The Relevance of the Institutional Underpinnings of Porter's Five Forces Framework to Emerging Economies: An Epistemological Analysis

ABSTRACT Using the Toulmin method, we present an epistemological analysis of Porter's Five Forces Framework (FFF) in light of the increasing evidence pertaining to the institutional context in emerging economies. The analysis reveals three key qualifiers in the theoretical structure of FFF – transaction costs, capital flows and laws governing rivalry. Evidence from emerging economies indicates that FFF's assumptions about the qualifiers are not met in these economies. Indeed, firms in these economies adopt strategies not derivable from FFF to tackle their unique institutional contexts. Our Toulmin analysis helps pinpoint the directions for further research in emerging economies. Specifically, the three qualifiers provide a meaningful way of building typologies and taxonomies to accommodate the diversity of institutional contexts and to link them to firm-level strategies. Our discussion also highlights the need to turn the spotlight on laws governing rivalry, a relatively under-explored topic in emerging economies, and the effectiveness of different network strategies.     

Information Production, Insider Trading, and the Role of Managerial Compensation

We analyze the information production decision of a manager who can trade on this information and whose compensation is increasing in the stock price. The amount of information produced increases with the stock's volatility and liquidity and decreases with the manager's pay-performance sensitivity. Insider trading regulations that symmetrically inhibit the manager's ability to buy and sell stock cause her to produce less information. But asymmetric insider trading regulations like the short sales prohibition have an ambiguous effect inducing her to produce more or less information depending on her pay-performance sensitivity. This contradicts the standard argument made by opponents of insider trading regulations that such regulations always reduce information production.     

The Effect of Private-Debt-Underwriting Reputation on Bank Public-Debt Underwriting

We provide evidence that commercial banks extend their reputationin underwriting syndicated loans and private placements (privatedebt) to their bond-underwriting activities. In the absenceof bond market reputation, private-debt-market reputation enablescommercial banks to win underwriting mandates from their loanclients. Furthermore, it allows them to credibly commit to investorsagainst opportunistically using lending information and therebydeliver superior certification benefits in the form of higherissue prices relative to investment-bank underwriters. Thispricing benefit is not offset by higher underwriting fees andthus results in lower total issuance costs for borrowers.(JELG21, G28, L14, L15)     

The response of competitors to announcements of bankruptcy: An empirical examination of contagion and competitive effects

We find, like [Lang, L.H.P., Stulz, R.M., 1992. Contagion and competitive intra-industry effects of bankruptcy announcements: An empirical analysis, Journal of Financial Economics, 32(1), 45–60], that large firm bankruptcies generate a dominant contagion effect. A value-weighted portfolio of competitors' stocks experiences a significant loss of 0.56% in the three days centered around the Chapter 11 announcement. This represents an average loss of $3.32 for all the competitors combined for every dollar lost by the bankrupt firm. In addition, we find that small firm bankruptcies also generate a dominant contagion effect among smaller sized competitors; an equally-weighted portfolio of all competitors has a significant 0.12% drop. In a new approach to separate the contagion and competitive effects, we compare the stock price reactions of competitors who themselves subsequently file for bankruptcy in the next three years (candidates for contagion effect) with those who do not do so (candidates for competitive effect). As expected, candidates for contagion effect experience a significant, negative three-day stock price reaction of −4.68%. However, contrary to expectations, candidates for competitive effect also have a significant, negative return (−0.49%), suggesting that the competitive effect is weak at best since it is dominated by the contagion effect even in this sample. Other procedures to identify candidates for competitive effect generally yield similar findings. Finally, we analyze competitors' stock price reactions based on selected characteristics (e.g., industry concentration, and leverage), with similar results as before. One explanation for the failure to detect a competitive effect is that the impact may already have been incorporated in stock prices prior to the filing for Chapter 11. Consistent with this explanation, we find significant positive stock price reactions by competitor stocks for the hundred days prior to the bankruptcy announcement.     

Top Management Compensation and the Structure of the Board of Directors in Commercial Banks

We examine the relationship between top management compensationand the structure of the board of directors for a sample ofcommercial banks. We find that boards with more reputable outsidedirectors compensate managers more heavily with long-term incentives(stock and stock options) than with cash (salary and bonus).We also find a significant positive correlation between thefuture performance of our sample banks and the proportion oftheir managers’ compensation in the form of long-termincentives. Taken together, these results suggest that boardswith highly reputed outside directors are more effective inproviding managers with the appropriate incentives and thusensuring better future firm performance. Another indicationof the effectiveness of these boards is our finding that theycompensate managers more heavily with long-term incentives (insteadof cash) when these managers are more entrenched. We also findvery little evidence of mutually beneficial back-scratchingor collusion between outside directors and senior managers whensetting management compensation. But boards with long-servingoutside directors are less effective in creating appropriatemanagement incentives.     

The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity

Corporate venture capital (CVC) activity exposes firms to new technologies and markets. An important but as yet unexplored question is the relationship of the industry diversification profile of the portfolio of venture companies to corporate value creation. Insights from options and diversification perspectives support our hypothesis that diversification of a corporate investor's portfolio of venture companies is related to corporate wealth creation in a U‐shaped relationship. We also propose that a corporate investor's financial constraints moderate the relationship between the diversification profile of its CVC portfolio and value creation. When we tested our hypotheses using a sample of CVC investments across multiple industries, we found support for them, and these findings may inform the CVC activities of corporate investors. Copyright © 2013 John Wiley & Sons, Ltd.     

The relationship between incentive compensation and performance related CEO turnover

We study the relationship between incentive compensation and performance related CEO turnover. Our theoretical model predicts that the slope of the compensation contract and forced turnover may be complements. Our results support this prediction. We find that incentives and turnover are positively related. This relationship however, varies with the equity ownership of CEOs and does not hold for CEOs who own more than 5% equity. Moreover, this relationship is stronger if the firm under performs its industry. Our results suggest that high-powered incentives may increase the signaling power of performance measures and lead to higher likelihood of turnover.