High‐Reputation Firms and Their Differential Acquisition Behaviors

Research summary: E merging reputation research suggests that high‐reputation firms will act to maintain their reputations in the face of high expectations. Yet, this research remains unclear on how high‐reputation firms do so. We advance this research by exploring three questions related to high‐reputation firms' differential acquisition behaviors: Do high‐reputation firms make more acquisitions than similar firms without this distinction? What kind of acquisitions do they make? How do investors react to high‐reputation firms' differential acquisition behaviors? We find that high‐reputation firms make more acquisitions and more unrelated acquisitions than other firms. Yet, we also find that investors bid down high‐reputation firms' stock more than other firms' in response to acquisition announcements, suggesting that investors are skeptical of how high‐reputation firms maintain their reputations . Managerial summary: W e know that high‐reputation firms wish to maintain their elite standing in the face of high‐market expectations, but we know little about how they do so. We explore this puzzle by investigating how reputation maintenance influences high‐reputation firms' acquisition behaviors. We classify high‐reputation firms are those firms that make Fortune's M ost A dmired annual list, and we find that high‐reputation firms make more acquisitions and more unrelated ones than other firms. Surprisingly, we also find that the market tends to react negatively to these acquisitions. Thus, managers may want to reconsider their strategy of making acquisitions as a means to maintain their firms' high reputations . Copyright © 2017 John Wiley & Sons, Ltd.     

Government's green grip: Multifaceted state influence on corporate environmental actions in China

Research summary: Emerging economies such as China enjoy economic expansion, but also face dramatic environmental challenges. China's government is a central actor in both stimulating economic activities and pursuing environmental protection. Drawing on panel data and in‐depth interviews, we examined the influence of the Chinese state at multiple levels on the environmental actions of publicly listed firms. The results show that corporate environmental actions follow an inverted U‐shape as control of environmental practices moves from the central government to the most decentral administrative level. This curvilinear relationship is positively moderated by the stringency of environmental regulation and negatively moderated by environmental monitoring capacity. We conclude that state influence on corporate environmental actions in China is multifaceted and subject to “policy‐policy decoupling.” Managerial summary: As China's environmental awareness is growing, the country's government is increasingly concerned with the question as to how it can improve the environmental performance of the firms it controls. Our evidence shows the concurrence of two contravening government influences on corporate environmental practices: a performance‐enhancing effect of the regulatory pressure by multiple authorities and a performance‐diminishing effect of the autonomy enjoyed by local governments. Both the most centrally and the most decentrally controlled firms in China show significantly weaker environmental performance than those controlled by intermediary levels of government. The stringency of sectorial environmental regulation and environmental monitoring capacity affect the strength of the Chinese government's green grip.     

Do investors actually value sustainability? New evidence from investor reactions to the Dow Jones Sustainability Index (DJSI)

Research Summary: Research exploring investor reactions to sustainability has substantial empirical limitations, which we address with a large‐scale longitudinal financial event study of the first global sustainability index, DJSI World. We examine investor reactions to firms from 27 countries over 17 years that are added, deleted, or continue on the index. We find that once relevant controls and comparisons to observationally equivalent firms beyond the index are included, DJSI events have only limited significance and/or materiality. Nonetheless, investors' valuation of sustainability around the world has evolved over time, involving diminishing reactions to U.S. firms and increasing benefits, particularly of continuation on the index, over time. The study highlights the importance of careful analysis and longitudinal global samples in making inferences about the financial effects of social performance. Managerial Summary: The debate about how investors perceive corporate social responsibility (CSR) predates Milton Friedman's famous statement that the only social responsibility of business is to increase profits. Although extensive research has studied whether sustainability contributes to financial performance, we have yet to understand whether investors believe it pays off. This financial event study of reactions to the addition, continuation, and deletion from DJSI World, the first global sustainability index, shows that investors care little about DJSI announcements. Nonetheless, there is some evidence that global assessments of sustainability are converging and that investors may increasingly be valuing continuation on the DJSI, suggesting that firms may gain at least limited benefits from reliable sustainability activities.     

Managing corporate-government relationships in a multi-cultural setting: How political corporate social responsibility (PCSR) as a response to legitimacy pressures affects firm reputation

As many multinationals set up subsidiaries in emerging markets, they face legitimacy pressures from the host countries. This pressure leads firms to engage in political corporate social responsibility (PCSR) activities. We distinguish two types of attributions of PCSR activities – public-serving and self-serving – and study how these two types of PCSR attributions affect firm reputation. Analyzing 463 PCSR activities by 104 firms in China between 2015 and 2017, we find that public-serving PCSR enhances firm reputation, while self-serving PCSR diminishes it. In addition, we document a negative interaction effect between the two attributions of PCSR. We also find that CEO participation attenuates the negative effect of self-serving PCSR whereas administrative distance accentuates the positive effect of public-serving PCSR. Our research contributes to the nascent literature on government relation networks and sheds light on how firms should manage their relationships with the host countries in a multi-cultural setting.     

Does bribery in the home country promote or dampen firm exports?

This study examines the impact of bribery within the home country on firm exports by developing two contrasting hypotheses. On the one hand, preferential treatment resulting from government officials in exchange for bribes may promote exports by enhancing efficiency and enabling bribing firms to better compete in foreign markets. On the other hand, preferential treatment resulting from bribes may decrease exports by providing firms with more established positions within the domestic market diminishing the incentive to explore foreign markets. Adopting the three‐stage least squares method, we test these competing arguments using a sample of firms operating within transition economies. We find that bribery within the home country decreases rather than increases firm exports. The implications of our findings are discussed. Copyright © 2013 John Wiley & Sons, Ltd.     

Managerial social capital,strategic orientation,and organizational performance in an emerging economy

This study replicates and extends previous research focusing on China, to a sub‐Saharan African emerging economy environment. Specifically, the study directly replicates the impact of social capital derived from the micro‐managerial networking relationships and ties with top managers at other firms and government officials on macro‐organizational performance using data from Ghana. This study further extends previous work by examining the impact of social capital derived from managerial social networking relationships and ties with community leaders on organizational performance. It examines how the relationship between social capital and organizational performance is contingent on an organization's competitive strategic orientation. The findings suggest that social capital developed from managerial networking and social relationships with top managers at other firms, government officials (political leaders and bureaucratic officials), and community leadership enhance organizational performance. The findings from the contingency analyses reveal some interesting trends. The impact of social capital on organizational performance differs between firms that pursue the different competitive strategies (low‐cost, differentiation, and combination of low‐cost and differentiation) and those who do not pursue those strategies. Copyright © 2007 John Wiley & Sons, Ltd.     

Corporate reputation and sustained superior financial performance

Good corporate reputations are critical because of their potential for value creation, but also because their intangible character makes replication by competing firms considerably more difficult. Existing empirical research confirms that there is a positive relationship between reputation and financial performance. This paper complements these findings by showing that firms with relatively good reputations are better able to sustain superior profit outcomes over time. In particular, we undertake an analysis of the relationship between corporate reputation and the dynamics of financial performance using two complementary dynamic models. We also decompose overall reputation into a component that is predicted by previous financial performance, and that which is ‘left over’, and find that each (orthogonal) element supports the persistence of above‐average profits over time. Copyright © 2002 John Wiley & Sons, Ltd.     

Home Alone: The Effects of Lone‐Insider Boards on CEO Pay,Financial Misconduct,and Firm Performance

Research summary: Corporate scandals of the previous decade have heightened attention on board independence. Indeed, boards at many large firms are now so independent that the CEO is “home alone” as the lone inside member. We build upon “pro‐insider” research within agency theory to explain how the growing trend toward lone‐insider boards affects key outcomes and how external governance forces constrain their impact. We find evidence among S&P 1500 firms that having a lone‐insider board is associated with (a) excess CEO pay and a larger CEO‐top management team pay gap, (b) increased likelihood of financial misconduct, and (c) decreased firm performance, but that stock analysts and institutional investors reduce these negative effects. The findings raise important questions about the efficacy of leaving the CEO “home alone.” Managerial summary: Following concerns that insider‐dominated boards failed to protect shareholders, there has been a push for greater board independence. This push has been so successful that the CEO is now the only insider on the boards of more than half of S&P 1500 firms. We examine whether lone‐insider boards do in fact offer strong governance or whether they enable CEOs to benefit personally. We find that lone‐insider boards pay CEOs excessively, pay CEOs a disproportionately large amount relative to other top managers, have more instances of financial misconduct, and have lower performance than boards with more than one insider. Thus, it appears that lone‐insider boards do not function as intended and firms should reconsider whether the push towards lone‐insider boards is actually in shareholders' best interests. Copyright © 2017 John Wiley & Sons, Ltd.     

The Impact of Industrial Design Effectiveness on Corporate Financial Performance*

Despite the growing recognition of industrial design's value in creating sustainable competitive advantage, few studies have attempted to quantify the contribution that design makes to company financial performance. This article examines the relationship between industrial design and company financial performance in order to assess industrial design's contribution to this performance. Effective industrial design was evaluated by asking a panel of 138 industrial design experts to rank the industrial design effectiveness of publicly traded firms within nine selected manufacturing industries; the ranking process yielded 93 firms. Based on the rankings, firms within each industry were divided into two groups: those judged as exhibiting high design effectiveness versus those judged as low in design effectiveness. Audited financial data reported to the SEC across a seven‐year period from 1995 to 2001 were used to evaluate financial performance. Using traditional financial ratios senior managers consider essential performance measures, those firms with high design effectiveness were hypothesized to have higher returns on sales, returns on assets, and growth rates of sales, net income, and cash flow than firms with low design effectiveness. High design effectiveness firms further were hypothesized to have higher stock market returns. These comprehensive, corporate financial measures incorporate expenditures made on industrial design (industrial designers' salaries, design consultants' fees, computer‐aided industrial design equipment) and expenditures that designers influence through their design choices (material costs, manufacturing equipment). This analysis reveals that firms rated as having “good” design were stronger on all measures except growth rate measures. These results provide strong evidence that good industrial design is related to corporate financial performance and stock market performance even after considering expenditures on industrial design. Further, the patterns of financial performance over the seven‐year horizon suggest that these effects are persistent.     

Reassessing board member allegiance: CEO replacement following financial misconduct

Research summary: We examine how board members' reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes‐Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a 12‐year period before and after the passage of Sarbanes‐Oxley. Managerial summary: Given past concerns about lack of oversight by boards of directors leading to firm financial misconduct, we examine how the relationship between directors and CEOs may be altered in the face of such misconduct. We argue that directors most closely tied to the CEO (inside board members and board members appointed by the CEO), typically the most supportive of the CEO, may become most concerned about their own reputation following financial misconduct. We find that CEOs receive less support from these directors, a finding in contrast to past studies demonstrating that such board members tend to shield CEOs following poor performance. These findings are accentuated following the passage of the Sarbanes‐Oxley Act, which places greater responsibility on the CEO for the accuracy of financial reports. Copyright © 2015 John Wiley & Sons, Ltd.     

When does guanxi bolster or damage firm profitability? The contingent effects of firm- and market-level characteristics

This paper advances that a nuanced approach is necessary to understand the effectiveness of managerial ties (guanxi) in improving firms' financial performance. We take a contingency approach to examine how the effects of managerial ties on performance may be moderated by firm-level factors (i.e., firm age and entrepreneurial orientation) and market-based forces (i.e., demand uncertainty and technological turbulence). Using a survey of 289 firms in China, we find that managerial ties are more salient with regard to enhancing performance for more entrepreneurial-oriented and younger firms. Managerial ties fail to provide performance benefits to firms when high demand uncertainty exists or when the level of technological turbulence is high, which suggests a performance limitation of established ties with government officials, buyers, suppliers, and competitors. The theoretical and managerial implications of the findings are further discussed.     

Cross‐border acquisitions by state‐owned firms: How do legitimacy concerns affect the completion and duration of their acquisitions?

Research summary: Cross‐border acquisitions may raise legitimacy concerns by host‐country stakeholders, affecting the acquisition outcomes of foreign firms. We propose that theorization by local regulatory agencies is a key mechanism that links legitimacy concerns with acquisition outcomes. Given that theorization is time consuming and its outcome is uncertain, we argue that state‐owned foreign firms experience a lower likelihood of acquisition completion and a longer duration for completing a deal than other foreign firms. Moreover, we introduce a set of firm characteristics (target public status, target R&D alliances, and acquirer acquisition and alliance experiences) that may affect the threshold level of legitimacy, thereby altering the proposed relationships. Our framework and findings provide useful implications for institutional theory on its core concept of legitimacy. Managerial summary: Cross‐border acquisitions by state‐owned foreign firms may lead to national security concerns and thus debates and discussions among local regulatory agencies. We argue that such institutional processes may reduce the likelihood of acquisition completion and prolong the duration of acquisition completion. Using cross‐border acquisitions in the United States, we find that acquisitions by state‐owned foreign firms are not less likely to be completed than acquisitions by other foreign firms, but they take more time to be completed. Moreover, state‐owned foreign firms are less likely to complete an acquisition when the target firm has more R&D alliances. However, their acquisition experience and alliance experience in the host country increase the likelihood of acquisition completion, whereas their alliance experience alone shortens the acquisition duration. Copyright © 2016 John Wiley & Sons, Ltd.     

Toward a legitimacy‐based view of political risk: The case of Google and Yahoo in China

Traditional political risk theories often focus on a developing host country government's ability to intervene in the activities of foreign multinationals in the extractive or infrastructure sectors. This results in inadequate understanding of (1) how a government's motivation to intervene is influenced by the broader societal context, (2) the importance of multinationals' political risk at home, and (3) the increasing political risk faced by high‐tech and service firms. We argue that there is a need to update the bargaining power and political institutions theories and further develop a legitimacy‐based view of political risk. Then, we examine the political risk experienced by Google and Yahoo at home and abroad due to their activities in China to illustrate the benefits of a holistic approach to political risk. Copyright © 2015 John Wiley & Sons, Ltd.     

Stepping across for social approval: Ties to independent foundations' boards after financial restatement

Research Summary: Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary: Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.     

Corporate Governance and Performance in Publicly Listed,Family-Controlled Firms: Evidence from Taiwan

Using a multi-industry dataset of 228 firms listed on the Taiwan Stock Exchange (TSE) this paper analyses the effects of ownership structure and board characteristics on performance in large, publicly traded firms that are controlled by founding families. After taking account of possible endogeneity problems, we do not find that family control is associated with performance measured in terms of accounting ratios, sales per issued capital, earnings per share and market-to-book value. However, share ownership by institutional investors, and foreign financial institutions in particular, is associated with better performance. Our results indicate that board independence from founding family and board members’ financial interests have a positive impact on performance.     

Corporate social performance,analyst stock recommendations,and firm future returns

This study posits that security analysts heed corporate social performance information and factor it into their recommendations to general investors. In particular, as corporate social performance is often uncertain and ambiguous to general investors, analysts may serve as the informational pathway connecting corporate social performance to firm stock returns. Thus, we argue that analyst recommendations mediate the relationship between corporate social performance and firm stock returns. On the basis of not only a qualitative study with literature searches and interviews of stock analysts but also a quantitative study with two longitudinal samples of large firms, we find support for these arguments. Our findings uncover an information‐based underlying mechanism for the link between corporate social performance and financial performance. Copyright © 2013 John Wiley & Sons, Ltd.     

Status in a strange land? Context‐dependent value of status in cross‐border venture capital

Research Summary: While recent literature has depicted status as an intangible asset that is firm‐specific and mobile, we have a limited understanding of whether status confers advantage in a way similar to other intangible assets. This study examines the macro‐structural contingencies that influence the marginal value of firm status as firms expand to new markets. Building on the literatures on status and social approval assets, as well as globalization and international management, we hypothesize that two conditions influence how valuable home‐country status will be in a given host country: the interconnectedness of the home and host countries, and their relative position in the global network. We test our hypotheses in a study of 187 venture capital (VC)‐backed biotechnology ventures in 19 countries between 1990 and 2006. Managerial Summary: Startups typically prefer high‐status VC investors for endorsements, network connections, and resources. One might expect the benefits of high‐status VCs to be even higher when they invest across borders. Yet, we show that status is ingrained in context, and that the performance advantage of partnering with high‐status cross‐border VC firms depends on the relationship between the country of the VC firm and that of the startup. We find that, when the VC industries in the two countries are more connected, the positive effect of cross‐border VC firm status on successful exit is amplified. However, when the VC firm comes from a more central country than the startup, the benefits of VC firm status are less pronounced and vice versa.     

In search of El Dorado: The elusive financial returns on corporate political investments

Although many believe that companies' political activities improve their bottom line, empirical studies have not consistently borne this out. We investigate the relationship between corporate political activity (CPA) and financial returns on a set of 943 S&P 1500 firms between 1998 to 2008. We find that firms' political investments are negatively associated with market performance and cumulative political investments worsen both market and accounting performance. Firms placing former public officials on their boards experienced inferior market performance and similar accounting performance than firms without such board members. We find, however, that CPA is positively associated with market performance for firms in regulated industries. Our results challenge the profit‐maximizing assumptions underlying CPA research and focus on agency theory to better understand CPA. Copyright © 2012 John Wiley & Sons, Ltd.     

Competing for government procurement contracts: The role of corporate social responsibility

Research Summary: This study examines whether corporate social responsibility (CSR) improves firms’ competitiveness in the market for government procurement contracts. To obtain exogenous variation in firms’ social engagement, I exploit a quasi‐natural experiment provided by the enactment of state‐level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government‐company relationship, suggesting that CSR helps mitigate information asymmetries by signaling trustworthiness. Moreover, the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders. Managerial Summary: This study examines how companies can strategically improve their competitiveness in the market for government procurement contracts—a market of economic importance (15–20% of GDP). It shows that companies with higher social and environmental performance (CSR) receive more procurement contracts. This effect is stronger for more complex contracts, in the early years of the government–company relationship, and in more competitive industries. These findings indicate that firms’ CSR can serve as a signaling and differentiation strategy that influences the purchasing decision of government agencies. Accordingly, managers operating in the business‐to‐government (B2G) sector could benefit from integrating social and environmental considerations into their strategic decision making.     

Information asymmetry and investor valuation of IPOs: top management team legitimacy as a capital market signal

The condition of information asymmetry between current owners and potential IPO investors creates a context wherein the legitimacy of the top management team (TMT) may serve as a valid signal of value to potential investors. The results confirm our hypotheses that TMT legitimacy is negatively correlated with post‐IPO stock value run‐up. Our results support a previously unexplored view of the TMT as an important signal of value in IPOs, and suggest that dual benefits accrue to the TMT selection process in IPO firms. Copyright © 2005 John Wiley & Sons, Ltd.