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1 – 10 of over 18000Benlu Hai, Qingzhu Gao, Ximing Yin and Jin Chen
Significant increase or decrease in research and development (R&D) expenditure may have an immense impact on market value. Based on the punctuated equilibrium theory, this paper…
Abstract
Purpose
Significant increase or decrease in research and development (R&D) expenditure may have an immense impact on market value. Based on the punctuated equilibrium theory, this paper aims to empirically analyze the impact of R&D volatilities on market value and the moderating effect of executive overconfidence.
Design/methodology/approach
The study uses the panel data set that covers 902 Shanghai and Shenzhen A-share manufacturing listed firms and multiple regression method to test the theoretical hypotheses.
Findings
The results show that both positive and negative R&D volatilities have a robust and significant positive impact on the market value. Further analysis shows that the executive overconfidence positively moderates the relationship between R&D volatilities and market value.
Research limitations/implications
In a rapidly changing and highly competitive environment, firms should recognize that the balance of innovation strategies will help to bring higher market value. Furthermore, firms could improve corporate governance to make the best of managerial characteristics, such as overconfidence, on the innovation decision-making process.
Originality/value
By pushing the static perspective to a dynamic perspective and empirically documenting the role of executive overconfidence, this study contributes to the literature on the relationship between R&D expenditure and market value, generating theoretical and practical insights for firms to improve innovation governance and innovation strategies to achieve better business performance.
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George Blazenko and Wing Him Yeung
This paper aims to investigate two related questions on business research and development (R & D) simultaneously. First, does R & D create or resolve uncertainty…
Abstract
Purpose
This paper aims to investigate two related questions on business research and development (R & D) simultaneously. First, does R & D create or resolve uncertainty? Second, does uncertainty encourage or discourage business R & D?
Design/methodology/approach
This paper uses the three-stage least squares regression method and a system of simultaneous equations to examine the two research questions simultaneously. Instrumental variables overcome the econometric endogeneity problem.
Findings
The results are consistent with the hypothesis that R & D creates rather than resolves uncertainty. Why then do risk-averse business managers undertake R & D? This paper argues that in creating uncertainty, R & D also creates “shadow options” for supplementary business investment not envisaged by business managers in the original objective for R & D. Rather, managers unexpectedly uncover shadow options in R & D’s inherent knowledge discovery process, which encourages business R & D in the first instance. Consistent with this real options interpretation, this paper reports evidence that volatility encourages R & D.
Originality/value
This paper differs from the current literature in the sense that it investigates the two related R & D questions simultaneously rather than individually. The authors argue that the two related questions are inextricably interrelated, and investigating the two questions simultaneously would provide results that can possibly solve conflicting empirical results in the current literature. The results are also particularly useful for business managers who make decisions on whether to undertake R & D projects or not.
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George W. Blazenko, Andrey D. Pavlov and Freda Eddy‐Sumeke
The purpose of this paper is to compare investment in innovation (e.g. R&D) between new venture start‐ups before commercialization and operating businesses after commercialization…
Abstract
Purpose
The purpose of this paper is to compare investment in innovation (e.g. R&D) between new venture start‐ups before commercialization and operating businesses after commercialization.
Design/methodology/approach
Real options methods were used to model a new venture start‐up as a perpetual call option on an operating business that grows with R&D. The operating business uses R&D to improve actual earnings while the start‐up uses R&D to improve prospective earnings. When the start‐up entrepreneur commercializes his/her new product, device, or service with conventional investment (e.g. plant, property, and equipment to begin production), prospective earnings convert into actual earnings.
Findings
The ability of the start‐up entrepreneur to avoid commercialization costs upon failed R&D makes R&D more valuable to the start‐up entrepreneur than to the manager of the already operating business (for whom commercialization costs are sunk) and despite R&D costs that the start‐up incurs without the revenues that only commercialization generates. The value of R&D to the start‐up can be so great that the entrepreneur invests in R&D before the manager of an otherwise similar operating business in similar business conditions.
Originality/value
Without favoring either a priori, the authors show that under broad circumstances, a new venture start‐up undertakes R&D before an already operating business. The authors also discuss the empirical implications of the results.
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DIMITRIS PSYCHOYIOS, GEORGE SKIADOPOULOS and PANAYOTIS ALEXAKIS
The volatility of a financial asset is an important input for financial decision‐making in the context of asset allocation, option pricing, and risk management. The authors…
Abstract
The volatility of a financial asset is an important input for financial decision‐making in the context of asset allocation, option pricing, and risk management. The authors compare and contrast four approaches to stochastic volatility to determine which is most appropriate to each of these various needs.
Henry Huang, Li Sun and Joseph Zhang
This paper examines the relationship between environmental uncertainty and tax avoidance at the firm level. We posit that managers faced with more uncertain environments are…
Abstract
This paper examines the relationship between environmental uncertainty and tax avoidance at the firm level. We posit that managers faced with more uncertain environments are likely to engage in more tax avoidance activities. We find a significant and negative relationship between environmental uncertainty and effective tax rates, and our results persist through a battery of robust checks. We further find that managerial ability mitigates the above relationship. Moreover, we find that small, highly leveraged, and innovative firms operating in uncertain environments engage in more tax avoidance.
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The purpose of this paper is to investigate how managerial risk-taking incentives affect the sensitivity of R&D investments to the availability of a firm’s internal finance.
Abstract
Purpose
The purpose of this paper is to investigate how managerial risk-taking incentives affect the sensitivity of R&D investments to the availability of a firm’s internal finance.
Design/methodology/approach
The author studies a large panel sample of US firms from 1992 to 2013 using a dynamic structural model and estimates a system GMM estimator that accounts for unobserved firm-specific effects, and that allows the author to address the potential endogeneity of all of the financial and executive compensation variables.
Findings
Managerial risk-taking incentives, in particular CEO portfolio vega, have a significantly positive impact on the financial constraints that bind R&D investments. Moreover, the author finds that CEO portfolio vega has stronger impacts on the investment-cash flow sensitivity of R&D in firms that are more likely to face binding financial constraints.
Originality/value
Prior studies on the financial constraints of R&D investments do not consider the potential impact of executive compensation on R&D investments. The author complements this stream of literature by providing novel results showing that managerial risk-taking incentives have a significant impact on the severity of the financial constraints on R&D investments.
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This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy…
Abstract
Purpose
This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm.
Design/methodology/approach
Using S&P 1500 data from CRSP, Compustat, Execucomp and Capital IQ between 2006 and 2011, statistical analysis and regression models are used to determine potential correlations between the variable of interest, inside debt and debt control variables, including specialization.
Findings
Firms with high inside debt specialize in commercial loans and drawn credit lines. Larger firms diversify their debt holdings among commercial instruments and senior bonds. As firm size increases with inside debt, the effects are counteracted. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt.
Research limitations/implications
Debt diversification is partially affected by compensation in the form of inside debt. Future studies of debt diversification should include CEO compensation controls.
Practical implications
For struggling companies or for those that want to return to a conservative financial policy, they can influence the CEO to make this decision by deferring his compensation to retirement.
Originality/value
This paper considers debt policy through the lens of a key decision maker, the CEO, and uses compensation as an incentive to determine what choices are made concerning debt.
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Chee Seng Cheong, Anna Olshansky and Ralf Zurbruegg
The purpose of this paper is to investigate the causal relationship between risk experienced within the real estate industry and that of the overall market in the UK context. The…
Abstract
Purpose
The purpose of this paper is to investigate the causal relationship between risk experienced within the real estate industry and that of the overall market in the UK context. The motivation behind this research is to investigate whether the real estate sector transmits risk to the wider marketplace and whether this phenomenon existed, or was exacerbated, during the most recent financial crisis.
Design/methodology/approach
The study was undertaken over a 20‐year timeframe, from 1990 to 2010, with special attention being awarded to the global financial crisis (GFC) period from 2008 to 2010. The paper first undertakes graphical modeling of market and industry volatilities in an attempt to identify which industry drives market uncertainty. This is followed by quantitative computation of industry‐specific volatility, which is employed in examining the relationship between these volatilities using block exogeneity/Granger causality tests. Rolling sample analysis and impulse response functions are employed as robustness tests to substantiate the main results.
Findings
First, the analysis confirms research that finance industry volatility is a leader in driving market volatility. Second, it expands on these findings to identify the real estate sector as being a key source of this causal relationship. It finds that real estate risk is the one that regularly drives finance industry volatility over the 20‐year sample period. Third, and most importantly, it emerges that the causal link between the real estate sector and market volatility is at its strongest leading up to the most recent financial crisis. More specifically, the real estate investment trusts sub‐sector of real estate industry volatility is the one that has the strongest unidirectional relationship with market‐wide volatility, both directly and indirectly, through driving the finance industry volatility during the GFC.
Originality/value
These findings are significant for market participants, such as pension funds, which need to protect their assets from a stock market crash. Furthermore, anticipating a downturn by observing the trends in real estate sector volatility is highly advantageous in informing their trading strategies now and into the future. Policy makers likewise need a signal of an impending credit crunch and can utilize real estate market statistics to pre‐empt a freezing up of the credit markets.
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Shuming Bai, Kai S. Koong and Yanni Wang
China adopted its new Accounting Standards for Business Enterprises No. 6 in 2007, which substantially converges with the International Financial Reporting Standards. It…
Abstract
Purpose
China adopted its new Accounting Standards for Business Enterprises No. 6 in 2007, which substantially converges with the International Financial Reporting Standards. It stipulates that firms operating in China shall capitalize development costs provided specific criteria have been met. This paper aims to examine the effects of the new accounting policies of R&D on the value-relevance and stock performance of 36,299 Chinese firms-years from 2007 to 2020.
Design/methodology/approach
A comprehensive multi-stage analysis was conducted. Multiple linear regressions were performed on the pooled cross-sectional time-series total R&D, capitalized expenditures, expensed costs and other key financial factors to test for the effects of R&D on the stock prices, contemporaneous stock returns and subsequent stock returns for the full sample, capitalizer sample and expenser sample, respectively.
Findings
First, majority of Chinese firms (about 80% of those reported) elect to adopt expensing R&D approach, while about 20% deploys capitalization treatment. Second, key attributes such as size, profitability, leverage and R&D intensity are highly associated with capitalization propensity. Third, current capitalization affects the contemporaneous stock prices and stock returns (priced-in) with yearly volatility. Finally, intertemporal association exists between firms’ expensing costs and subsequent returns due to a delayed reaction.
Originality/value
As the world largest emerging economy, the results show that research and development information adds value, and capitalizers outperforms expensers in the area of stock performance. This strategy works irrespectively of economic development stage or capital market maturity. The findings call for more capitalization.
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This article examines predictability of returns and volatily in three major stock markets, the U.S., U.K., and Japan, using the Vector Autoregrassive and the Autoregressive…
Abstract
This article examines predictability of returns and volatily in three major stock markets, the U.S., U.K., and Japan, using the Vector Autoregrassive and the Autoregressive Conditional Heteroskedastic (ARCH) approaches. We find that in all three markets dividendprice ratios and/or dividend growth rates predict returns. Moreover, there is persistence in the variance of stock returns attribute to the innovations related to the same variables.
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