Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?

We examine whether underwriter reputation, venture capitalist (VC) backing, and VC reputation are related to the probability that a newly public firm has serious accounting problems. Using a novel data set, we find that the probability of restatement by an initial public offering (IPO) firm is positively related to underwriter reputation and negatively related to VC backing, VC reputation, and VC maturity. Our results do not appear to be driven by the endogeneity of underwriter reputation or VC backing. Our findings suggest that while VCs positively influence the financial reporting quality of IPO firms, underwriters’ concerns about revenue generation outweigh their concerns about reputation.     

承销商声誉与IPO企业质量关系的实证分析——基于我国A股市场的数据

本文采用三种不同的标准衡量我国承销商声誉,运用我国A股发行市场的数据分别从企业财务指标、承销IPO的风险和IPO长期回报这三个方面,对承销商声誉与发行企业质量之间的关系进行了实证分析。结果发现:理论上得出的承销商声誉与IPO企业质量之间的正相关关系在我国并不存在,说明投资者通过承销商声誉等级来区分发行企业质量的信号甄别机制在我国证券发行市场基本不存在,我国承销商的信息生产功能和认证中介职能严重缺位。     

博弈论视角的我国证券承销商声誉机制研究

本文在对声誉机制理论进行综述的基础上,从博弈论视角分析了证券承销商声誉机制发挥作用的条件和我国承销商声誉机制缺失的必然。针对我国目前证券市场上承销商声誉机制缺失的原因进行了剖析,进而提出了政策建议,以提高证券市场上承销商的质量。     

Looking Attractive until You Sell: Earnings Management,Lockup Expiration,and Venture Capitalists

Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.     

Does age structure forecast economic growth?

Increases in the proportion of the working age population can yield a “demographic dividend” that enhances the rate of economic growth. We estimate the parameters of an economic growth model using a cross section of countries over the period 1960 to 1980, and investigate whether the inclusion of age structure improves the model's forecasts for the period 1980 to 2000. We find that including the age structure improves the forecast, although there is evidence of parameter instability between periods with an unexplained growth slowdown in the second period. We use the model to generate growth forecasts for the period 2000 to 2020.     

Do Family Firms Have Better Reputations Than Non‐Family Firms? An Integration of Socioemotional Wealth and Social Identity Theories

We draw from socioemotional wealth and social identity research to develop a theory on reputational differences among family and non‐family firms. We propose that family members identify more strongly with their family firm than non‐family members do with either a family or non‐family firm. Heightened identification motivates family members to pursue a favourable reputation because it allows them to feel good about themselves, thus contributing to their socioemotional wealth. We hypothesize that when the family's name is part of the firm's name, the firm's reputation is higher because family members are particularly motivated for their firm to have a better reputation. Family members also need organizational power to pursue a favourable reputation; thus, we hypothesize that the level of family ownership and family board presence should be associated with more favourable reputations. We find support for our theory in a sample of large firms from eight countries with disparate governance systems and cultures.     

When a Sinner Does a Good Deed: The Path‐Dependence of Reputation Repair

This study examines how shareholders will interpret a socially desirable action taken by firms with a damaged corporate reputation status. We first explain theoretically why shareholders’ path‐dependent judgments of a tainted firm increase the likelihood of shareholders making less favourable judgments of the firm's socially desirable actions. We then test the theoretical predictions using a sample of Chinese listed firms that were sanctioned for securities fraud and subsequently made donations to the 2008 Sichuan earthquake relief funds. We find that the shareholders evaluate the donations made by fraud‐tainted firms less favourably than those made by firms that have not been sanctioned for fraud. Furthermore, the shareholders’ evaluations of the donations made by fraud‐tainted firms is less favourable if the firms have committed more serious fraud and undertaken fewer positive remedial actions in the post‐fraud period. Overall, our evidence demonstrates that shareholders’ path‐dependent judgments of fraud‐tainted firms constitute a major obstacle that constrains the effectiveness of reputation repair.     

Firm and Group Influences on Venture Capital Firms’ Involvement in New Ventures

abstract Drawing on expectancy, equity, and collective effort theories, we argue that the level of involvement of individual firms in multifirm alliances depends on both individual firms’ self‐focused interests and factors stemming from the firms’ membership in the alliance group. We apply our theoretical arguments to the context of venture capital syndicates and test the hypotheses using data about 160 venture capital firms (VCFs) drawn from a survey instrument and a secondary data source. The results show that individual firms’ involvement in a multifirm alliance is somewhat dominated by group effects; specifically, financial stake relative to that of the group and the reputation of the other group members significantly influence the focal firm's involvement. However, focal firms’ involvement relates negatively to their own reputation. We discuss the implications of these findings for future research. Our results imply that firms in multiparty alliances pay attention to the characteristics of their alliance partnership to calibrate their own behaviour. In our specific setting, VCF involvement in syndicates depends more on relative syndicate characteristics than on the focal firm's absolute level of investment. Further, because reputation is negatively associated with involvement, entrepreneurs and potential syndicate entrants should ensure that they fully leverage VCF reputation to achieve their goals.     

Reputation and Corporate Social Responsibility Aberrations,Trends, and Hypocrisy: Reactions to Firm Choices in the Stock Option Backdating Scandal

Drawing on strategic corporate social responsibility (CSR) and reputation theory, this paper examines the market reaction to firm disclosures of involvement in the US stock option backdating scandal. We examine how a firm's prior signals regarding ethical behaviour and values, as demonstrated through CSR initiatives, may both ameliorate and exacerbate market reactions. CSR initiatives may buffer a firm against general wrong‐doing but expose it to greater scrutiny and sanction for related wrong‐doing. Our results show that firms with enhanced overall reputations for CSR are partially buffered from scandal revelations. However, we find that when firms possess an enhanced reputation for CSR associated with corporate governance, violations pertaining specifically to governance are viewed as hypocritical and more harshly sanctioned. We also find lower and negative market reactions for firms that delay but self‐disclose their involvement in the scandal. The study extends the emergent, related literatures on strategic CSR and reputation management, and documents dynamics in the relationship between corporate social and financial performance.     

Evaluating shifts in Japan's quality-of-life

This paper presents a Data Envelopment Analysis/Malmquist index (DEA/MI) analysis of the change in quality-of-life (QOL), which is defined as the state of a social system as measured by multiple social-indicators. Applying panel data from Japan's 47 prefectures for the period 1975–2002, we identify significant movement in the country's overall QOL using a “cumulative” frontier shift index. Results suggest that Japan's QOL rose during the so-called “bubble economy years” (second half of the 1980s), and then dropped in the succeeding “lost-decade” (1990s). We also identify those prefectures considered most “responsible” for the shift(s) in QOL. Moreover, the use of both upper- and lower-bound DEAs enabled an evaluation of both “good” and “bad” movements in QOL.     

The Interaction of Top Management Group,Stakeholder, and Situational Factors on Certain Corporate Reputation Management Activities*

abstract This study examines when a firm's members are most likely to promote and defend its reputation. Building on past research in impression management theory and the upper‐echelons perspective, I argue that firms facing increased visibility among different stakeholder groups will increase corporate reputation management activities towards those groups and decrease activities towards other groups. I further argue that top management group characteristics will moderate these relationships, suggesting that certain top management groups are more attuned to the situational needs of reputation management. A set of hypotheses are tested using pooled cross‐sectional time‐series data on a set of Fortune 500 companies. Results indicate that firms generally directed reputation management activities towards their more visible stakeholders. However, the type and extent of reputation management behaviour varied. Specifically, for firms whose top management groups were more highly educated or output oriented, highly visible situations with the media were more likely to be associated with a higher use of press releases. Moreover, those same firms devoted more resources to mass media advertising under situations of high consumer visibility compared to firms whose top management groups were less educated or throughput oriented.     

The effect of firm financial characteristics and the availability of alternative finance on IPO underpricing

This article tests the hypothesis that the financial characteristics of the issuing firm, along with the availability of alternative sources of financing, are important determinants of the level of underpricing. While risk and its relationship to underpricing have been examined in previous studies, liquidity risk is unique because of its special implications for a firm’s bargaining position with the underwriter. Consistent with my hypothesis, firms with greater liquidity concerns at the IPO experience greater underpricing. On the other hand, firms with higher levels of venture capital funding and/or debt financing are more fully priced.     

Priced risk and asymmetric volatility in the cross section of skewness

We investigate the sources of skewness in aggregate risk factors and the cross section of stock returns. In an ICAPM setting with conditional volatility, we find theoretical time series predictions on the relationships among volatility, returns, and skewness for priced risk factors. Market returns resemble these predictions; however, size, book-to-market, and momentum factor returns are not always consistent with our predictions. We find evidence that size and book-to-market may be priced post-crisis but not in the decade before. Momentum does not appear priced by our test. We link aggregate risk and skewness to individual stocks and find empirically that the risk aversion effect manifests in individual stock skewness. Additionally, we find several firm characteristics that explain stock skewness. Smaller firms, value firms, highly levered firms, and firms with poor credit ratings have more positive skewness.     

Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period*

This paper examines empirically the reasons why Japanese manufacturing firms frequently fail to satisfy concavity of the cost function in input prices. We focus on the ‘bubble period’ in the 1980s when land was in great demand and land prices soared. By estimating the translog cost function with land as one of production inputs, we find that violation of concavity mainly resulted from weak bank–firm relationship and massive transactions of land. We also demonstrate that elasticities of substitution between land and other inputs are estimated quite differently if the firms violating concavity are not excluded from the analysis.     

Economic efficiency of multi-product structure: the evidence from Korean housebuilding firms

The Korean housebuilding industry has been subject to structural changes since the 1980s. One of the key features is that housebuilding firms have become diversified into a range of businesses and as a result display multi-product structure. This paper examines the efficiency of the multi-product structure of Korean housebuilding firms. For the analysis, translog cost functions were estimated using data for 201 building firms for the 3 years 1993–1995. The empirical results indicate that medium-size building firms enjoy increasing returns to scale, whereas large firms experience constant returns to scale. Korean building firms exhibit significant economies of scope in their diversification activities. Large firms have the greatest economies of scope. These results are consistent with cost efficiency for the multi-product structure of Korean housebuilding firms. The estimated optimum scale suggests that many large firms should expand only through diversification.     

Does going public in the U.S. facilitate corporate innovation of foreign firms?

We examine how going public in the U.S. IPO market influences corporate innovation. Using 185 foreign and 2948 U.S. domestic firms going public in the U.S. over the 1980–2006 period, we find that while exhibiting similar innovativeness in the pre-IPO period, non-U.S. firms tend to generate more innovation than U.S. domestic firms after going public. The findings are robust to adopting subsample tests, various measures of changes in innovation around the year of the IPO, and accounting for truncation problems and potential endogeneity concerns. Further tests show that changes in innovation around the year of the IPO tend to be less prominent for non-U.S. firms that domiciled in countries with more developed equity market and higher level of economic freedom. Our study provides insights into the real effect of going public in the U.S. IPO market on innovative activities.     

INSTITUTIONALISED JUSTIFICATION OF CORPORATE ACTION: INTERNATIONALISATION AND THE EU IN CORPORATE REPORTS

This paper provides an institutional analysis of the way a set of Finnish firms have used the concept of internationalisation and the EU in justifying major strategic decisions. They have used internationalisation, and in particular the then new possibility of Finland joining the EU, as an argument in support of radical change. An analysis of their annual reports reveals a number of institutional arguments which are strong because they are generally accepted, a priori, as being important not only to firms but indeed to Finland as a whole. In using institutional arguments firms are aligning their own interests with those of the country, and in so doing are able to justify radical changes in most parts of their own organisations. We are not claiming that Finnish firms should not react to the challenges which EU represents. Rather, we suggest that by using institutional arguments they are borrowing legitimacy from a wider public. The arguments used are typically very broad, invoking very general visions of the role of Finland in the EU. We call these arguments “easy rides” because, even if they are only partially explicated, it is generally assumed that they will become accepted without questioning by public and employees alike. Certain specific patterns of “easy rides” can be distinguished: i) The mobilisation of a “national mission”, ii) “Sacrifice now, reap the benefit later”, and iii) “Bigger is better”. The paper concludes with a methodological discussion about the difficulty of distinguishing between the technical/functional and the institutional arguments.     

Entry and barriers to entry in emerging markets

This note briefly introduces the symposium on entry and entry barriers in emerging markets edited by Nauro Campos and Saul Estrin. The symposium contains four inter-related case studies focusing in depth on the relationship between entry of new firms and institutional arrangements in four major emerging markets: Brazil, China, India and Russia. We find that entry rates are not necessarily low in emerging markets, and that institutional quality is a complex and “fuzzy” notion so that its impact on the entry process is not straightforward.     

The Stock Market Reaction to the Hiring of Management Consultants: A Signalling Theory Approach

Drawing from signalling theory, this study examines how the stock market reacts to the public announcement of the hiring of management consultants and whether it differentially values clients on the basis of their financial profitability and the brand‐name of the engaged consultant. An event study analysis of 118 client firms that publicly announced the hiring of management consulting firms finds that the stock market, on average, responded positively and significantly to the engagement news. Regression analysis further reveals that the stock market reaction tended to be the highest for client firms that had the highest profitability levels. In addition, the stock market reaction to the hiring announcement was not related to the consultant's brand‐name reputation; clients engaging the most reputable consultants (e.g. McKinsey & Company, Bain, Boston Consulting Group, Booz‐Allen Hamilton) did not realize any different market response than those clients that employed the other consultants. Overall, most client firms that publicly announced the hiring of management consultants experienced a rise in their market value and those that had the highest financial profitability realized the highest increase. Further, the findings imply that there may be boundaries to reputational spillover benefits in partnering relationships.     

China''s State-Owned Enterprises in the First Reform Decade: An Analysis of a Declining Monopsony

We study the evolution of employment and wage outcomes in Chinese SOEs during the first decade of economic reforms, using a panel of data for almost 1000 enterprises covering the years 1980–90. Unlike the 1990s, which were marked by growing labor redundancy in the SOE sector, we find that CPE-fostered capital-intensity remained so extreme during the 1980s that workers' marginal products exceeded their full wages, just as in a classical monopsony outcome. Consistent with reasoning about the impact of competition upon monopsony, however, we find the marginal product-wage gap declined in the face of market-oriented reforms, and that monopsony was weakest where the state sector's shares of industrial output and enterprises were lowest, and for smaller enterprises and enterprises managed by lower levels of government. Our analysis also supports Xu and Zhuang's (1996) finding that bonus payments increased enterprises' revenues by more than it did their costs.