Search results

1 – 10 of over 1000
Book part
Publication date: 6 September 2018

Debarati Bhattacharya, Tai-Yu Chen and Wei-Hsien Li

This paper studies how a firm reacts to the threat from product market competition. Consistent with the strategic equilibrium model, we find that a firm increases investment in…

Abstract

This paper studies how a firm reacts to the threat from product market competition. Consistent with the strategic equilibrium model, we find that a firm increases investment in response to external product market threats. Further, the paper analyzes whether product market threats lead to an improvement in investment efficiency. When faced with product market competition, we find that firms that are otherwise likely to underinvest (overinvest) increase (increase) their investment significantly (less than the firms that are likely to underinvest) in the next period. However, firms that are predisposed to overinvest do not make cuts in capital expenditure, which indicates that strategic investment is a critical countermeasure for addressing competitive threats for all firms, their inclination to make suboptimal investment decisions notwithstanding. Overall, the evidence supports the predatory risk of waiting as well as competition and investment efficiency hypotheses. Additional tests suggest that product market threat partially substitutes for other external monitoring mechanisms designed to manage agency problems.

Article
Publication date: 17 April 2020

Russell Barber and Dana Hollie

The purpose of this study is twofold: (1) to examine the incremental contribution of product market fluidity (P_THREAT), another measure of competition from that of the Herfindahl…

Abstract

Purpose

The purpose of this study is twofold: (1) to examine the incremental contribution of product market fluidity (P_THREAT), another measure of competition from that of the Herfindahl index (H_COMP) and (2) to examine how a research and development (R&D) real activities earnings management strategy to meet an earnings target is influenced by competition.

Design/methodology/approach

Using a linear probability model, we test whether P_THREAT is incremental to the H_COMP competition measure and whether it influences the likelihood of firms using abnormally low R&D real activities earnings management to meet an earnings target.

Findings

We find that P_THREAT is incrementally informative to the commonly used Herfindahl measure of competition in predicting abnormally low R&D real activities earnings management activities. This finding is consistent with the notion of examining P_THREAT because the Herfindahl index alone may be incomplete, depending on the product makeup of a company. The negative coefficient suggests that reducing discretionary spending on R&D in the short run could have a detrimental effect on long-term profits because bypassed R&D opportunities would put firms at a disadvantage with their competitors' R&D efforts. In contrast, we find that firms are more likely to use R&D activities earnings management as a mechanism to meet an earnings target when P_THREAT is high. This suggests that when high competitive pressure exists, firms are more likely to use abnormally low R&D as a mechanism to meet an earnings target.

Originality/value

We specifically focus on R&D activities earnings management because our primary competition measure, P_THREAT, captures changes in rival firms' products relative to the firm. Because R&D is primarily what drives product change, R&D is the type of real activities earnings management that is most relevant to our competition measure. Hence, this study contributes to the literature by examining how competition influences the likelihood of firms possibly engaging in R&D activities earnings management and meeting earnings targets in the presence of P_THREAT competition.

Details

Managerial Finance, vol. 46 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 25 October 2022

Md Mahmudul Hasan, Md Safayat Hossain and Giorgio Gotti

This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that…

Abstract

Purpose

This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade off relative costs between accrual-based earnings management (AEM) and real earnings management (REM).

Design/methodology/approach

This study uses ordinary least square regressions to examine the association of managerial ability on the relations between product market competition and earnings management. The paper follows prior literature to measure managerial ability, product market competition and earnings management.

Findings

This study shows empirical evidence that high-ability managers in high-competition industries are likely to engage in AEM but less likely to engage in REM. These findings overall indicate that high-ability managers in high-competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly.

Practical implications

This study has important practical implications as the findings identify situations when important stakeholders, such as the board of directors and investors, may take precautions to prevent managers’ opportunistic behaviors. The findings of this study also might be helpful for firms when it comes to selecting managers. The findings may provide some input to the firms in considering the risks and benefits trade-offs of recruiting a high versus low-ability manager in a more or less competitive environment.

Originality/value

The findings of this study show new insight into how managerial ability moderates the relation between product market competition and different types (i.e. accrual-based and real activity-based) of earnings management.

Details

Review of Accounting and Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 18 June 2021

Ca Nguyen and Alejandro Pacheco

This study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how…

Abstract

Purpose

This study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.

Design/methodology/approach

Using a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.

Findings

Borrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.

Originality/value

This study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.

Details

International Journal of Managerial Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Book part
Publication date: 19 February 2024

Quoc Trung Tran

This chapter analyzes how the industry environment determines corporate dividend decisions. First, common participants in the product market are competitors, suppliers, and…

Abstract

This chapter analyzes how the industry environment determines corporate dividend decisions. First, common participants in the product market are competitors, suppliers, and customers. These micro-stakeholders create competitive pressures on firms and thus affect their current and future performance. Competitors influence dividend decisions through three mechanisms, namely predation threat, corporate governance, and imitation. Predation threat reduces firms' incentives to pay dividends when facing high rivalry. Competition helps firms improve corporate governance. However, strong corporate governance may increase or decrease dividend payments since dividend policy may be the outcome of strong corporate governance or the substitute for weak corporate governance, respectively. Besides, firms tend to imitate their industry peers in dividend policy. Second, as a financial policy, dividend policy is also affected by participants in the financial market like investors, creditors, and auditors. These financial stakeholders' behaviors are important to stock prices. Due to the agency problem, creditors have high incentives to restrict firm's dividend payments in order to protect their benefits. On the other hand, creditors are effective external monitors who help firms improve their corporate governance. Outside investors affect corporate dividend policy through their valuation. Firms pay more dividends if investors prefer dividends to capital gains. Auditors play the role of a third-party monitor, and thus, they help firms reduce managers' expropriation of shareholders and improve the quality of accounting information. Furthermore, we also investigate dividend policy of regulated industries in both financial sector (banking, insurance, and real estate) and utilities sector (energy, telecommunications, and transportation).

Article
Publication date: 7 March 2023

Seunghee Yang and Wonsuk Ha

Despite the importance of research and development (R&D), information on its value is not readily available to managers. This study aims to explore the role of common auditors…

Abstract

Purpose

Despite the importance of research and development (R&D), information on its value is not readily available to managers. This study aims to explore the role of common auditors, who audit multiple peer firms in the product market, in clients’ R&D investment decisions. This study highlights common auditors as information intermediaries who affect corporate R&D investment, focusing on the importance of knowledge resources in R&D investment and the limited ability of peers’ public information to communicate the value of R&D.

Design/methodology/approach

This study employs pairwise data of firm-peer-year observations to identify a common auditor who provides audit services to the focal firm and its peer firm. This study examines how a firm’s R&D investment changes when the firm’s incumbent auditor provides audit services to peers and analyzes various factors that moderate the effect of common auditors.

Findings

Peer firms audited by the same auditor make similar R&D investment decisions. This effect is more pronounced when the auditor specializes more in auditing R&D, when the auditor has a long-term client relationship, and when the firms exhibit a higher level of demand for incremental information relevant to R&D investment. Consistent with the beneficial role of common auditors, firms that are more responsive to auditor-provided information engage more actively in innovation activities in subsequent years.

Originality/value

This study deepens the understanding of how networks created by common auditors facilitate information flow among client firms and shape these firms’ R&D investment decisions.

Details

Managerial Auditing Journal, vol. 38 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 18 February 2022

Joseph Maxwell Asamoah, Cephas Simon Peter Dak-Adzaklo and Emmanuel Ofosu

This study aims to investigate the impact of institutional investors distraction on firms' choice between bank debt and public debt.

Abstract

Purpose

This study aims to investigate the impact of institutional investors distraction on firms' choice between bank debt and public debt.

Design/methodology/approach

The study employs the measure of institutional investors distraction from Kempf et al. (2017), which captures exogenous attention-grabbing events in other aspects of institutional investors' portfolios holdings to examine this research question. The study uses a sample of 16,047 firm-year observations comprising 2,521 US firms for the period of 2000–2016.

Findings

The result shows a significant positive association between institutional shareholder distraction and firms' bank ratio. Cross-sectional tests show that the positive association between institutional shareholders distraction and firms' bank ratio is stronger for firms in poorer information environments and for firms facing greater competitive threats from rivals.

Originality/value

This study underscores the important governance role played by institutional shareholders and the consequence when such a monitoring role is impaired. In particular, firms with distracted shareholders rely on expensive bank monitoring and scrutiny to supply their additional monitoring capacity.

Details

Managerial Finance, vol. 48 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 4 February 2022

Darshana D. Palkar

Prior research has documented a guilt by association phenomenon whereby instances of corporate misconduct generate a negative spillover to innocent firms due to their shared…

Abstract

Purpose

Prior research has documented a guilt by association phenomenon whereby instances of corporate misconduct generate a negative spillover to innocent firms due to their shared industry membership with the wrongdoing firm. However, research on competitive dynamics predicts a positive spillover whereby some firms benefit from the revelation of financial misconduct by an industry peer. This study lends support to both these effects by highlighting the role product similarity plays in the understanding of investors' perceptions surrounding corporate misconduct.

Design/methodology/approach

The study assesses the investors' valuation of cash using Faulkender and Wang's (2006) methodology. The difference-in-differences approach is employed to compare the market valuation of cash held by non-accused firms with higher and lower litigation spillover risk operating in industries with higher vs lower product similarity.

Findings

The findings show that an increase in the volume and severity of misconduct by industry peers is associated with an undeserved loss in the value of cash held by non-accused firms operating in industries with high product similarity. In contrast, firms that sell differentiated products stand to gain from the troubles of the accused peer. Moreover, non-accused firms in industries with high product similarity reduce capital expenditures more following misconduct accusations against peers to preserve cash in anticipation of future lawsuits.

Originality/value

This study contributes to the growing spillover literature that investigates how a crisis caused by one firm affects the valuation of its peers.

Details

Managerial Finance, vol. 48 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 29 January 2020

Amjad Iqbal, Xianzhi Zhang, Muhammad Zubair Tauni and Khalil Jebran

The purpose of this paper is to examine the interaction between competition and corporate payout policy and more specifically to answer the question that whether competition…

Abstract

Purpose

The purpose of this paper is to examine the interaction between competition and corporate payout policy and more specifically to answer the question that whether competition mitigates the principal–principal agency conflicts and influences firms to distribute dividends to shareholders in Chinese corporations.

Design/methodology/approach

This research models measures of competition with scaled measures of dividends and analyzes a sample of 16,730 firm-year observations from Chinese-listed manufacturing firms for the period spanning 2003 to 2016. Further, this research uses the Tobit model (a censored regression) to empirically test the proposed hypotheses.

Findings

This research finds that intense competition not only mitigates agency problems and forces firms to disgorge cash but also increases a firm’s likelihood to pay dividends and weakens the negative association between agency conflicts and dividends.

Practical implications

The results show an important policy implication for the industry. As the principal–principal agency conflict restrains the dividends, the regulatory authorities could encourage a competitive environment and a more diverse ownership structure to induce a higher dividend rate and protect the minority shareholders. In addition, this study also has implications for other emerging markets characterized by concentrated ownership and principal–principal agency problems.

Originality/value

This study adds to the literature related to the disciplinary role of competition and identifies competition as a significant determinant of corporate payout policy. Furthermore, this research extends earlier research on corporate payout decisions that besides firm-level corporate governance and country-level legal system, industry-level competition also influences corporate payout decisions, significantly.

Details

Journal of Asia Business Studies, vol. 14 no. 3
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 23 November 2020

Ahmed Alhadi, Ahsan Habib, Grantley Taylor, Mostafa Hasan and Khamis Al-Yahyaee

The purpose of this paper is to examine the relation between financial statement comparability and corporate investment efficiency of a large sample of US firms.

Abstract

Purpose

The purpose of this paper is to examine the relation between financial statement comparability and corporate investment efficiency of a large sample of US firms.

Design/methodology/approach

The authors use a large sample of US-listed firms from 1981 to 2013. The authors use several econometric methods including ordinary least square, firms fixed effects and mediation effects regression. Sensitivity tests that include the use of alternative measures of both the dependent and independent variables provide results that are consistent with the authors’ baseline model results.

Findings

The authors find that financial statement comparability mitigates risks associated with both under-investment and over-investment. They also find that product market competition mediates the relation between financial statement comparability and investment efficiency. The authors consider this to be a function of a competitive environment, whereby firms normally disclose less private information. This in turn reduces the effect of financial statement comparability on investment efficiency. Conversely, where there are higher levels of product market competition, it is less likely that firms will under-invest. Their results are consistent with these predictions.

Originality/value

The authors contribute to this growing field of research by providing evidence that financial statement comparability does in fact improve firms’ investment efficiency. Findings enhance our understanding of the relation between investment efficiency and financial statement comparability which is likely to have flow-on effects in terms of financial reporting quality and firm value. This study also contributes to research that links agency theory to financial statement comparability through an analysis of moral hazard and adverse selection tenets, and how it leads to reduced levels of investment inefficiency in a firm.

Details

Meditari Accountancy Research, vol. 29 no. 6
Type: Research Article
ISSN: 2049-372X

Keywords

1 – 10 of over 1000