Institutional investors and international investments in emerging economy firms: A behavioral risk perspective

While the extant literature has examined the influence of controlling and non-controlling principals on the internationalization decisions of emerging market firms, heterogeneity among non-controlling principals is largely ignored. The risk characteristics of different groups of owners, shaped by their institutional environments, could contribute to the differences in their preferences for firm internationalization. In this paper, we draw insights from institutional theory and behavioral risk perspective to examine the risk propensities and risk perceptions of various non-controlling principals, such as pressure-resistant (FIIs and mutual funds) and pressure-sensitive (banks, insurance companies and lending institutions) institutional investors. Empirical results from a sample of 2364 unique Indian firms during the 2005–2014 time-period show that, after controlling for firm-level resources and capabilities identified in prior literature, the ownership share of different types of institutional investors is associated with firms’ international investments differently. While pressure-sensitive institutional investors, such as banks and insurance companies, are not supportive of foreign investments by firms, pressure-resistant institutional investors, such as FIIs and mutual funds, are supportive of this strategic decision. Furthermore, our results show that the family ownership in a firm (measured in terms of family shareholding) further lowers the preference of pressure sensitive institutional investors for internationalization, whereas family ownership positively moderates the pressure resistant investors towards internationalization.     

Effect of climate-related risk on the costs of bank loans: Evidence from syndicated loan markets in emerging economies

Based on a novel dataset that combined syndicated loans originated in the emerging market economies with greenhouse gas emission intensity data of borrowers, this study examines whether and to what extent banks in these emerging markets have factored in climate transition risk in their lending decisions. On loan pricing, our results suggest that banks in these emerging markets have started to price-in climate transition risk for loans to emissions-intensive sector since the Paris Agreement. This could reflect their increased awareness of a climate-transition risk towards such firms. The extent of the transition risk premium is also found to be dependent on the environmental attitude of banks. Specifically, green banks are found to charge a higher loan spread than other banks, when lending to the same brown firm after the Paris Agreement. Apart from pricing a transition risk premium in the loan spread, we find evidence that banks may also consider imposing more stringent non-pricing contractual terms, such as shortening loan tenor and imposing collateral requirement, on brown firms especially when the associated credit risk impacts on these firms are more uncertain.     

Long-lasting bank relationships and growth of firms

A puzzling but consistent result in the empirical literature on banking is that firms with close bank ties do not grow faster than bank-independent firms. In this paper, we reconsider the link between relationship lending and firm growth, distinguishing firms by size and expansion/contraction conditions. The idea is that the beneficial effects of relationship lending on information asymmetries can be compensated by other negative capture, risk, and externality effects which make relational banks reluctant to support long-term growth projects of client firms, and that the strength of these compensating effects varies with firm size and health status. We explore the influence of long-lasting bank relationships on employment and asset growth of a large sample of Italian firms. The main finding is that relationship lending hampers the efforts of small firms to increase their size, while it mitigates the negative growth of troubled, medium–large enterprises.     

Carbon Risk,Carbon Risk Awareness and the Cost of Debt Financing

We seek insights into potential benefits for firms adopting strategies to improve business sustainability in a carbon-constrained future. We investigate whether lenders incorporate a firm’s exposure to carbon-related risk into lending decisions through the cost of financing, and if so, importantly whether firms can mitigate the penalty by demonstrating an awareness of their carbon risks. We use a sample of 255 firm-year observations from eight industries over the period 2009–2013. We measure carbon-related risk exposure as the firm’s historical carbon emissions and our primary measure of carbon risk awareness is based on the firm’s willingness to respond to the Carbon Disclosure Project (CDP) survey. We document a positive association between cost of debt and carbon risk for firms failing to respond to the CDP. Further, this association is economically meaningful, with a one standard deviation increase in carbon risk mapping into between a 38 and 62 basis point increase in the cost of debt. Equally, we find that this penalty is effectively negated for firms exhibiting carbon risk awareness. Our results are robust when we consider alternate measures of carbon awareness—disclosure through alternative medium to the CDP and firms’ annual cash investment in new capital assets using “cleaner” technology. Our results highlight not only the importance of carbon awareness as a business strategy for polluting firms, but also its importance to lenders exposed to their clients’ default and reputational risk. The debt market appears to incorporate historical carbon emissions and forward-looking indicators of carbon performance.     

The Effects of CEO Trustworthiness on Directors’ Monitoring and Resource Provision

This research investigates the interplay between leadership styles and institutional corporate social responsibility (CSR) practices. A large-scale field survey of managers reveals that firms with greater transformational leadership are more likely to engage in institutional CSR practices, whereas transactional leadership is not associated with such practices. Furthermore, stakeholder-oriented marketing reinforces the positive link between transformational leadership and institutional CSR practices. Finally, transactional leadership enhances, whereas transformational leadership diminishes, the positive relationship between institutional CSR practices and organizational outcomes. This research highlights the differential roles that transformational and transactional leadership styles play for a firm’s institutional CSR practices and has significant implications for theory and practice.     

A Comparison of Advertising Practices within the Accounting Profession

This article reports the findings of a survey among UK chartered accountancy firms on their promotional practices following the 1984 removal of advertising prohibitions in the profession. Specifically, it compares advertising practices between firms, using a typology of firms based on size of advertising budgets and use of advertising agencies. The financial resources devoted to advertising certainly influenced promotional activities. However, they were found to be no substitute for advertising agency expertise. Firms using advertising agencies had a more systematic approach to promotion; they were more likely to undertake pre-advertising research, segment their markets, make more varied and intensive use of media, and to evaluate their advertising. Firms with relatively large budgets which did not use advertising agencies tended to be less rigorous in their approach, showing little interest in crucial matters such as pre-advertising research and post-advertising evaluation.     

Does trade credit play a signalling role? Some evidence from SMEs microdata

Using micro-data on small- and medium-sized enterprises, this paper empirically investigates the “signalling hypothesis” formulated on the role of trade credit (Biais and Gollier in Rev Financ Stud 10: 903–937, 1997; Burkart and Ellingsen in Am Econ Rev 94: 569–590, 2004). The research method adopted allows evaluation of the impact of suppliers’ credit on bank debt accounting for the strength (duration) of bank–firm relationships. Our main finding is that trade credit seems to have an information content for banks, especially when the latter do not dispose of adequate (soft) information on firms, which is likely the case at the beginning stages of bank–firm relationships. An implication of our results is that the availability of suppliers credit might be crucial to foster access to institutional funding for new firms entering the market. Our evidence also suggests that banks seem to consider suppliers a reliable source of information on firms’ financial conditions even after several years of lending relationships.     

Modeling firm specific internationalization risk: An application to banks’ risk assessment in lending to firms that do international business

Drawing on internationalization process theory, we develop a new model for firm-specific internationalization risk assessment. The model shows that firm-specific internationalization risks can be determined from a firm's experiences and from current business activities in a firm's network. Experiential risks are categorized as international, country market, network, or relationship experience risks. Risk assessment in current network activities can be determined from a firm's dependency on a network and from the network's performance and evolution. We apply our model to credit risk assessment by banks and other credit institutions. This article adds to research on financial institutions’ credit risk assessment by focusing on firm-specific internationalization risk assessment, an area that has previously received little attention in the literature. In addition, this article provides a better understanding of risk assessment in the internationalization process, shedding light not only on the risks involved in firms’ commitment to internationalization but also on the risks that banks and other institutions take when they commit by lending to internationalizing firms.     

Supply Relational Risk: What Role Does Guanxi Play?

The topics of supply chain risk and global sourcing have garnered significant attention in recent years. Although there is ample circumstantial evidence of global sourcing risk, especially from the western‐firm perspective of sourcing from China, few published studies have investigated the root causes of this risk. In this paper, we argue that much of the risk associated with sourcing from China stems from the differences associated with institutional norms and philosophical orientation between western and Chinese thought and culture. Based on an in‐depth literature review and case analysis, we compare western forms of supply chain relationship management with Guanxi, the Chinese form of relationship management and propose a framework of how western firms are exposed to supply relational risk when sourcing from Chinese suppliers. The framework proposed in this article sheds light for supply chain managers with regard to the potential pitfalls facing firms when working with Chinese suppliers, and provides the groundwork for future research regarding supply chain practices and Guanxi networks.     

Ownership structure and earnings management in emerging markets—An institutionalized agency perspective

Previous earnings management research has largely focused on firm-level governance mechanisms in single countries or on macro-level variables in multiple countries. Building on this research, we incorporate firm ownership predictors along with national institutional dimensions to explore why firm decision makers in emerging markets vary in their earnings management behavior. Our theoretical framework integrates agency and institutional theories proposing that firm-level ownership mechanisms do not function in isolation, but are reinforced or attenuated by elements of the institutional governance environment. The multilevel empirical analysis of 1200 firms in 24 emerging markets indicates that controlling ownership is positively related to earnings management. We find that the level of minority shareholder protection in a country weakens this positive relationship. We also find that regulatory quality strengthens the negative relationship between institutional ownership and earnings management activity. It is hoped that awareness of how firm ownership structures interact with national-level institutions in affecting firm-level behavior will help managers and investors develop skills and practices to better cope with business norms in emerging economies.     

Trustworthiness and interest rates: an empirical study of Italian SMEs

Trust is expected to reduce transaction costs and agency costs and thus influence the cost of credit for small businesses. Assessments of trustworthiness are based on the ability, benevolence and integrity of the owner manager. The study examines whether lending managers’ assessments of the trustworthiness of small and medium-sized enterprise (SME) owner managers are associated with the interest rate charged. Data were obtained from a survey of lending managers from small banks in North East Italy. Control variables and a vector of trustworthiness factors were collected on a random sample of customers, resulting in data for 365 small firms (74% response rate). Multivariate regression analyses provided evidence of a negative association between trustworthiness and interest rates. Banks, owner managers, policy makers and researchers should recognise the potential of trust to influence lending decisions and behaviour.     

Strategy Tradeoffs in the Knowledge and Network Economy

In traditional "value chain" firms, the main activity tradeoff is between differentiation and low cost. Increasingly, however, firms are creating customer value through networks (eg AOL) or by providing knowledge-based solutions for customers (eg venture capital firm Kleiner Perkins). This article discusses the quite different activity tradeoffs faced by these "value networks" and "value shops". It then explores the tradeoff between exploitation (focusing on short-term performance) and exploration (focusing on transcending short-term activity tradeoffs). Finally, in reviewing the implications for managers, it discusses the problem of trying to manage different types of business (value chains, networks and shops) within the same corporation.     

The Choice between Bank Debt and Trace Credit in Business Start-ups

This paper investigates the choice between bank debt and trade credit in business start-ups. While trade credit is more expensive than bank debt, suppliers tend to follow a more lenient liquidation policy when client firms encounter financial distress. As a result, suppliers are more willing to renegotiate the outstanding debt or grant additional debt whereas banks are more likely to liquidate borrowers upon default. Given the risky nature of business start-ups, we argue that the entrepreneur’s choice of debt instruments reflects these differences in liquidation policy between lenders and is thus determined by the venture’s failure risk, the entrepreneur’s private control benefits that are lost upon liquidation and the liquidation value of firm assets. Using unique data on 325 first-time business start-ups, we find that firms in industries with high historical start-up failure rates and entrepreneurs who tend to highly value private benefits of control use less bank debt. These effects are especially prevalent in start-ups where assets have a high liquidation value and thus banks are more likely to liquidate the venture following default. An erratum to this article can be found at     

Are top managers important for firm performance and idiosyncratic risk? Evidence from sharia vs non‐sharia‐compliant firms in the UK and Pakistan

We examine the impact of top managers on performance and idiosyncratic risk of the sharia‐compliant firms in the UK and Pakistan by constructing a manager–firm matched panel data and then tracking the role of individual top managers across different firms. The results regarding the individual effects on performance by a particular firm show that there exists a significant difference for managers who move from a non‐sharia to a sharia‐compliant firm. However, this difference is not significant for managers who move from a sharia‐compliant firm to another sharia firm. Policy implications of the findings are discussed.     

论个体网络借贷系统性风险的法律控制机制

个体网络借贷等互联网金融是金融与科技深度“联姻”的产物,其客观上潜藏着巨大的系统性风险。基于信息障碍的客观存在,个体网络借贷机构既丧失了传统民间金融的人身性信任机制,也不具备传统银行等正规金融的制度化信任机制。个体网络借贷系统性风险的影响因素主要包括技术性因素、经营性因素和制度性因素。个体网络借贷系统性风险法律控制机制的完善需要依法构建金融网络安全建设的协作机制,明确监管机构对个体网络借贷实施科技监管的可行举措,从事前事后两个环节构建风险传导管控机制,通过明确受信地位充分发挥民商法的调整功能,以软法治理提升个体网络借贷机构和行业的自律水平。     

Law‐abiding organizational climates in developing countries: The role of institutional factors and socially responsible organizational practices

The institutional environment of developing countries may lead firms to engage in unlawful firm conduct, which is a pervasive problem in this context. Our paper examines the effectiveness of organizational practices for ensuring that firms adhere to the law in the light of pressures from the institutional environment to be unlawful. Using the lens of anomie theory, we investigate: (a) the negative effect of aspects of the institutional context—regulatory burden and lack of industry munificence—on a law‐abiding climate, a type of organizational climate related to unlawful conduct, and (b) the role of socially responsible organizational practices in combating these negative effects. Survey data were collected from 118 firms and analysed using OLS moderated regression. Our results indicate that a manager's perceptions of regulatory burden and lack of industry munificence are negatively related to the extent to which the firm has a law‐abiding climate. Furthermore, our findings shed light on the ability of socially responsible practices to countervail this effect. While the negative effect of perceived regulatory burden on law‐abiding climate weakens when codes of ethics are used more extensively by a firm, it strengthens when firms hold a CSR certification. The latter finding may be due to the lack of enforcement associated with the specific certification considered in our study.     

The effect of institutional isomorphic pressure on the internationalization of firms in an emerging economy: evidence from China

This study uses institutional theory to explore the driving force for internationalization of firms in emerging economies. It posits that the internationalization practices of firms are driven not only by efficiency consideration, but also by the desire to conform to institutional isomorphic pressures exerted by the social environment. The impact of three types of institutional isomorphic pressures – coercive pressure, mimetic pressure and normative pressure – on the intensity of internationalization is investigated. Analysis using survey data collected from 174 Chinese firms shows that all three institutional pressures have positive and significant effects on the intensity of internationalization. We also examine the interaction between institutional pressure and firm capability. Results suggest that firm capabilities enhance the effect of coercive pressure on internationalization, and weaken the effect of normative pressure on internationalization.     

Currency depreciations, financial transfers, and firm heterogeneity

The present paper investigates five episodes of currency collapse from the perspective of non-financial firms operating in Argentina, Brazil and Mexico. We focus on two aspects: wealth and income transfers from borrowing firms to lenders and firm heterogeneity. At the firm level, we find that the currency collapses are preceded and associated with sharply rising financial transfers from firms to lenders. The debt and income structure is central in explaining the asymmetric firm dynamics. Most affected are firms with high levels of unhedged foreign-currency debt. At the country level, Argentina, Brazil, and Mexico display three contrasting examples. Argentina has a large currency mismatch, Brazil balances the currency denomination of debt and income (natural hedge), and Mexico occupies an intermediate position.     

Organization Context and Human Resource Management in the Small Firm

This paper examines the relationship between organization contextual variables and human resource management (HRM) practices in small firms. The proposed model is based on an integration of theoretical perspectives, including the resource-based approach, institutional theory, transaction cost economics (TCE), and concepts from strategic management. The model is explored empirically, with qualitative and quantitative analyses of data collected from a sample of sixteen small Dutch firms. Specific contextual variables examined include company size, the presence of a collective labor agreement, having a large firm associate, either as supplier, purchasing group or franchiser, and the company's strategic orientation toward growth (growth strategy). An important finding is the significance of having a large firm associate. Companies with a large firm associate are more likely to report having employer-based training programs. As predicted, company size is associated with more formal HRM practices, including greater regularity of performance appraisal and greater likelihood of employer-based training. A weak relationship is found between a more growth-oriented strategy and greater formality of these two HRM practices. Predictions based on collective labor agreements are not supported. The paper concludes that the findings warrant further research on the relationship between organization contextual variables and the formalization of HRM practices, although a clearer definition of the latter variable is needed in future research.