Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.     

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead‐lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse‐response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5‐minute intervals, we find that the relationship is return‐driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.     

ON THE ROBUSTNESS OF RANGE‐BASED VOLATILITY ESTIMATORS

We empirically examine Parkinson's range‐based volatility estimate in the federal funds market, which is unique because institutional regulations create a predictable pattern in interday volatility. We find that range‐based volatility estimates and standard deviations produce the expected volatility pattern. We also find that at trading pressure points where microstructure noise should be greatest, range‐based estimates are less than the standard deviations. Thus, we support the argument that range‐based volatility estimates remove the upward bias created by microstructure noise. We find that the Parkinson method is the most efficient range‐based volatility measure among a set of alternates in this market.     

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.     

Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

Value creation through stakeholder synergy

Our “stakeholder synergy” perspective identifies new value creation opportunities that are especially effective strategically because a single strategic action (1) increases different types of value for two or more essential stakeholder groups simultaneously, and (2) does not reduce the value already received by any other essential stakeholder group. This result is obtainable because multiple potential sources of value creation exist for each essential stakeholder group. Actions that meet these criteria increase the size of the value “pie” available for essential stakeholder groups, and thereby serve to attract exceptional stakeholders and obtain their increasing effort and commitment. The stakeholder synergy perspective extends stakeholder theory further into the strategy realm, and offers insights for realizing broader value creation that is more likely to produce sustainable competitive advantage. Copyright © 2014 John Wiley & Sons, Ltd.     

Revisiting the role of the environment in the capabilities–financial performance relationship: A meta‐analysis

Within the capabilities‐based view of the firm, there is debate about the relative importance of ordinary and dynamic capabilities for firm performance and about the extent to which their performance effects are contingent on environmental conditions. We meta‐analyze 115 studies to investigate the relationship between both ordinary and dynamic capabilities and the financial performance of firms in relatively stable versus changing environments. The results suggest that the performance effects of both types of capabilities are positive and similar in magnitude. Environmental dynamism reinforces the effects of both ordinary and dynamic capabilities. Furthermore, the two types of capabilities are closely associated. Our findings provide support for a moderate capabilities‐based view of the firm, rather than one that considers dynamic capabilities as superior to ordinary ones. Copyright © 2015 John Wiley & Sons, Ltd.     

Does experience imply learning?

Research summary : Research traditionally uses experiential learning arguments to explain the existence of a positive relationship between repetition of an activity and performance. We propose an additional interpretation of this relationship in the context of discrete corporate development activities. We argue that firms choose to repeat successful activities, thereby accumulating high experience with them. Data on 437 aircraft projects introduced through three governance modes show that the positive performance effect of the firm's experience with the focal mode becomes insignificant after accounting for experience endogeneity. We suggest that in a general case, experience with corporate development activities may be tinged with both learning and selection effects. Therefore, omitting to account for experience endogeneity may lead to incorrect conclusions from an “empirically observed” positive experience–performance relationship. Managerial summary : This paper emphasizes that firms generally choose to undertake the corporate development activities (new product introductions, diversification moves, international expansions, alliances, acquisitions, etc.) with which they have been the most successful in the past and that they expect to be the most successful in the future. Hence, if a firm possesses certain capabilities, it will repeatedly engage in certain activities corresponding to those capabilities, thereby simultaneously achieving high levels of activity experience as well as superior activity performance. This view suggests that an “empirically observed” positive experience–performance relationship may not be due solely to learning‐based enhanced capabilities but may also be driven by astute self‐selection. Overall, we provide a new interpretation of the relationship between experience and performance in the context of infrequent, heterogeneous, and causally‐ambiguous corporate development activities. Copyright © 2015 John Wiley & Sons, Ltd.     

Stepping in and stepping out: Strategic alliance partner reconfiguration and the unplanned termination of complex projects

Research summary : I add to work that emphasizes the stability of strategic alliances by considering the consequences of alliance partner reconfiguration. I offer two contrasting perspectives: (1) alliance partner reconfiguration leads to disruption, hence increases the risk of subsequent project termination; (2) partner reconfiguration leads to adaptation, hence decreases this risk. Data on 1,025 interfirm Australian mining alliances (2002–2011) shows that on average alliance partner reconfiguration increases the risk of project termination. For firm exit from an alliance, the effect is contingent on a firm's resource base, but not for firm entry. Surprisingly, I do not find that alliance partner reconfiguration is beneficial in a dynamic environment. I discuss the implications of these findings for the literature on strategic alliance dynamics and that on strategic alliance outcomes. Managerial summary : This paper studies what happens when over time strategic alliances change their original membership. The research shows that both entry in and exit from an alliance increase the risk of project termination. Hence, weathering difficult times and managing conflict by keeping teams stable should be a prime directive if project survival is the alliance partners' overriding concern. In addition, I find that the exit of a firm with a comparatively large resource base increases the hazard of termination more than if the departing firm has a relatively small resource base. Therefore, one cannot underestimate the importance of trying to keep on board those alliance partners who bring a critical resource to the table. Copyright © 2015 John Wiley & Sons, Ltd.