CEO and Outside Director Equity Compensation: Substitutes or Complements for Management Earnings Forecasts?

Abstract

This study examines how the equity compensation of chief executive officers (CEO) and that of outside directors affect management earnings forecasts (MFs) and the relationship between these two positions in terms of compensation. Our evidence reveals that CEO (director) equity compensation is positively associated with MF likelihood, frequency, and accuracy when director (CEO) equity compensation is not high. However, an increase in director (CEO) equity compensation is not effective in improving disclosure quality when the level of CEO (director) equity compensation is already high. These results suggest that the two incentive mechanisms act as substitutes when both are intensively used in the context of MF disclosure.     

Ex-ante evaluation of the consumers' preference for the 4th generation mobile communications service

Research about next-generation mobile communications (MCs) technology has become an issue in these days since MCs bear a close relationship to our daily lives. The third generation (3G) MCs technology is now evolving into the fourth generation (4G) MCs technology. An initial analysis of potential consumer preferences for the technology is essential to ensure successful strategies and changes. This paper attempts to apply a choice experiment to evaluating consumers' willingness to pay (WTP) for each attributes of the 4G technology. The experiment encompasses five attributes: data rates, the quality of communications service, the number of broadcasting channels, video-on-demand (VOD) service, and supplementary services. We consider the trade-offs between the price and attributes of the 4G for selecting a preferred alternative and derive the marginal WTP (MWTP) estimate for each attribute. The results indicate that the average MWTP for the improved communications service is KRW 4443 (USD 4.03) and the average MWTP for one more broadcasting channel is KRW 67 (USD 0.06). The average MWTPs for VOD and supplementary services is KRW 1932 (USD 1.75) and KRW 1601 (USD 1.45), respectively.     

The role of networking and commitment in foreign market entry process: Multinational corporations in the Chinese automobile industry

This study addresses the role of business networking and commitment to local market when MNCs enter an emerging market. We investigate the reasons for variations in the speed of MNCs’ foreign market entry. Particularly, we examine whether MNCs’ networking with the key local actors facilitates MNCs’ entry and whether learning and commitment in the context of networking affects the speed of MNCs’ entry process in the Chinese automobile market. The study is based on the experiences of three MNCs, a U.S.-based firm, a European firm, and a Korean firm. Data is collected through in-depth interviews and through secondary sources related to the entry process of these cases. The cases illustrate that speed of foreign market entry is significantly influenced by business networking between MNCs and the key business and socio-political actors, since different types of business networking determine the level of learning and commitment. Our cases also show that the effects of business networking generated during the initial foreign market entry by the MNC may be different than those during sequential entries.     

Productivity growth of newly industrializing economies in heterogeneous capital goods markets: the case of the Korean machinery and equipment industry

Although many previous studies have investigated the economic growth of East Asian countries from the perspective of productivity growth, they have adopted a limited focus only on the national level or on the aggregated level and have overlooked the heterogeneity at the disaggregated level. Furthermore, only a few studies have examined the sources of the remarkable growth and trade performance of the Korean machinery and equipment industry, despite its importance for sustainable growth of national economy. Therefore, we investigated the Total Factor Productivity Growth (TFPG) of the Korean machinery and equipment industry and its 12 sub-sectors from 1970 to 2012 using the stochastic frontier production approach. As a result, we found that the industry has achieved labour input-driven TFPG largely due to technical progress. This is contrary to the previous result that East Asia has expanded the production frontier by capital accumulation. In contrast, in some sub-sectors, scale effect and allocation efficiency have driven TFPG. We also found distinctive patterns of TFPG across different sub-sectors from the perspectives of the effect of input factors and the pattern of technical progress. These results imply that policy makers should consider industry-specific policy designs that incorporate the specific characteristics of individual sub-sectors.     

Painting Your Point: The Role of Color in Firms' Strategic Responses to Product Failures via Advertising and Marketing Communications

Color plays a significant role in firms' strategic marketing communications and advertising. This research examines how color (red versus blue) in advertising and marketing communications that follow a firm's failure dynamically influences consumers' interpretations of negative firm information and sensitivity to the firm's response to the failure. We find that the color red used in postfailure advertising and firm marketing communications narrows the scope of consumers' conceptual attention on the firm failure and makes consumers less sensitive to a firm's response to the failure. In contrast, exposure to the color blue expands the scope of consumers' conceptual attention and makes them integrate the firm's response in their firm evaluations. In addition, the negative effect of red is mitigated via the use of a more benign cue, leading to the broadening of the scope of conceptual attention and integration of a firm's response that are consistent with blue cues.     

Consumers’ Responses to Public Figures’ Transgression: Moral Reasoning Strategies and Implications for Endorsed Brands

This paper proposes an empirical assessment of the main factors behind the decision of a corporate sponsor to launch a socially responsible (SR) fund. Our analysis is performed on a database that encompasses 414 SR fund creations by 46 corporate sponsors between 1990 and 2012. We provide evidence that economic and human resources slack, leverage, low media coverage and high extra-financial performance of the corporate sponsor contribute to an increase of the probability to propose SR funds. These results lead us to argue that the introduction of such funds goes beyond the economic objective of enlarging the market share of the corporate sponsor. It may thus be seen as a particular strategy in terms of communication and signaling, due to the specific characteristics of SR funds.     

Capital budgeting with multiple criteria and multiple decision makers

In this article, we propose a model that incorporates the preferences of multiple decision makers into a decison-making process using (1) The analytical hierarchy process (AHP); and (2) multiple criteria and multiple constraint levels (MC²) linear programming in a capital budgeting context. Our model can foster strategic and nonfinancial factors that are important in the capital budgeting problems of the current business environment. The two-phased solution framework proposed in this article is sufficiently flexible to reach a compromise among decision makers. Our method also facilitates collection of decision makers' preferences to minimize suboptimization of overall company's goals. In addition, application of AHP to derive weights to decision makers' preferences for resource availability decreases the solution complexity. All these characteristics represent a significant improvement compared with previous linear or goal programming approaches to capital budgeting problems.     

Deregulation and earnings management: The case of the U.S. airline industry

This paper examines earnings management dynamics in the airline industry during the airline industry deregulation of 1978. We expect that earnings management would increase after deregulation, since industry deregulation generally increases managerial discretion, whereas internal corporate governance systems are sluggish in adapting to newly changed environments. As corporate governance structures become more effective in tempering highly discretionary managers, and as capital markets learn more about how to design better management incentive systems, managers’ incentives and capacity to engage in earnings management will diminish. Based on industry data, we find that the magnitude of absolute values of discretionary accruals increase significantly in the post-deregulation period. Managers in the airline industry were inclined to engage in income increasing earnings management after deregulation. However, the increased level of earnings management then decreased to return close to the level seen during the regulation period. The findings support the predicted deregulation impact on earnings management dynamics.     

It Is Much Bigger Than What We Thought: New Estimate of Trade Diversion

Estimates of the trade diversion (TD) effect of preferential trade agreements (PTAs) tend to be much smaller than that of the trade creation (TC) effect. This paper examines two sources of estimation bias of the TD effect. The first bias arises from the failure to recognise that the concept of TD is inapplicable for a substantial proportion of PTAs, and thus, previous studies wrongly count cases where trade cannot be diverted as cases where trade is not diverted. The second bias arises from the difficulty in controlling for multilateral resistance and other unobserved time‐varying country heterogeneity when estimating both TC and TD effects simultaneously due to perfect multicollinearity. This paper corrects these two biases using a new measure of TD which provides a better mapping between the concept and data characteristics. Removing the two sources of bias leads to a multifold increase in the estimate of the TD effect. It is found that the total TD effect is comparable to the TC effect in dollar terms.     

Cash is surprisingly valuable as a strategic asset

Academics, politicians, and journalists are often highly critical of U.S. firms for holding too much cash. Cash holdings are stockpiled free‐cash flow and incur substantial opportunity costs from the perspectives of economics. However, behavioral theory highlights the benefits of cash holdings as fungible slack resources facilitating adaptive advantages. We use the countervailing forces embodied in these two theories to hypothesize and test a quadratic functional relationship of returns to cash measured by Tobin's q. We also build and test a related novel hypothesis of scale‐dependent returns to cash based on the competitive strategy concept of strategic deterrence. Tests for both of these hypotheses are positive and show that returns to cash continue to increase far beyond transactional needs. Copyright © 2013 John Wiley & Sons, Ltd.