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1 – 10 of over 5000Senda Mrad, Taher Hamza and Riadh Manita
The purpose of this paper is to investigate the effect of equity market misvaluation on manager behavior. Using a sample of 535 French-listed over 2000–2018, the authors analyze…
Abstract
Purpose
The purpose of this paper is to investigate the effect of equity market misvaluation on manager behavior. Using a sample of 535 French-listed over 2000–2018, the authors analyze whether corporate investment decision is sensitive to equity market overvaluation.
Design/methodology/approach
The study adopts market-to-book (M/B) decomposition developed by Rhodes-Kropf and Viswanathan (2004, RKV) that proxies for market misvaluation at the firm and industry levels. The authors conducted a long-term performance analysis via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors tested the relationship between equity misvaluation, corporate investment decisions and equity issuance. The authors ran several robustness tests.
Findings
The empirical results show that equity market misvaluation affects corporate investment positively as the stock price deviates further away from its fundamental. Based on market timing theory, the authors find that corporate investment occurs in periods of high valuation motivated by equity issuance to benefit from the low cost of capital. This effect is more prominent for financially constrained firms. Consistent with the catering channel, the authors find that the misvaluation-investment nexus is more pronounced in firms with short-horizon investors. By examining the stocks’ long-term performance of misvalued firms, via a sorting portfolio procedure, the authors find that undervalued firms outperform and generate higher abnormal returns (Jensen’s alpha) than overvalued firms, suggesting that mispricing-driven investment appear to be short-lived and lead to lower return in the long term.
Practical implications
Corporate decision-makers and governance structures should pay attention to the rationality of the corporate investment decision in the context of equity market misvaluation. Managers who focus on maximizing the stock market value in the short-run at the expense of its long-term performance must give preference to value-creating investment, not driven by an external mechanism such as equity market mispricing. More generally, investors and portfolio managers must take into account the market mispricing process in decision-making. Nonetheless, from the portfolio sorting perspective, decision-makers must act in terms of high governance quality to mitigate suboptimal investment due to stock market mispricing (Jensen, 2005). Finally, equity market overvaluation, leading managers to invest via equity financing in particular, should be a signal to attract investors’ attention to seize the window of opportunity and embark on a short-term portfolio strategy. Such a strategy promises high returns in the short term.
Originality/value
This paper investigates jointly two theoretical channels: equity market timing and catering. The authors propose for the analysis three components of the M/B decomposition to dissociate market misvaluation at the firm and industry level from the fundamental component of market value (growth). This procedure provides a better understanding of the role of firm and industry misvaluation in explaining corporate investments. The authors provide evidence of the equity market misvaluation via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors examine the effect of misvaluation on both the investment and the financing decisions.
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Oli Ahad Thakur, Matemilola Bolaji Tunde, Bany-Ariffin Amin Noordin, Md. Kausar Alam and Muhammad Agung Prabowo
This study empirically investigates the relationship between goodwill assets and capital structure (i.e. debt ratio) of firms and the moderating effect of financial market…
Abstract
Purpose
This study empirically investigates the relationship between goodwill assets and capital structure (i.e. debt ratio) of firms and the moderating effect of financial market development on the relationship between goodwill assets and capital structure.
Design/methodology/approach
This research applied a quantitative method. The article collects large samples of listed firms from 23 developing and nine developed countries and applied the panel data techniques. This research used firm-level data from the DataStream database for both developed and developing countries. The study uses 4,912 firm-level data from 23 developing countries and 4,303 firm-level data from nine developed countries.
Findings
The findings reveal a significant positive relationship between goodwill assets and capital structure in developing countries, but goodwill assets have a significant negative relationship with capital structure in developed countries. Moreover, financial market development positively moderates the relationship between goodwill assets and the capital structure of firms in developing countries. The results inform firm managers that goodwill assets serve as additional collateral to secure debt financing. Moreover, policymakers should formulate a debt market policy that recognizes goodwill assets as additional collateral for the purpose of obtaining debt capital.
Research limitations/implications
The study has several implications. First, goodwill assets are identified as a factor of capital structure in this study. Fixed assets have been identified as one of the drivers of capital structure in previous research, although goodwill assets are seldom included. Second, this article shows that along with demand-side determinants, supply-side determinants also play an important role in terms of the firms' choice about the capital structure. Therefore, firms should take both the demand-side and supply-side factors into consideration when sourcing for external financing (i.e. debt capital).
Originality/value
The study considered goodwill as a component of capital structure. The study analysis includes a large sample of enterprises, including 4,912 big firms from 23 developing countries and 4,303 large firms from nine industrialized or developed countries, which adds to the current capital structure information. Furthermore, a large sample size increases the results' robustness and generalizability.
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Yusuf Babatunde Adeneye, Ines Kammoun and Siti Nur Aqilah Ab Wahab
This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates…
Abstract
Purpose
This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms.
Design/methodology/approach
The sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis.
Findings
The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor.
Practical implications
This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages.
Social implications
The findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives.
Originality/value
To the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.
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Hanen Ben Fatma and Jamel Chouaibi
The purpose of this paper is to examine the impact of the characteristics of two corporate governance mechanisms, namely, board of directors and ownership structure, on the firm…
Abstract
Purpose
The purpose of this paper is to examine the impact of the characteristics of two corporate governance mechanisms, namely, board of directors and ownership structure, on the firm value of European financial institutions.
Design/methodology/approach
Using the market-to-book ratio calculated by the Thomson Reuters Eikon ASSET4 database, this study measures the firm value of 111 financial institutions belonging to 12 European countries listed on the stock exchange during the period 2007–2019. Multivariate regression analysis on panel data is used to estimate the relationship between corporate governance attributes, such as board size, board independence, board gender diversity, ownership concentration and CEO ownership, and the firm value of European financial institutions.
Findings
The empirical results reveal that board gender diversity and CEO ownership are positively related to the firm value, whereas board size and ownership concentration are negatively related. Furthermore, the findings suggest that board independence is insignificantly correlated with the firm value. Regarding the control variables, the results show that financial institutions' size, age and legal system are significant factors in changing the firm value. Nevertheless, financial institutions' leverage and activity sector are not significantly correlated with their value.
Originality/value
This research contributes to the literature by providing the significant links between some corporate governance mechanisms and the firm value of companies from the financial industry, by addressing the information gap for this critical industry in the context of a developed market like Europe.
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The current study aims at examining the impact of upward and downward earnings management on the cross-sections of stock return. The study also examines the moderating role of…
Abstract
Purpose
The current study aims at examining the impact of upward and downward earnings management on the cross-sections of stock return. The study also examines the moderating role of cross-sectional effects on the association between earnings management and stock returns.
Design/methodology/approach
The study employed univariate and bivariate-sorted portfolio-level analysis to investigate the issue. Fama–Macbeth cross-sectional regression is used to analyze the moderating role of different cross-sectional effects. The study used a sample of 3085 Bombay Stock Exchange (BSE) listed stocks spanning over 20 years from January 2000 to December 2019.
Findings
The findings suggest that investors have different perceptions toward different forms of earnings management. In other words, results exhibit that investors perceive downward earnings management as an element of risk; hence, they discount the returns at a higher rate. On the contrary, results show that upward earnings management is positively perceived by the investors; hence, they hold the stocks even at a lower rate of return. This relation is found to be consistent even after controlling the impact of marker effect, size effect, value effect and momentum effect.
Originality/value
This study is among pioneering studies that consider the direction of earnings management while examining its impact on the stock return. This study is also among the earlier attempts to examine the moderating role of four different cross-sectional effects by taking a uniform sample of stocks over the same period.
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Quyen Le, Alireza Vafaei, Kamran Ahmed and Shawgat Kutubi
This paper aims to examine the association between busy directors on corporate boards and accounting conservatism.
Abstract
Purpose
This paper aims to examine the association between busy directors on corporate boards and accounting conservatism.
Design/methodology/approach
The authors use a sample of 500 firms listed on the Australian Security Exchange from 2004 to 2019. The busyness of non-executive directors is proxied by three indicators. For accounting conservatism, the authors use both conditional and unconditional accounting conservatism via asymmetric timeliness of earnings, accrual-based loss recognition, cumulative total accruals and book-to-market ratio. The authors cluster the standard errors at the firm level to compensate for potential residuals’ dependency and heteroscedasticity, in addition to analysing the main models using year and industry fixed effects (Petersen, 2009). Separately, the authors look at the impact of female busy directors on firms’ adoption of conservative accounting methods. Both propensity score matching analyses and Heckman (1979) two-stage approach systematically address endogeneity issues.
Findings
The presence of busy directors on boards leads to greater unconditional conservatism and less conditional conservatism. The relationships between busy female directors with both conditional and unconditional conservatism remain consistent with the main findings.
Practical implications
This paper provides useful insights for shareholders, regulators and accounting standards setters to better evaluate busy directors’ effectiveness in monitoring firms’ financial reporting quality. Directors and the companies themselves can refer to the authors’ findings to decide the best structure for their boards and committees, considering their specific monitoring requirements. Given that no mandatory restriction has been legislated, improved policies or new ones will ensure that busy directors can effectively fulfil their duties.
Originality/value
This research contributes to the broader research theme by examining the influence of directors’ quality on financial reporting conservatism. It also contributes to the ongoing debate in the corporate finance literature regarding the experience and busyness hypotheses of directors with multiple directorships. Additionally, this research adds value to gender diversity research by finding evidence that female busy directors follow the same pattern of reporting conservatism as male busy directors.
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Yasir Abdullah Abbas, Nurwati A. Ahmad-Zaluki and Waqas Mehmood
This paper examines the relationship between the extent and quality of the four dimensions of corporate social responsibility disclosure (CSRD) namely community, environment…
Abstract
Purpose
This paper examines the relationship between the extent and quality of the four dimensions of corporate social responsibility disclosure (CSRD) namely community, environment, workplace and marketplace with the long-run share price performance of Malaysian initial public offering (IPO) companies.
Design/methodology/approach
This study utilised secondary data by the content analysis of the annual reports and Datastream of 115 IPOs listed from 2007 to 2015 in Malaysia. The IPO’s performance was determined by calculating the return measures under the equally weighted and value-weighted schemes of the mean abnormal returns and buy-and-hold abnormal returns covering the three years post-listing using the event-time approach.
Findings
The findings demonstrate that Malaysian IPOs experience substantial overperformance and underperformance when both the IPO performance measures are benchmarked against the matched companies and market. The results indicated that the extent and quality of the community and environment CSRD dimensions are positively and significantly correlated to the IPO’s performance. On the other hand, the extent and quality of the workplace and marketplace CSRD dimensions are negatively and significantly correlated to the IPO performance.
Practical implications
Malaysian regulators could benefit from these findings in their endeavour to carry out a reform process on CSRD to improve its quality. The results of this study are important to investors, regulators, non-government organisations, communities and policymakers. They also enhance the understanding of companies about the importance of disclosing greater CSR information to improve their performance and profitability.
Originality/value
To the researchers' best knowledge, this study provides new insights into the association between CSRD and the performance of Malaysian IPO companies, which is considered important.
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Sándor Erdős and Patrik László Várkonyi
The purpose of this study is to examine herd behaviour under different market conditions, examine the potential impact of the firm size and stock characteristics on this…
Abstract
Purpose
The purpose of this study is to examine herd behaviour under different market conditions, examine the potential impact of the firm size and stock characteristics on this relationship, and explore how herding affects market prices in the German market.
Design/methodology/approach
The authors apply a method that does not rely on theoretical models, thus eliminating the biases inherent in their application. This technique is based on the assumption that macro herding manifests itself in the synchronicity (comovement) of stock returns.
Findings
The study’s findings show that herding is more pronounced in down markets and is more pronounced when market returns reach extreme levels. Additionally, the authors have found that there is stronger herding among large companies compared to small companies, and that stock characteristics considered have no effect on the degree of macro herding. Results also suggest that the contemporaneous market-wide information drives macro herding and that macro herding facilitates the incorporation of market-wide information into prices.
Practical implications
The study’s results strongly support the idea of directional asymmetry, which holds that stocks react quickly to negative macroeconomic news while small stocks react slowly to positive macroeconomic news. Additionally, the study’s results suggest that the contemporaneous market-wide information drives macro herding and that macro herding facilitates the rapid incorporation of market-wide information into prices.
Originality/value
To the best of the researchers’ knowledge, this is the first study that examines macro herding for a major financial market using a herding measure based on the co-movement of returns that does not rely on theoretical models.
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Hongji Xie, Zhen Yang and Shulin Xu
Economic policy uncertainty (EPU) has huge impact and harm on real economy, so the economic logic and other economic effects behind this must be further studied. By constructing…
Abstract
Purpose
Economic policy uncertainty (EPU) has huge impact and harm on real economy, so the economic logic and other economic effects behind this must be further studied. By constructing the “China Economic Policy Uncertainty Index” to capture the degree of EPU faced by Chinese companies, the authors empirically test whether and how EPU affects the level of executives' perquisite consumption.
Design/methodology/approach
This study investigates the relationship between EPU and executive perquisite consumption based on a sample of 3,185 publicly listed firms in China. To examine the relationship between EPU and executives' perquisite consumption, a mixed least squares method was used for regression. To alleviate the problem of missing variables that do not change over time and control the influence of unobservable individual heterogeneity at the firm level, the firm fixed effects model is used for regression.
Findings
The study finds that EPU is positively associated with executive perquisite consumption. This positive association is stronger for firms with smaller size, lower management shareholding and higher levels of separation of ownership and control. Effective external governance (i.e., analyst coverage, media coverage, auditor and market competition) can mitigate the relationship between EPU and executive perquisite consumption. Further analysis reveals that EPU increases executive perquisite consumption by holding more cash and decreasing firm risk taking. EPU hurts market value of firms by boosting executive perquisite consumption and tunneling.
Practical implications
In an environment with high EPU, the board of directors should reduce managers' compensation performance sensitivity to ease the agency conflict caused by uncertainty. Firms should improve their governance mechanisms and standard and pay attention to their environmental changes. Policymakers should pay attention to maintaining the continuity and predictability of policies, stabilizing the economic policy expectations of market entities and avoiding frequent changes in policies that can harm economic and firm value. The regulatory authorities should actively guide listed companies to increase active information disclosure during periods of high policy uncertainty.
Originality/value
This study contributes to the research on corporate governance by showing how EPU influences executives' behaviors. The authors advance relative studies by showing that this uncertainty embedded in a firm's external environments influences executive perquisite consumption. This study also contributes to the literature on how internal and external governances influence corporate behavior during uncertainty. These findings extend this line of research by suggesting that effective external governance is an attribute that can alleviate the effect of uncertainty on managers' opportunistic behaviors.
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Min Bai, Yafeng Qin and Feng Bai
The primary goal of this paper is to investigate the relationship between stock market liquidity and firm dividend policy within a market implementing the tax imputation system…
Abstract
Purpose
The primary goal of this paper is to investigate the relationship between stock market liquidity and firm dividend policy within a market implementing the tax imputation system. The main aim is to understand how the tax imputation system influences the relationship between firm dividend policy and stock market liquidity within a cross-sectional framework.
Design/methodology/approach
This paper investigates the relationship between stock market liquidity and the dividend payout policy under the full tax imputation system in the Australian market. This study uses the Generalized Least Squares regressions with firm- and year-fixed effects.
Findings
In contrast to the negative relationship between the liquidity of common shares and the firms' dividends documented in countries with the double tax system, the study reveals that in Australia, the dividend payout ratios are positively associated with liquidity after controlling for various explanatory variables with both the contemporaneous and lagged time periods. Such a finding is robust to the use of alternative liquidity proxies and to the sub-period tests and remains during the COVID-19 pandemic period.
Research limitations/implications
The insights derived from this study have significant implications for various stakeholders within the economy. The findings provide regulators with valuable insights to conduct a more holistic assessment of how the tax system impacts the economy, especially concerning the dividend choices of firms. Within the context of a full tax imputation system, investors can make investment decisions without factoring in the taxation impact. Simultaneously, firms can be relieved of concerns about losing investors who prioritize liquidity, particularly when a high dividend payout might not align optimally with their financial strategy.
Originality/value
This study contributes to the literature by extending the literature on the tax clientele effects on dividend policy, providing evidence that the tax imputation system can moderate the impact of liquidity on dividend policy. This study examines the impact of the dividend tax imputation system on the substitution effect between dividends and liquidity.
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