases, firms tend to lower their leverage ratios. However, firms that are from regions with lower degrees of marketization, are state-owned or have prior bank-firm relationships mitigate the negative effect of policy uncertainty. Moreover, we provide consistent evidence that this negative effect is sourced from the deterioration of the external financing environment. We also find that firms adjust their financing structures by using more trade credit when economic policy uncertainty increases. Our results are robust to sample selection, data frequency, model specification and endogeneity.     

A patent race in a real options setting: Investment strategy, valuation, CAPM beta, and return volatility

In this paper, we study financial properties of R&D intensive firms through a continuous-time real-options patent-race model. Numerical analysis in this study shows that intense competition drives a firm to invest more aggressively, which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor. Furthermore, we find that a firm's position in competition has important impacts on its financial properties. For instance, a firm's cost of capital is a non-monotonic function of its relative position in the race. In addition, the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind, or positive when firms are close in the race.     

Spatial competition with demand uncertainty: A laboratory experiment

Motivated by recent research on product differentiation, we conduct laboratory experiments to study how demand uncertainty influences firms' incentives to differentiate. We ground our experiment on a discrete version of the standard location-then-price game introduced by Hotelling (1929), and we consider different levels of demand uncertainty. We first derive the game equilibrium assuming risk-neutral firms, and obtain the standard prediction that a high level of demand uncertainty generates more differentiation. Second, we extend the analysis to consider non-risk neutral firms and markets with asymmetric risk profiles. We show that the game equilibrium can differ substantially according to the attitude to risk. Third, we compare our predictions with the experimental data and find that demand uncertainty acts as a differentiation force in the context of both symmetric markets composed of risk-neutral or risk-lover subjects and asymmetric markets. We find support also for the agglomeration effect arising from demand uncertainty for sufficiently risk-averse subjects. Overall, these results might explain the opposite product differentiation strategies frequently observed in markets with fast-evolving tastes (i.e., minimum or maximum differentiation). Finally, the data confirm that subjects differentiate to relax price competition and provide evidence of a strong positive relationship between differentiation and prices.     

自由贸易试验区建设影响企业外汇衍生品投资吗?

本文采用2010～2019年A股上市公司样本,探究自由贸易试验区建设对企业外汇衍生品投资的影响.研究发现,自贸试验区设立后,试验区内及其所在地上市公司外汇衍生品投资倾向显著提升.异质性检验结果表明,这一关系在面临风险更高、资产周转能力较差、多国化经营程度较低、处于激烈竞争行业以及面临融资约束的样本中更为明显;在经济发展...     

Market response to FDA announcements

This study investigates announcement effects at four points in the Food and Drug Administration (FDA) review process and explores conditions that may impact final approval. We show that investors adjust expectations through the approval process, and most uncertainty is resolved by final approval. While smaller firms reap benefit from the approval, the market penalizes first movers. We do not find additional gain for pioneering research, implying that these firms may be able to reduce R&D spending.     

Motives and consequences of IPOs in cold periods

We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.     

Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences

Abstract

This study examines the determinants and consequences of voluntary adoption of non-local accounting principles (non-local GAAP) by firms listed and domiciled in the European Union (EU). We restrict ourselves to the two predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). We have used various sources to identify EU firms that use non-local GAAP. We examine the 1999 annual reports of all these firms, because accounting standard choices in more recent years may be affected by the announcement of the proposal by the European Commission in February 2001 to mandate IAS usage from 2005 on. The maintained hypothesis is that firms that voluntarily adopt IAS or US GAAP expect to experience net benefits from adoption. The finding that 133 non-financial firms in the EU voluntarily used non-local GAAP in 1999 suggests that the majority of listed EU firms does not expect to benefit from non-local GAAP adoption. By studying the characteristics of non-local GAAP adopters this study provides insight into the determinants of non-local GAAP adoption. We find that firms voluntarily using non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP. We also study whether non-local GAAP adopters have lower levels of information asymmetry, a much cited benefit of using more transparent financial reporting, than non-adopters. We examine three proxies for information asymmetry: analyst following, cost of equity capital, and uncertainty among analysts and investors (forecast dispersion and stock return volatility). We document a positive effect of non-local GAAP adoption on analyst following, but fail to find evidence of a lower cost of capital for non-local GAAP adopters. Contrary to expectations, uncertainty among analysts and investors appears to be higher for firms using IAS or US GAAP than for firms using local GAAP. However, by comparing ‘early’ and ‘late’ adopters, we find some evidence that suggests that benefits take some time to fully materialise.     

Towards a Democratic New Normal? Investor Reactions to Interim-Regime Dominance during Violent Events

Although interim regimes in former autocracies are generally tasked with initiating a democratic ‘new normal’, they may privately intend to become their country’s new autocratic rulers. We argue that, to cope with the uncertainty stemming from this possibility, investors infer an interim regime’s intentions from the dominance displayed by the regime during government-related violence, as reflected in the share of civilian fatalities. Specifically, we propose that investors interpret higher interim-regime dominance as a signal of weaker democratic intentions and associate such weaker intentions with a gloomier political outlook for local firms. We therefore hypothesize that investors react more negatively to violent events characterized by higher interim-regime dominance. We also hypothesize a less negative effect of such dominance for firms with larger foreign footprints, lower indebtedness, or more concentrated ownership, since investors will likely consider such firms more resilient to political deterioration. Applying event study methodology to 94 spells of violence in Egypt during the Arab Spring, we find substantial support for our hypotheses, thus contributing to management research on investor decision-making, violence, and political uncertainty.     

Global Engagement and Returns Volatility

This paper finds that a greater reliance on foreign market sales increases the volatility of firms’ stock returns, using high‐frequency data for publicly listed Japanese manufacturing firms over the period 2000–10. The two margins of global engagement we consider, namely, exports and sales via foreign affiliates (horizontal foreign direct investment), have both a positive and economically significant effect on firm‐level volatility. We find, however, that increasing the intensity of sales through foreign affiliates has a stronger effect on volatility than a similar change in export intensity. We also uncover evidence consistent with the notion that firms’ need to use external finance to cover the substantial costs involved in reaching foreign consumers can be an important channel through which firms’ participation in international markets increases their exposure to economic uncertainty.     

Corporate Governance,Investment, and Firm Valuation in Asian Emerging Markets

We investigate the effects of corporate governance and family ownership on firm valuation through investment efficiency in Asian emerging markets. Using 3 years of time series data from the Credit Lyonnais Securities Asia corporate governance score for 10 Asian emerging markets, we find that good corporate governance leads to better or more efficient investment decisions and eventually to higher firm value. We also find that investors reward firms for improvement in corporate governance. The findings do not hold for Asian firms with a family or concentrated ownership structure. The results are not driven by changes in accounting standards in these markets.     

Investment decisions and debt financing under information uncertainty

This study examines how information uncertainty influences investment decisions. In contrast to prior studies, which assume no information uncertainty, our model includes a discrepancy in valuing debt between shareholders and debtholders at the time of debt issuance. We derive the values of corporate securities and the optimal investment threshold and coupon under information uncertainty. We show that compared with the absence of information uncertainty, debtholders value debt less than shareholders do, and hence, shareholders should contribute more investment funds. Debt financing restraints due to information uncertainty lead to delayed investment. We find that information uncertainty plays a mitigating role in shareholder-debtholder conflicts over investment policy. Moreover, the information uncertainty costs that shareholders incur increase sharply with the level of information uncertainty.     

Revisiting Oligopolistic Reaction: Are Decisions on Foreign Direct Investment Strategic Complements?

Knickerbocker (1973) introduced the notion of oligopolistic reaction to explain why firms follow rivals into foreign markets. We develop a model that incorporates central features of Knickerbocker's story—oligopoly, uncertainty, and risk aversion—to establish the conditions required to generate follow-the-leader behavior. We find that rival foreign investment will make risk-neutral firms less inclined to move abroad once its rivals have done so. We show that Knickerbocker's prediction relies on risk aversion and derive an expression for the minimum amount of risk aversion needed to generate oligopolistic reaction.