Does corporate social responsibility protect shareholder value from the shock of COVID-19? Evidence from China

Our study examines whether and how increased engagement in social responsibility activities by a firm affects movements in its stock prices during the COVID-19 public health crisis, which is regarded as an exogenous shock to economic ties between focal firms and their customers, employees, and suppliers. We find that corporate social responsibility has an inverted U-shaped relationship with shareholder value. The nonlinear relationship is more dominant at firms with higher cash-flow constraints and weaker cost-adjustment capabilities. Our research also generates meaningful implications for business practices.     

Empirical Evidence on Corporate Risk‐Shifting

We study empirically whether nonfinancial firms’ behavior is consistent with systematic risk‐shifting. We compare firms’ operating risk before and after a debt issue, under the assumption that if there is any risk‐shifting it is most likely to occur right after a debt issue. We document a significant increase in firms’ operating risk, even after adjusting for industry influences. The risk‐shifting is higher for firms with no subsequent debt issues, and for firms with lower credit ratings. Other determinants are earnings volatility, size of debt issue, and whether the bond is callable.     

Bank Corporate Governance,Beyond the Global Banking Crisis

Following up on the publication of the Walker Report ( 2009 ) in the United Kingdom, international organizations such as the Basel Committee ( 2010 ), the OECD ( 2010 ), and the European Union ( 2010 ) have proposed guidelines to improve bank corporate governance and, more specifically, risk governance. These international reports vary widely on what the prime objective of bank corporate governance should be, with one group recommending a shareholder‐based approach, and the other a stakeholder‐based one. Moreover, the focus of these reports is exclusively on risk avoidance, with little guidance as to how an acceptable level of risk should be defined. Drawing on insights from economics and finance, this paper is intended to contribute to the debate on bank corporate governance. Our four main conclusions are as follows. Firstly, the debate on bank governance should concern not only the boards but also the governance of banking supervision with clearly identified accountability principles. Secondly, since biases for short‐term profit maximization are numerous in banking, boards of banks should focus on long‐term value creation. Thirdly, board members and banking supervisors should pay special attention to cognitive biases in risk identification and measurement. Fourthly, a value‐based approach to risk taking must take into account the probability of stress scenarios and the associated costs of financial distress. Mitigation of these costs should be addressed explicitly in the design of bank strategy.     

Corporate Risk Management under Information Asymmetry

This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under‐investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry‐specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity‐based industries without addressing information asymmetry.     

Factors influencing corporate governance disclosures: evidence from Alternative Investment Market (AIM) companies in the UK

This study examines the relationship between company and ownership characteristics and the disclosure level of compliance with Quoted Companies Alliance (QCA) recommendations on corporate governance in Alternative Investment Market (AIM) companies. We report clear evidence that compliance increases with company size, board size, the proportion of independent non-executive directors, the presence of turnover revenue, and being formerly listed on the Main Market. However, we find that shell and highly geared AIM companies disclose relatively lower levels of corporate governance than recommended under QCA guidelines. Our findings suggest that market regulators should review the potential impact of the quality of corporate governance in these companies on the future vibrancy of AIM. We find no evidence that ownership structure or the type of Nominated Advisor is related to disclosure of compliance with QCA guidelines. Overall, in a lightly regulated environment such as the AIM market, it seems that companies will ultimately pursue a cost–benefit strategy in voluntarily complying with good corporate governance practice.     

The effect of prior outcomes on gender risk-taking differences

This study proposed that men are more likely to take greater risk after a win (‘house money’ effect), while women are more likely to take greater risk after a loss (‘escalation of commitment’ effect). These effects are, however, moderated by prior experiences in risk-taking and role characteristics. Three distinct groups of 30 subjects (total?=?90) each were solicited to play an experimental betting game. The subjects were categorized into risk providers (RP), risk customers (RC), and non-risk customers (NRC). RP are represented by casino executives, RC by leisure life-time casino gamblers, and NRC by non-casino gamblers. On average, RC group was found to take most betting risk. Male RCs were more likely to bet more after a win, while female RCs were more likely to bet more after a loss. NRCs, irrespective of gender, were more likely to bet more after a loss. There were no gender risk-taking differences in prior outcomes in the RP group.     

Board governance and corporate performance

We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and firm operating performance. Our results imply that adherence to the board‐related recommendations of the UK Corporate Governance Code strengthens the board's monitoring capacity, potentially helping mitigate agency problems, but that investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use the Code flexibility opportunistically, aiming to decrease the monitoring capacity of the board, which is followed by subsequent underperformance. This finding questions the effectiveness of the voluntary approach to governance regulation followed in the UK and in many countries around the world.     

Diversification,Performance, and the Corporate Life Cycle

This paper investigates the relation between the extent of diversification in firms and their performance at different life cycle stages. To illustrate the joint endogeneity of diversification and performance, we treat both the extent of diversification and firm performance as endogenous variables in a simultaneous equation system. Empirical results reveal that corporate diversification erodes firm value. Overall, firms in their growing stages experience a significant diversification discount; however, mature firms do not show such findings. Although unrelated diversification leads to trading at a discount in all growing and mature firms, conversely, related diversification exhibits an evident premium in mature firms.     

Investments,Credit, and Corporate Financial Distress: Evidence from Central and Eastern Europe

Although they are instrumental for economic development, productivity-enhancing corporate investments may increase the financial vulnerability of companies, especially in an economic and financial crisis. We employ an instrumental probit model with the aim of finding evidence for the investment and credit patterns that led companies into financial distress during the global financial crisis 2009–2010. The company-level micro-data for our study on three Central and East European countries—Hungary, Bulgaria, Romania and two Baltic countries, Latvia and Lithuania—originates from two independent surveys, the Business Environment and Enterprise Performance Survey conducted in 2008 and the Financial Crisis Survey conducted in 2009/2010. Both were carried out jointly by the EBRD and the World Bank. Our results emphasize a substantial adverse impact from investment intensity and debt financing on company financial soundness during a crisis. On top of that, we discover a strong non-linear pattern in the sensitivity of company distress to its investment-financing nexus.     

Managerial Overconfidence,Self-Attribution Bias,and Downwardly Sticky Investment: Evidence from Korea

The extant literature on behavioral corporate finance has explored the effects of overconfidence on investment–cash flow sensitivity (ICS) to explain overinvestment, yet it has overlooked the asymmetric behavior of investments in relation to changes in cash flow levels. This study examines whether investments behave asymmetrically responding to changes in cash flows and, if so, how managerial overconfidence affects asymmetric ICS. Using a sample of KOSPI and KOSDAQ firms in Korea, we find the incidence of downwardly sticky ICS in unconstrained firms. We then find that overconfident managers encourage ICS to be stickier than their rational peers do in unconstrained firms. Finally, we find that managerial overconfidence intensified by self-attribution bias induces ICS to get even stickier, suggesting more explicit evidence of corporate investment distortions. The results of alternative tests using the asymmetric models of Homburg and Nasev (2008) are qualitatively consistent with prior results. Overall, our findings imply a higher incidence of excessive investment commitments driven by overconfident managers.