Methodological issues in the use of financial ratios

It appears that the extensive use of financial ratios by both practitioners and researchers is often motivated by tradition and convenience rather than resulting from theoretical considerations or from a careful statistical analysis. Basic questions, such as: Is the control for firm size, a major objective of the ratio form, called for by the theory examined; what is the structural relationship between the examined variables and size; and what is the optimal way to control for industry-wide factors, are rarely addressed by users of financial ratios. The major purpose of this study is to discuss the conditions under which conventional tools, such as financial ratios and measures of industry central tendency, achieve the intended objectives of analysis (e.g., size control). Various issues related to financial analysis, such as spurious correlation due to a common denominator, the choice of an optimal size variable, and the treatment of outlier observations, are also examined.     

Marketing and Technological Absorptive Capacities: Environmental Antecedents and Performance Outcomes in High-Tech Firms

Purpose: This article investigates marketing and technology absorptive capacities as distinct types of external knowledge while considering three environmental conditions, namely uncertainty, munificence, and heterogeneity and two distinct outcomes, namely innovation and financial performance.

Methodology/approach: Using a quantitative approach, the authors analyze data from 141 Israeli business-to-business high-tech firms.

Findings: The data mostly supported the hypotheses. Empirical findings imply that an uncertain environment is a precursor for a strong effort to develop a technological absorptive capacity and, to a lesser extent, a marketing absorptive capacity. Technological and marketing absorptive capacities were found to be distinct constructs with positive impacts on financial and innovation performance. Marketing absorptive capacity had a stronger impact than technological absorptive capacity on financial performance. Surprisingly, marketing absorptive capacity was negatively associated with innovation performance.

Originality/value: This study attempts to overcome some limiting assumptions of absorptive capacity theory that have contributed to its reification in order to make three theoretical contributions. First, it distinguishes between marketing and technological absorptive capacities. Second, it tests differential responses of the two absorptive capacities to environmental contingencies. Third, it compares the differential impacts of marketing and technological absorptive capacities on financial and innovation performance.     

The usefulness of accounting estimates for predicting cash flows and earnings

Accounting estimates and projections potentially improve the relevance of financial information by providing managers a venue to convey to investors forward-looking, inside information. The quality of financial information is, however, compromised by the increasing difficulty of making reliable estimates and forecasts and the frequent managerial misuse of estimates. Given the ever-increasing prevalence of estimates in accounting data, particularly due to the move to fair value accounting, whether these opposing forces result in an improvement in the quality of financial information is among the most fundamental issues in accounting. We examine the contribution of accounting estimates embedded in accruals to the quality of financial information, as reflected by their usefulness in the prediction of enterprise cash flows and earnings. Our out-of-sample prediction tests indicate that accounting estimates beyond those in working capital items (excluding inventory) do not improve the prediction of cash flows. Estimates do, however, improve the prediction of next year’s earnings, though not of subsequent years’ earnings. We conclude that the usefulness of accounting estimates to investors is limited and provide suggestions for improving the usefulness of estimates.     

Career Exploration and Perceived Employability within an Emerging Economy Context

Following four decades of unprecedented economic, social, and cultural change, the United Arab Emirates (UAE) labor market is highly segmented: The native population is almost exclusively employed in the government sector, while the private sector is effectively outsourced to foreigners. This has created an unsustainable situation with growing numbers of young citizens reaching working age and with a public sector that has reached the saturation point. Policymakers repeatedly try to legislate to encourage private‐sector employers to hire citizens. These policies have had limited success. We explored the career attitudes of 2,267 United Arab Emirates citizens prior to their entry into the labor market. Using structural equation modeling, we found that the social contract and resulting expectations toward state employment have strong implications for willingness to work in the private sector. © 2014 Wiley Periodicals, Inc.     

Dynamics of communication protocol diffusion: the case of multipath TCP

During the last decade the Internet has faced an architectural stagnation due to lack of wide scale adoption of new communication protocols. A significant reason for non-adoption is that the conflicting interests of networked stakeholders involved in the diffusion process are not understood or taken into account during the protocol development. This paper increases understanding of the dynamics of communication protocol diffusion and provides feedback to protocol development by studying the case of Multipath TCP (MPTCP). Firstly, we introduce a protocol development process which builds on the existing diffusion of innovation theories. Secondly, a quantitative analysis using system dynamics is provided to evaluate the criticality of the factors affecting the MPTCP diffusion. The diffusion of communication protocols is found to follow three adoption models differentiated by the basis of adoption decision. The key finding is that unintentional adoption, alongside device acquisitions or operating system updates, adds a new dimension to the diffusion of innovations theory and may have a significant impact on protocol diffusion. The cross-side network effects between different adopter groups play also an important role and may lead to either market pull or technology push type of diffusion depending on which stakeholder starts to adopt first. Although MPTCP is used as an example protocol, the findings can be also applied to the diffusion studies of other communication protocols.     

Understanding second careers: Lessons from a study of U.S. navy admirals

We examined the career transition of senior executives from a strong bureaucratic organization into a dynamic business environment. In surveying retired, flag‐rank admirals characterized by the need to start a second career, we found significant support for a career transition model. The retired admirals in this study largely enjoyed a smooth transition into civilian careers. Their traditional career was associated primarily with external success, the contemporary protean career with internal success. The role of the organization proved instrumental for a successful transition. © 2007 Wiley Periodicals, Inc.     

R&D AND CAPITAL MARKETS

The substantial growth of R&D expenditures over the last two decades, together with the continuous substitution of knowledge (intangible) capital for physical (tangible) capital in corporate production functions, has elevated the importance of R&D in the performance of business enterprises. At the same time, however, the evaluation of corporate R&D activities by investors is seriously hampered by antiquated accounting rules and insufficient disclosure by corporations. Despite the fact that the expected benefits of R&D stretch over extended periods of time, corporate investments in R&D are immediately written off in financial reports, leaving no trace of R&D capital on balance sheets and causing material distortions of reported profitability. After a brief review of statistics documenting the growth and economic importance of corporate R&D in the U.S., the article presents a comparison of R&D disclosure regulations among industrialized nations that shows U.S. rules to be the least flexible in allowing management discretion in how they measure and report R&D. Next the author surveys the large and growing body of empirical research on R&D, which provides strong testimony to the substantial contribution of R&D to corporate productivity and shareholder value. Moreover, despite widespread allegations of stock market “short termism” throughout the 1980s and early '90s, the research indicates “unequivocally” that capital markets consider investments in R&D as a significant value-increasing activity. But if investors clearly demonstrate a willingness to take the long view of R&D, there is also evidence of undervaluation of some R&D-intensive companies—particularly those with low profitability—as well as other potential costs to corporations and investors stemming from inadequate public information about R&D. To help correct the reporting biases and distortions of R&D, the author offers some suggestions for investors and analysts that follow R&D-intensive companies. In particular, he proposes (1) adjustment of reported data to reflect the capitalization and amortization of (instead of expensing) corporate R&D and (2) the use of various quantitative measures for gauging research capabilities and output, including citations of the firm's patents and measures indicating the share of current revenues coming from products developed within recent years.