Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary : This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets. Managerial summary : Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.     

A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.     

Alliance portfolio reconfiguration following a technological discontinuity

Research summary : We study how technological discontinuities generate first‐ and second‐order effects on alliance formation and termination, leading to reconfiguration of firms' alliance portfolios. Following technological shocks, we argue that firms often seek alliances that provide new resources while also having incentives to form alliances for reinforced and challenged resources that complement the new resources. In parallel, alliance terminations, even involving resources otherwise unaffected by the discontinuity, increase due to limits in firms' alliance carrying capacity. We study biopharmaceutical firms between 1990 and 2000, which faced a technological discontinuity in 1995 in the form of combinatorial chemistry and high‐throughput screening. We improve understanding of how technological discontinuities affect the value of resources and how firms reconfigure alliance portfolios in response. Managerial summary : When firms form alliances to gain new resources during technological discontinuities that disrupt their industry, they cannot consider only the focal new partnerships. Instead, new alliances create complementarity and substitution pressures that lead to broader reconfiguration of the firms' alliance portfolios: (1) complementarity creates incentives to also form alliances for resources that the technological discontinuity reinforces or challenges in order to improve the collective value of co‐specialized assets; (2) substitution creates incentives to terminate existing alliances, even if their value is otherwise unaffected by the discontinuity, in order to create carrying capacity for new alliances. Thus, one new alliance can generate a cascade of reconfiguration that challenges the balance between the benefits of stability and the need for change in an alliance portfolio. Copyright © 2016 John Wiley & Sons, Ltd.     

Does a long‐term orientation create value? Evidence from a regression discontinuity

Research summary : In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary : This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.     

Gaining from scientific knowledge: the role of knowledge accumulation and knowledge combination

This study investigates the performance effect of scientific knowledge in the context of highly science‐dependent industry. Given the popularity of sourcing scientific knowledge from science community, the purpose of this study is to investigate which firms gain greater benefits from scientific knowledge. From the perspective of absorptive capacity and combinative capability, we argue that both knowledge accumulation and knowledge combination moderate a firm's ability to capture value from scientific knowledge. Empirical data come from paper and patent citations and financial information in biotechnology and pharmaceutical firms. Results show that scientific knowledge alone has a positive effect on firms' financial performance. A firm's tendency to combination familiar and older technological knowledge amplifies the positive effect of scientific knowledge. However, knowledge accumulation, including R&D investment and patent stock, does not boost the positive effect.     

Alliance capability,stock market response,and long‐term alliance success: the role of the alliance function

This paper addresses two key questions: (1) what factors influence firms' ability to build alliance capability and enjoy greater alliance success, where firm‐level alliance success is measured in two ways: (a) abnormal stock market gains following alliance announcements and (b) managerial assessments of long term alliance performance; and (2) are the two alternate ways of assessing alliance success correlated? We find that firms with greater alliance experience and, more importantly, those that create a dedicated alliance function (with the intent of strategically coordinating alliance activity and capturing/disseminating alliance‐related knowledge) realize greater success with alliances. More specifically, firms with a dedicated alliance function achieve greater abnormal stock market gains (average of 1.35%) and report that 63 percent of alliances are successful whereas firms without an alliance function achieve much lower stock market gains (average of 0.18%) and only a 50 percent long‐term success rate. We also find a positive correlation between stock market‐based measures of alliance success and alliance success measured through managerial assessments. In addition to providing insights into the development of alliance capability among firms, this paper is one of the first to provide empirical support for the efficient markets argument by demonstrating that the initial stock market response to a key event positively correlates to the long‐term performance and value of the event. Copyright © 2002 John Wiley & Sons, Ltd.     

Real options and real value: the role of employee incentives to make specific knowledge investments

Real options reasoning emphasizes the strategic value of making flexible investments in a turbulent environment. Employees' investments in specific human capital are often critical to the success of a real option project, but the very flexibility that allows a firm to change course in response to new information also affects employees' incentives to make such specific human capital investments. We develop a model of real option investment that explicitly incorporates the role of employee incentives. The model suggests that the effect of investing in a real option project on employee incentives may be positive, further increasing the value of the project, or negative, sometimes more than offsetting the benefit of flexibility and resulting in reduced project value. Therefore, firms and managers should take into consideration the role of employee incentives when applying real options logic to investment decision making. Copyright © 2008 John Wiley & Sons, Ltd.     

Who bribes? Evidence from the United Nations' oil-for-food program

How do managers react in an environment where bribery is likely to bring high rewards, but also presents high risks? We examine the supply side (firms' illicit payments) of bribery in a global setting, using the United Nations' (UN) Oil-for-Food Program, part of UN sanctions on Iraq. Some companies helped Iraq circumvent UN sanctions through bribe payments in the form of illicit surcharges. Our transaction-level analysis of factors affecting bribe payments draws on the economic theory of crime, agency theory, and home country institutions. Results suggest that firms pay larger bribes when there are stronger financial and managerial incentives, but pay less when their home countries have implemented the OECD Anti-Bribery Convention. We find little relationship between a widely used country-level corruption perception index and firms' actual bribery. Copyright © 2012 John Wiley & Sons, Ltd.     

Going short‐term or long‐term? CEO stock options and temporal orientation in the presence of slack

Research summary: We draw on behavioral agency theory to explain how decision heuristics associated with CEO stock options interact with firm slack to shape the CEO's preference for short‐ or long‐term strategies (temporal orientation). Our findings suggest CEO current option wealth substitutes for the influence of slack resources in encouraging a long‐term orientation, while prospective option wealth enhances the positive effect of slack on temporal orientation. Our theory offers explanations for non‐findings in previous analysis of the relationship between CEO equity based pay and temporal orientation and provides the insights that CEO incentives created by stock options (1) enhance the effect of available slack upon temporal orientation and (2) can both incentivize and de‐incentivize destructive short‐termism, depending upon the values of current and prospective option wealth. Managerial summary: We explore how compensation design can play a role in affecting the CEO's preference for short‐ or long‐term strategic projects. When the CEOs have accumulated option wealth, they are more likely to invest in the long term. Yet when they have a large number of recently granted options with the potential to generate significant wealth in the event of successful risk taking, the CEO is more likely to prefer the short term in order to achieve personal wealth gains more quickly. The more liquid assets the firm holds, the weaker both of the aforementioned effects. An implication for boards is that they should anticipate CEO short‐termism if the CEO has been granted new options, underlining the potential negative consequences of option compensation. Copyright © 2015 John Wiley & Sons, Ltd.     

Fast‐mover advantages: Speed capabilities and entry into the emerging submarket of atlantic basin LNG

Entry timing benefits and costs typically vary with firms' capabilities. In this study, we empirically examine the entry timing implications of firms' intrinsic speed capabilities, which refer to the ability to execute investment projects faster than competitors. We hypothesize that firms with intrinsic speed capabilities face low preemption risks and, thus, can afford to wait longer for uncertainty resolution before deciding to enter new markets. This hypothesis is more applicable when investment is associated with higher levels of commitment and, thus, greater option value of waiting. A direct implication is that late entrants with intrinsic speed capabilities should have greater expected post‐entry performance. We find support for these hypotheses in the Atlantic Basin liquefied natural gas (LNG) industry from 1996 to 2007. Copyright © 2013 John Wiley & Sons, Ltd.     

The effect of government 5G policies on telecommunication operators’ firm value: Evidence from China

To lead the world's fifth-generation mobile communication networks (5G) market, China introduced several policies to support 5G industry development that will impact telecommunication operators, the main implementers in this industry. Thus, this study examines the impact of the government's 5G policy announcements on telecommunication operators' firm value in China, where the state exerts a strong influence on industry development. We find that government policy announcement in general affects telecommunication operators' stock returns negatively, and when the government announces policies with a higher level of interference, the decline in firm value is more pronounced. To understand the comprehensive impact of 5G technology on telecommunication operators, we also examine the effect of institution-driven corporate technology R&D and investment activities on firm value. We find that the firms' 5G activities also decrease their firm value, and this effect is more significant than government policy announcements. These results imply that the market has a negative evaluation of the introduction of 5G technology due to its immaturity and uncertainty. This study provides a basis for understanding the market's views on 5G technology and development policies.     

Skill relatedness and firm diversification

Because of the importance of human capital, a firm's choice of diversification targets will depend on whether these targets offer opportunities for leveraging existing human resources. We propose to quantify the similarity of different industries' human capital or skill requirements, that is, the industries' skill relatedness, by using information on cross‐industry labor flows. Labor flows among industries can be used to identify skill relatedness, because individuals changing jobs will likely remain in industries that value the skills associated with their previous work. Estimates show that firms are far more likely to diversify into industries that have ties to the firms' core activities in terms of our skill‐relatedness measure than into industries without such ties or into industries that are linked by value chain linkages or by classification‐based relatedness. Copyright © 2012 John Wiley & Sons, Ltd.     

Disentangling the performance effects of efficiency and bargaining power in horizontal growth strategies: An empirical investigation in the global retail industry

Mergers and acquisitions (M&A) and organic growth are two common strategies to achieve horizontal growth. In this study, we disentangle two distinct sources of firm performance corresponding to different theoretical perspectives on firm size: firms' bargaining power with respect to suppliers and customers, and operating efficiency arising from scale economies. We conceptually argue and empirically show that relatively, M&A enhance bargaining power in the short term while organic growth enhances operating efficiency over the long term. In order to disaggregate these effects, we use accounting rather than financial or managerial data and test our predictions in the global retail industry over a 20‐year period. We examine implications of these results for sustainability of size‐based competitive advantages. Copyright © 2014 John Wiley & Sons, Ltd.     

The influence of firm and industry characteristics on returns from technology licensing deals: evidence from the US computer and pharmaceutical sectors

This study examines the relationships between firm and industry characteristics and firms' abnormal stock market returns accompanying the announcement of technology licensing deals. In particular, I examine the fit among firms' licensing activities, their resource endowments, and their industry context, and develop hypotheses on its impact on abnormal stock market returns after licensing deals. Analyzing 11 years of inward and outward licensing transactions in the US computer and pharmaceutical industries between 1990 and 2000, I find support for my argument that while firms profit from both inward and outward licensing, the magnitude of such profits is determined by licensing firms' resource endowments, and that these determinants have a different impact in different industry contexts. Understanding these relationships helps explain when firms should use licensing to exploit their proprietary technologies and make better predictions about the impact of licensing transactions on firm performance.     

Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Research summary: We contribute to the corporate political activity (CPA ) literature by showing that investors value companies that host visits of high‐ranking government officials (P resident and P remier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in C hina from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled . Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of C hinese public firms that hosted 84 visits by the C hinese P resident and the P remier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy . Copyright © 2016 John Wiley & Sons, Ltd.     

Do‐no‐harm versus do‐good social responsibility: Attributional thinking and the liability of foreignness

Research summary: The efforts of multinational corporations to be socially responsible do not always engender positive evaluations from overseas stakeholders. Drawing on attribution theory, we argue that two heuristics guide stakeholders in evaluating firms' social performance: foreignness and the valence of firms' social responsibility. We provide evidence from a field study of secondary stakeholders and an experimental study involving 129 non‐governmental organizations. Consistent with attribution theory, the liability of foreignness is minimized when firms engage in “do‐good” social responsibility (focused on proactive engagement creating positive externalities) but is substantial when firms engage in “do‐no‐harm” social responsibility (focused on attenuating negative externalities). In online supporting information, Appendix S1, we demonstrate that these evaluations have consequences for whether stakeholders subsequently cooperate, or sow conflict, with firms. Managerial summary: There is no guarantee that efforts to be socially responsible will improve multinational corporations' relations with overseas stakeholders, such as customers, governments, and activists. In a field study and an experiment, we unpack when foreign firms suffer from harsh stakeholder evaluations. Foreign firms especially suffer from harsh evaluations when they conduct “do‐no‐harm” CSR rather than “do‐good” CSR. Stakeholders attribute the motive for foreign firms' do‐no‐harm CSR to managerial interests and shareholder pressures, perceiving a wedge between managers and owners (who may be unmotivated to reduce the negative impacts of their business activities) and local stakeholders (who bear the social costs). A practical implication is that foreign firms gain more from highlighting do‐good rather than do‐(no)‐harm CSR initiatives. Copyright © 2015 John Wiley & Sons, Ltd.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

A multilevel framework of firm boundaries: firm characteristics,dyadic differences,and network attributes

Extending prior firm boundary research that tends to focus on economic explanations and rely on atomistic assumptions, we propose a multilevel framework by bridging the resource‐based view and the social network perspective, with their respective emphases on the importance of firms' internal resource endowments and external resource opportunities. Specifically, we argue that firms' boundary choices can be better understood by considering the tension between the need for external resources and the need for risk controls, affected by internal and external resource factors at three important levels: firm characteristics, dyadic differences, and network attributes. We also explore firms' boundary choices under two conditions: whether to initiate external relationships (non‐partnering vs. partnering) and whether to pursue either alliances or acquisitions if external relationships are needed. Our analyses of the United States computer industry over a nine‐year span largely support our theoretical framework and demonstrate the importance of unique factors at and across individual, dyadic, and network levels in understanding firms' boundary choices. Copyright © 2009 John Wiley & Sons, Ltd.