Employee treatment and firm innovation

We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of ‘good’ employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus – more innovation related to firms’ core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long‐term incentive hypothesis, suggesting that well‐treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value.     

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.     

Internal information quality and patent-related innovation

This study investigates how the quality of information available within a firm affects patent-related innovative activities. Relying on recent theoretical and empirical research, we use externally observable information attributes to proxy for the quality of internal information. Our empirical results indicate that firms with higher internal information quality generate more patents and patent citations. Cross-sectional analyses show that this positive effect is greater when firms are susceptible to greater internal information frictions due to firm decentralization, short management team tenure, and long product development cycles. We also document that firms experience an increase in patents and patent citations following an improvement of internal information quality proxied by internal control weakness remediation. Overall, our results suggest that the positive relation between internal information quality and task performance extends to patent-related innovation, a non-routine type of task that may rely on information originating from sources other than firms’ formal internal information systems.     

The influence of corporate social responsibility on investment efficiency and innovation

We examine two important channels through which corporate social responsibility (CSR) affects firm value: investment efficiency and innovation. We find that firms with higher CSR performance invest more efficiently: these firms are less prone to invest in negative net present value (NPV) projects (overinvestment) and less prone to forego positive NPV projects (underinvestment). We also find that firms with higher CSR performance generate more patents and patent citations. Mediation analysis indicates that firms with higher CSR performance are more profitable and valuable, consequences partially attributable to efficient investments and innovation. These results, robust to alternate model specifications, lend support to enlightened stakeholder theory.     

专利提前公开的资本市场动因——基于企业被并购压力视角的研究

随着我国资本市场建设的日益完善,上市公司控制权市场活跃度得到显著提升,企业如何应对被并购压力成为值得关注的议题。本文研究企业是否会选择发明专利公开时点来应对被并购压力。研究发现,当被并购压力增大时,上市公司会越早公开专利。这是因为专利提前公开能够提升公司股票的异常回报,从而降低企业成为被并购目标的可能性或提高企业可获得的并购溢价。异质性分析发现:(1)被并购压力增大时,既有分析师关注度和风险投资者持股比例越高的企业越可能提前公开专利;(2)企业更可能选择技术成熟、质量较高的专利进行公开;(3)其他替代策略的存在会削弱被并购压力对专利提前公开的影响。在使用工具变量、行业并购政策变化和举牌事件作为外生冲击对内生性问题进行处理后,结果仍然稳健。     

Threat of termination and firm innovation

This study investigates how the ex-ante threat of termination affects firm performance in innovation measured by number of patents and citations. Empirical results show that the threat of termination is negatively associated with both measures of firm innovation. This relation however is sensitive to industry structure. The negative effect of the threat of termination on innovation is statistically significant only for high-tech firms. For low-tech firms there is no statistically significant relation between the threat of termination and firm innovation. One plausible explanation is that high-tech firms are inherently risky and have higher rates of project failure. Adding the risk of higher threat of termination makes the manager more risk averse and forces her to avoid investing in value increasing innovations. Managers in low-tech firms don’t face such pressures. The policy implication is that high-tech firms should lower threat of termination and increase tolerance for project failure to encourage innovation.     

Innovation capability and post-IPO performance

This paper studies how firms’ innovation capability is related to their stock performance and eventual survival for a sample of biotech IPO firms. We create product-related measures of firms’ innovation capability by tracking the changes in R&D expenses, products, patents, strategic alliances, and product development stages for our sample firms, as disclosed in their IPO prospectuses and third post-IPO 10-K filings. We find that innovation capability is critical to contemporaneous stock performance and eventual firm survival. Biotech IPO firms are more likely to succeed in the long run, if they are able to expand the scale of their research undertakings and make progress in these research activities.     

Investability and Firm Value

We study how investability, or openness to foreign equity investors, affects firm value in a sample of over 1,400 firms from 26 emerging markets. We find that, on average, investability is associated with a 9% valuation premium (as measured by Tobin's q). This significant valuation premium persists in firm‐fixed effects regressions, although the magnitude and robustness of the premium is somewhat lower. Analysis of the components of Tobin's q shows that firms that become investable experience significant increases in both market values and physical investment. These effects are strongest for firms that face country‐level or firm‐level financial constraints prior to becoming investable.     

Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting

I examine how strong corporate governance proxied by the threat of hostile takeovers affects innovation and firm value. I find a significant decline in the number of patents and citations per patent for firms incorporated in states that pass antitakeover laws relative to firms incorporated in states that do not. Most of the impact of antitakeover laws on innovation occurs 2 or more years after they are passed, indicating a causal effect. The negative effect of antitakeover laws is mitigated by the presence of alternative governance mechanisms such as large shareholders, pension fund ownership, leverage, and product market competition.     

Institutional investor networks and firm innovation: Evidence from China

We examine the impact of institutional investor networks on firm innovation in China. Employing the unexpected departure of mutual fund managers and the inclusion of the Shanghai-Shenzhen 300 index as identifications, we find that institutional investor networks have a positive impact on firm innovation. Specifically, firms that are hold by well-connected institutional investors are motivated to make R&D investments and receive greater patents than their counterparts. This positive influence is more pronounced for non-SOEs and for firms located in less-developed regions, indicating that institutional investor networks act as information flow facilitator and a value certifier to encourage innovation activities.     

Portfolio preferences of foreign institutional investors

This paper examines the investment allocation choices of actively-managed US mutual funds in emerging market equities after the market crises of the 1990s. We analyze both country- and firm-level disclosure and institutional policies that influence mutual funds’ allocation choices relative to major stock market indices. At the country level, we find that US funds invest more in open emerging markets with stronger accounting standards, shareholder rights, and legal frameworks. At the firm level, US funds are found to invest more in firms that adopt discretionary policies such as greater accounting transparency and the issuance of an ADR. Our results suggest that steps can be taken both at the country and the firm level to create an environment conducive to foreign institutional investment.     

Reactive or proactive? Investor sentiment as a driver of corporate social responsibility

Investors and financial markets have been a neglected stakeholder group in studies on a firm’s motivations to be socially and environmentally responsible. Despite being a strong driving force behind firm value, no study has investigated the influence of market and investor sentiments on CSR behaviour. Using a global sample, we investigate the effects of market and investor sentiments on firm CSR performance. We find negative market and investor sentiments in the prior year motivate firms to improve their CSR performance in the next year. We also find the magnitude of improvement in CSR performance differs not only by country, but by CSR sub-category as well. These findings imply that a firm’s motivation to improve its CSR performance is reactionary, rather than being driven by altruism. Regulators and proponents of CSR should thus seek to persuade investors and financial markets to put pressure on firms to further advance the CSR agenda.     

Firm internationalization and cost of equity: Evidence from China

This paper examines the relationship between firm internationalization and cost of equity. We find that firms with a higher degree of international operations have a significantly lower cost of equity, which is more pronounced for firms in provinces with a weak institutional environment or firms experiencing intense domestic competition. Our results are robust after adopting a firm fixed effect model, propensity score matching, difference-in-difference regressions and alternative measurements of key variables. Further, international operations help firms to break through their institutional constraints in the domestic market, which reduces the cost of equity and improves resource allocation efficiency in the capital market. Our paper enriches the literature on firm internationalization and the cost of equity from the perspective of emerging markets.     

Entering a new market: Market profitability and first-mover advantages

We analyze a firm's investment problem when it faces preemption risk and profits are convex in market profitability. In a setup where firms have asymmetric profit convexity, which we relate to firm quality, we show that this has interesting effects on valuation and the order of entry. The interplay between profit convexity and market growth impacts whether a high-quality or a low-quality firm is the first mover. We relate the first-mover advantage to patents; we find that patents expedite investments and increase the incentives for high-quality firms to become first movers. Furthermore, even with a persistent first-mover advantage we show that first-mover advantages in terms of firm value are either over- or underestimated. Thus, our model sheds light on why empirical studies find mixed support for the existence of a first-mover advantage.     

Capital structure effects of international expansion

This study investigates and qualifies the impact of internationalization on the capital structure of a firm. Previous studies have associated firm internationalization with foreign sales or foreign assets. However, an increase in sales volume generated abroad does not necessarily mean that a firm has actually invested in a new foreign country. This study examines non-financial firms included in the main developed stock indexes that report a new geographical area of operation. It reveals that, at less advanced levels of internationalization, growth in foreign volumes and new geographic expansion lead to differential decision-making in capital structure choices.This study concludes that (1) when the target foreign market is developed, the new market entry does not lead to significant changes in capital structure, whatever the past experience of the firm. (2) The capital structure of well-diversified firms is not significantly modified following a new foreign entry. (3) Both domestic firms and firms only active in developed markets significantly increase their debt to equity ratio when expanding into a region or country where they had no operation before. Well-diversified firms clearly exhibit a different behavior compared to firms in less advanced levels of internationalization.     

Does “Vote No” Change Corporate Governance and Firm Value? Evidence from the Shareholder Activism of the Korean National Pension Service

In this paper, we analyze the effect of shareholder activism on firm value through internal corporate governance in an emerging market. We investigate the shareholder activism by the National Pension Service (NPS) of Korea, the fourth-largest pension fund in the world in 2010. We investigate stock price reaction to a “vote no” press announcement and find that the market does not react in the short run, which reaction is inconsistent with the results from developed countries. We also find that firms experiencing “vote no” and improved internal corporate governance have higher firm valuation. Shareholder activism by the NPS is effective in increasing target firm value through improving internal corporate governance.     

Why Have Debt Ratios Increased for Firms in Emerging Markets?

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's market‐value debt ratio rose by 15 percentage points over this quarter century. I study how this rise in leverage was influenced by firm‐level factors and by the availability of debt financing at the country level. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure – size, profitability, asset tangibility, and growth opportunities – all shifted in the direction implying a higher optimal level of debt. At the country level, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.     

Foreign institutional ownership externalities and supplier innovation

Many emerging markets allow foreign investment as a way to reform domestic markets. Extant studies have found a positive externality on innovation brought forth by foreign direct investment (FDI); however, we know very little about the externality of another form of foreign investment, ownership by foreign institutional investors (FII), on innovation. In this paper, we document one form of FII externality by showing that foreign institutional ownership of the customer firm results in higher supplier innovation. We also show that the FII externality on supplier innovation is stronger when customers have more influence on the suppliers and when the FIIs can facilitate information flow better. Our findings suggest that the real impact of FII can go beyond the underlying firms, and promoting FII may benefit firms, especially smaller firms in emerging countries that do not directly have foreign ownership.     

Market Valuation Effect of Foreign Asset Divestitures in an Emerging Economy: Korean Evidence

We find evidence that foreign asset divestitures announced by Korean listed firms lead to a decrement in firm value. Interestingly the divestiture announcements by firms with a large proportion of institutional investors, who hold advanced professionalism in stock investments, contribute to an increment in firm value, but ones by firms with a large proportion of individual investors lead to a decrement in it. Unlike the case of firms in advanced countries, our distinctive finding that the divestiture announcements produce a decrement in firm value around the announcement day sheds new lights on market valuation effects of foreign asset divestitures of firms in other emerging economies.     

Financial centers and ownership concentration: When is ownership concentration value relevant? Evidence from an emerging market

Does the location of a firm’s headquarter effect ownership concentration? Do stock market participants value ownership concentration differently for firms located at different geographic locations? Using data from India, this paper shows that firms headquartered in Mumbai, the main financial center of a country, have lower ownership concentration than firms headquartered elsewhere. We argue that clustering of firms in the financial center reduce information asymmetries and lower the incentives for concentrated ownership. Our results also show that as the extent of analyst following increase, the difference between ownership concentration of firms headquartered in Mumbai and firms headquartered elsewhere goes up. We argue that higher analyst coverage reduces information asymmetries quicker for firms headquartered in the financial center and results in larger difference between the two groups. In addition, we also show that ownership concentration is value relevant only for firms headquartered in the non-financial centers. We show no relationship between ownership concentration and firm performance and valuation in the financial centers. This paper provides evidence that location of a firm’s headquarter in the financial center can significantly alter its information environment. Reduced information asymmetries lower the incentives for concentrated ownership in the financial centers.