Internal financial constraints,external financial constraints,and investment choice: Evidence from a panel of UK firms

This paper uses a panel of 24,184 UK firms over the period 1993–2003 to study the extent to which the sensitivity of investment to cash flow differs at firms facing different degrees of internal and external financial constraints. Our results suggest that when the sample is split on the basis of the level of internal funds available to the firms, the relationship between investment and cash flow is U-shaped. On the other hand, the sensitivity of investment to cash flow tends to increase monotonically with the degree of external financial constraints faced by firms. Combining the internal with the external financial constraints, we find that the dependence of investment on cash flow is strongest for those externally financially constrained firms that have a relatively high level of internal funds.     

The real effects of financial constraints: Evidence from a financial crisis

We survey 1,050 Chief Financial Officers (CFOs) in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86% of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.     

Investor abilities and financial contracting: Evidence from venture capital

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.     

Auditor human capital and financial misstatement: Evidence from China

In this study, we examine whether education, as an important component of the human capital of auditors, is related to the occurrence of financial misstatement, and investigate the moderating effect of professional experience. Using a sample of 16,651 firm-year observations from the Chinese stock market from 2003 to 2014, we find that the education level of signing auditors is significantly negatively associated with the likelihood of financial misstatement, which suggests that higher education can enhance the ethics and independence of auditors and mitigate the risk of financial misstatement. In addition, professional experience attenuates the negative relation between the education level of signing auditors and financial misstatement. Our findings are also robust to a variety of sensitivity tests, and our conclusions still hold after using a two-stage OLS-logistic regression to address the endogeneity problem. Lastly, the negative effect of education level on financial misstatement holds only for 985 Project universities, low individual-level (audit-firm-level) client importance, and state-owned enterprises.     

Affiliated firms and financial support: Evidence from Indian business groups

We investigate the functioning of internal capital markets in Indian Business Groups. We document that intragroup loans are an important means of transferring cash across group firms and are typically used to support financially weaker firms. Evidence suggests that an important reason for providing support may be to avoid default by a group firm and consequent negative spillovers to the rest of the group. Consistent with such spillovers, the first bankruptcy in a group is followed by significant drops in external financing, investments and profits of other firms in the group and an increase in their bankruptcy probability.     

Ownership structure and financial constraints: Evidence from a structural estimation

This article examines the impact of the divergence between corporate insiders' control rights and cash-flow rights on firms' external finance constraints via generalized method of moments estimation of an investment Euler equation. Using a large sample of U.S. firms during the 1994-2002 period, we find that the shadow value of external funds is significantly higher for companies with a wider insider control-ownership divergence, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity and for firms with financial misreporting, and is moderated by institutional ownership. The results show that the agency problems associated with the control-ownership divergence can have a real impact on corporate financial and investment outcomes.     

Cross-border venture capital performance: Evidence from China

This paper investigates the determinants of cross-border venture capital (VC) performance in the Chinese VC market. We focus on the impact of foreign VC firms' (VCs') human capital and domestic entrepreneurs' experience on the performance of both VC investments and portfolio companies using logit and Cox hazard models. After controlling for portfolio company quality, domestic VC industry development, domestic exit conditions and a number of other factors, little correlation was evident between VC performance and foreign VCs' human capital, such as experience, networks and reputation. In contrast, the domestic entrepreneurs' experience is crucial to VC performance. In particular, if an entrepreneur has more general experience in terms of the number of companies previously worked for or more special experience in terms of the number of companies previously served as a CEO or top manager, a portfolio company is more likely to pull off a successful exit through IPO or M&A, and the VCs are also likely to shorten their investment duration in the portfolio company.     

Returns to IT excellence: Evidence from financial performance around information technology excellence awards

The resource-based view has been used in IT business value research to theorize and investigate the impact of unique IT capabilities on sustainable competitive advantages. Prior research has empirically documented a positive association between superior IT capabilities and firm performance. However, such analyses have focused on IT capabilities of firms in the early 1990s. In this study, we examine the impact of superior IT capabilities on firm performance over the 1988–2007 period, which allows us to consider the structural shifts in the return of IT capability over time. Our results suggest that firms with superior IT capabilities are able to attain higher firm performance levels until 1999. However, such performance advantage disappears in the post-1999 time period. We also find that a subset of firms that sustain high levels of IT capabilities during the period 1988 to 2007 continue to perform better than their peers. We conclude that managers are able to achieve superior firm performance if they are able to maintain high levels of IT capability over time.     

The determinants of price discovery: Evidence from US-Canadian cross-listed shares

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996–2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange’s contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.     

The relevance of financial statement information for executive performance evaluation: Evidence from choice of bonus plan accounting performance measures

I explore whether the type of accounting performance measure used in the CEO bonus plan provides an indication of the informativeness of the firm's financial statements for purposes of performance evaluation. Using contingency table analysis and LOGIT regressions, I find firms with high levels of unrecorded intangible assets rely significantly less often on accounting rate-of-return measures (vs. earnings alone) in executive bonus plans.     

Political uncertainty and firms' information environment: Evidence from China

How political uncertainty affects the supply of value relevant information about a firm is an important but unresolved question. Using an emerging market setting where political leaders are expected to exert significant influence on economic activities, we examine the effect of political uncertainty caused by turnovers of local government leaders on a firm’s information environment. We find that during periods of political uncertainty, the total amount of idiosyncratic information about a firm that is available to the market is reduced. The adverse effect on information supply is manifest in firms that are more politically dependent and stronger when uncertainty is more severe. Further, we provide evidence suggesting that firms react to political uncertainty by reducing the amount and the quality of information provided to investors. We find that information intermediaries such as financial analysts and the media have a moderating effect on the information environment as they increase the production of information during periods of political uncertainty. However, these intermediaries do not negate the net loss of information.     

State-ownership and financial constraints on investment of Chinese-listed firms: new evidence

We examine how state-ownership affects financial constraints on investment of Chinese-listed firms during 1999–2008. We find that although an average sample firm experiences some degree of financial constraints, state-ownership does not necessarily help in reducing the firm's financial constraints on investment. Further evidence shows that state-ownership does not lead to more borrowing from the Chinese banking sector, implying that state-ownership does not necessarily reduce the firm's financial constraints via the state-controlled banking sector. We consider not only the standard factors in the investment equation, but also the firm's equity financing behaviour explicitly. The result is robust to both the conventional proxy for financial constraints, i.e. the investment–cash-flow sensitivity, and a recently developed proxy for financial constraints, i.e. the KZ index. Our results suggest that China's corporatisation movement is effective in that soft budget constraints once enjoyed by former state-owned enterprises have been removed along with the progress of corporatisation. These firms, although still state-involved, can be seen as modern corporations operating in a market environment.     

Family succession and firm performance: Evidence from Italian family firms

This article contributes to the growing empirical literature on family firms by studying the impact of the founder–chief executive officer (CEO) succession in a sample of Italian firms. We contrast firms that continue to be managed within the family by the heirs to the founders with firms in which the management is passed on to outsiders. Family successions, that is, successions by the founder's heirs, are further analyzed by assessing the impact of the sectoral intensity of competition on the post-succession performance. This analysis also addresses the endogeneity in the timing of the CEO succession by controlling for a pure mean-reversion effect in the firm's performance. We find that the maintenance of management within the family has a negative impact on the firm's performance, and this effect is largely borne by the good performers, especially in the more competitive sectors. These results indicate that there is no inherent superiority of the family-firm structure and emphasize the importance of conducting an analysis of governance in a variety of institutional settings.     

Corporate social performance, financial performance and institutional ownership in Canadian firms

This study examines the relationship of corporate social performance (CSP) to financial performance (FP) and institutional ownership. We perform our empirical analyses on a large-sample of publicly held Canadian firms and use a novel independent measure of CSP. Based on tests utilizing four years of panel data, we found no significant relationship between a composite measure of firms’ CSP and FP. However, we found significant relationships between individual measures of firms’ CSP regarding environmental and international activities and FP. Our findings indicate a significant relationship between firms’ composite CSP measure and the number of institutions investing in firms’ stock. In addition, we found significant relationships between firms’ CSP ratings regarding their international activities and product quality and the number of institutions investing in firms’ stock. These findings, while subject to the limitations inherent in the use of specific CSP measures, provide mixed support for the business case for CSP.     

Time-varying beta and the Asian financial crisis: Evidence from Malaysian and Taiwanese firms

This paper empirically investigates the effects of the Asian financial crisis of 1997–1998 on the time-varying beta of 10 firms from each of Malaysia and Taiwan. Daily data from 1990 to 2001 and the bivariate MA-GARCH model (BEKK) are applied to create the time-varying betas for the firms. Results provide ample evidence of the influence of the financial crisis and the period after on the time-varying betas of the twenty firms. Results provided are somewhat mixed, indicating a rise in the beta in some cases and a fall in other cases. Results also show that the 10 Malaysian firms applied were more affected than the Taiwanese firms.     

Family values: Ownership structure,performance and capital structure of Canadian firms

This study examines how family ownership affects the performance and capital structure of 613 Canadian firms from 1998 to 2005. In particular, we distinguish the effect of family ownership from the use of control-enhancing mechanisms. We find that freestanding family owned firms with a single share class have similar market performance than other firms based on Tobin’s q ratios, superior accounting performance based on ROA, and higher financial leverage based on debt-to-total assets. By contrast, family owned firms that use dual-class shares have valuations that are lower by 17% on average relative to widely held firms, despite having similar ROA and financial leverage.     

The incremental information content of non-US GAAP earnings disclosures: Evidence from UK firms

This paper examines price and trading volume responses in the US equity market to the preliminary earnings announcements (PEAs) in the UK of UK firms listed on US exchanges (e.g., NYSE and AMEX). The inquiry focuses on whether the return forecast error (absolute and squared values) and volume residual (standardized and unstandardized) for each day were significantly different from the average on the day of the earnings announcements (PEA). The most significantly unexpected return occurred the day prior to the Financial Times (FT) announcement. The results suggest prompt volume and price responses to the UK PEAs in the US security market. Excess trading volume occurred the day prior to and the day of the FT release price response occurred on the day subsequent to the PEAs. This may suggests that investors possess differential prior beliefs or likelihood functions in evaluating public disclosure. Consistent with Frost and Pownall [Frost, C., & Pownall, G. (1996), Interdependencies in the global markets for capital and information: The case of Smithkline Beecham plc. Accounting Horizons, 1, 38-57], US investors seem not to be confused by US/UK generally accepted accounting principles (GAAP) differences, and in fact use information about UK GAAP earnings in their valuations and trading decisions. This implies that traders correctly use UK accounting output to the determination of values in setting security prices and arriving at trading decisions. Broadly, these findings support the assumption that disclosures by UK-listed firms in their domestic market influence share liquidity and trading in the US market.     

Product innovation, budgetary control, and the financial performance of firms

Organizations are increasingly calling for greater budgetary oversight of the product innovation process. A major focus of their concern is the costs associated with product innovation together with their need to enhance their financial performance through these endeavours. However, the literature has raised a number of issues arising from such budgetary proposals, suggesting that the creativity of those involved in product innovation should not be constrained by cost concerns, that the use of management control systems is incompatible with product innovation, and that budgets may stifle innovation. It is argued in this paper that the extent to which product innovation has a positive impact on the financial performance of firms is dependent on the manner in which budgets are used in organizations. If budgets are used predominantly as a planning mechanism, then such budget planning facilitates product innovation resulting in enhanced performance. In contrast, if budgets are used primarily as a control mechanism, then it is unlikely that product innovation will contribute to financial performance. The results of the study are consistent with these expectations. This paper makes a contribution to the literature by providing empirical evidence of the impact of budgets in the context of product innovation.