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Article
Publication date: 28 October 2014

Mian Du, Siyan Chen and Huan Shao

The purpose of this paper is to investigate the relationship between corporate governance mechanism and firm value of the listed companies in China. Does the better…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate governance mechanism and firm value of the listed companies in China. Does the better corporate governance lead to the higher firm value? Or does the higher firm value make it easy to choose a better governance mechanism? Or they affect each other? In other words, this paper tries to answer whether the corporate governance mechanism is only decided by institutional arrangement, or by market choice according to firm value or performance or by the interaction of institutional arrangement and market choice? It tries to answer whether institutional arrangement maximizes the firm value, or an invisible hand pushes them to arrive at its maximum.

Design/methodology/approach

This paper establishes an analytic framework of simultaneous equations based on causality, which includes five endogenous variables: ownership of larger shareholders, managerial ownership, director compensation, debt financing and firm value. It adopts 1,644 data samples from 274 Chinese listed companies in Shanghai and Shenzhen Stock Exchange during 2007- 2012 after the non-tradable shares reform. Ordinary least squares (OLS) estimation of single equation, 2SLS and 3SLS estimation of simultaneous equations are respectively done to show the differences of these three kinds of estimations.

Findings

The empirical results show that differences exist among OLS, 2SLS and 3SLS estimation. Finally, 3SLS estimation should be adopted because the OLS and 2SLS estimation are biased. There are endogenous relationships between corporate governance mechanism and firm value. Through the 3SLS estimation, it is found that first, ownership concentration and firm value affect each other positively. Second, managerial ownership and firm value affect each other positively; third, director compensation and firm value affect each other negatively, while director compensation and firm performance affect each other positively. Finally, debt financing level and firm value are negatively related to each other.

Practical implications

It means that ownership of large shareholders, managerial ownership, director compensation and debt financing in the Chinese listed companies are found to have a root in the interaction between institutional arrangement and market choice. It is also found that adverse selection occurs when creditors loan to the listed companies. Managerial compensation is positively related to accounting profit, but it is negatively related to firm value because managers increase profit due by earning management. This could only increase the accounting profits and obtain huge cash compensation, but not increase firm value and even harm the interests of shareholders.

Originality/value

This paper not only shows the difference between OLS and 2SLS estimation but also compares the estimation of 2SLS and 3SLS in terms of empirical methods. It gives answers to the following questions: whether the relationship is one-way causality or bilateral causality between ownership concentration, managerial ownership, director compensation and firm value; whether governance mechanism affects firm value by institutional arrangement, or market drives both of them to strike a balance by an invisible hand. In other words, does it make them arrive at equilibrium through the competitive selection process when shareholders, directors, managers and creditors attempt to maximize themselves of their interests?

Details

Chinese Management Studies, vol. 8 no. 4
Type: Research Article
ISSN: 1750-614X

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Article
Publication date: 25 October 2011

Chiung‐Ju Liang, Tzu‐Tsang Huang and Wen‐Cheng Lin

Previous empirical studies on the nature of the relationship between ownership and corporate value have produced mixed results. Meanwhile, effective management of…

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3138

Abstract

Purpose

Previous empirical studies on the nature of the relationship between ownership and corporate value have produced mixed results. Meanwhile, effective management of knowledge‐based intellectual capital has become a key factor to corporate success, both in firm performance and corporate value. Thus, this paper aims to reexamine the link among ownership, proxies for intellectual capital and corporate value in the emerging Taiwan market.

Design/methodology/approach

Using two‐stage least square estimation of panel data in a simultaneous equations framework, the authors focus on: What is the interdependent impact of ownership on corporate value through the mediating role of intellectual capital (IC)? Does ownership directly or indirectly (i.e. via IC) influence corporate value? Does it persist across industries?

Findings

The empirical results suggest that the relationship between ownership and corporate value mainly depends on industry characteristics and the nature of proxies for intellectual capital in the emerging Taiwanese market. Further, the impacts of ownership on corporate value in more traditional industries are even stronger, that is, there exists the direct impact of ownership mechanism on corporate value. Notably, for the high‐tech firms, ownership can indirectly affect corporate value through the moderating role of intellectual capital.

Research limitations/implications

The implication reminds managers and investors not merely focusing on ownership mechanisms as the main value‐creation information, but a thorough review of IC should be made in order to avoid making incorrect decisions. The limitations suggest areas for further research. For instance, it is important to extend the role of intellectual capital (i.e. to employ other variables to proxy for IC) in exploring the interdependent impact of ownership on corporate value.

Originality/value

The paper potentially adds to ongoing research by extending the importance of the concept of IC in assessing the interdependent impact of ownership on corporate value.

Details

Journal of Intellectual Capital, vol. 12 no. 4
Type: Research Article
ISSN: 1469-1930

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Article
Publication date: 5 March 2018

Mouna Ben Rejeb Attia, Naima Lassoued and Mohamed Chouikha

The purpose of this paper is to examine the relationship between state ownership and firm profitability in developing countries by considering the endogenous nature of…

Abstract

Purpose

The purpose of this paper is to examine the relationship between state ownership and firm profitability in developing countries by considering the endogenous nature of state ownership and firm profitability.

Design/methodology/approach

A simultaneous equation analysis is applied to study 232 Tunisian firms over the 2001-2013 period. This analysis is compared with OLS estimates to show its power in terms of an endogenous setting and its potential to improve estimation.

Findings

Unlike the OLS estimates that show a non-significant relationship between state ownership and firm profitability, the simultaneous equation analysis reveals a non-symmetrical concave relationship. Specifically, state ownership affects positively firm profitability when it is relatively small and negatively when state ownership dominates. Specification test indicates that both state ownership and firm profitability are endogenous. Furthermore, the simultaneous model’s explanatory power exceeds that of OLS estimates and proves to be a suitable estimation technique.

Practical implications

Taking into account public firms’ categorization, the authors implicitly examine the effect of privatization and corporatization on firm profitability. The findings imply that privatization is not the only solution to the operational problems of public firms, but an internal governance system restructuring can also be favorable for these firms.

Originality/value

In addition to focusing on a new database of developing countries, the case of Tunisian firms, the main empirical analysis is conducted by considering the endogeneity issue. Thus, the findings improve understanding of the role played by state ownership and suggest that a partial state control appears to be beneficial to firm profitability.

Details

International Journal of Public Sector Management, vol. 31 no. 2
Type: Research Article
ISSN: 0951-3558

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Article
Publication date: 1 August 2010

Halimahton Binti Borhan and Elsadig Musa Ahmed

This study aims to examine the relationship between economic growth and different indicators of air and water pollution in Malaysia. Air pollution indicators were assessed…

Abstract

This study aims to examine the relationship between economic growth and different indicators of air and water pollution in Malaysia. Air pollution indicators were assessed on a number of measures: carbon monoxide, sulphur dioxide (SO), nitrogen dioxide, ozone and particulate matter (PM) while water pollution indicators were evaluating on a number of measures: biochemical oxygen demand, cadmium and arsenic. The income level per capita gross domestic product per capita were measured from the year 1996 to 2006 quarterly. Being different from the study by Hung and Shaw (2004) and Shen (2006), this study estimates population density as an endogenous variable. It formulates a fourequation simultaneous model for empirical research. Testes for exogeneity with the Hausman test and estimates the simultaneity model using the two‐stages least squares method. The Environmental Kuznets Curve (EKC) hypothesis is supported in the cases of SO and PM, and there are several differences found between single polynomial equation estimators commonly used in EKC literatures and simultaneous equation estimators.

Details

World Journal of Science, Technology and Sustainable Development, vol. 7 no. 3
Type: Research Article
ISSN: 2042-5945

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Article
Publication date: 9 November 2015

Pedro Carmona, Alexandre Momparler and Carlos Lassala

The purpose of this paper is to explore whether the provision of non-audit services (NAS) by public accounting firms undermines audit quality. The study addresses this…

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2176

Abstract

Purpose

The purpose of this paper is to explore whether the provision of non-audit services (NAS) by public accounting firms undermines audit quality. The study addresses this question by testing for an association between the provision of consulting services and auditor independence in listed companies.

Design/methodology/approach

The authors study if the magnitude of non-audit fees explains variations in earnings management by looking at the joint determination of non-audit fees, audit fees, and abnormal accruals using the SURE-regression estimation method.

Findings

Evidence from tested models suggests that audit services quality is uncompromised by the provision of NAS. In other words, high non-audit fees do not necessarily result in poor quality financial reporting.

Research limitations/implications

A different research methodology and a different sample (e.g. non-listed companies) may lead to differing results. As the paper analyses only one country, generalizability of the results might be a limitation. There is no need to increase legal restrictions on the provision of consulting services by public accounting firms in order to better safeguard audit quality.

Practical implications

Consulting clients may be more confident to hire both audit and NAS with the same firm and can make a case before the general Shareholders’ meeting. By providing both audit and NAS, consulting firms obtain knowledge spillovers and synergies while appealing highly qualified professionals.

Originality/value

The use of simultaneous equations (SURE-regression) to establish the auditor-client relation allows us to better model theoretical relations between audit fees, non-audit fees, and abnormal accruals. Likewise, joint modeling takes account of correlations between the error terms of the individual models, yielding more efficient estimates than ordinary least squares. Performing this analysis in a non-Anglo-American country with low litigation risk is also a valuable contribution to extant literature.

Details

Journal of Service Theory and Practice, vol. 25 no. 6
Type: Research Article
ISSN: 2055-6225

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Article
Publication date: 11 November 2014

Rick L. Andrews and Peter Ebbes

This paper aims to investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models. Endogeneity problems in demand models…

Abstract

Purpose

This paper aims to investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models. Endogeneity problems in demand models occur when certain factors, unobserved by the researcher, affect both demand and the values of a marketing mix variable set by managers. For example, unobserved factors such as style, prestige or reputation might result in higher prices for a product and higher demand for that product. If not addressed properly, endogeneity can bias the elasticities of the endogenous variable and subsequent optimization of the marketing mix. In practice, instrumental variables (IV) estimation techniques are often used to remedy an endogeneity problem. It is well-known that, for linear regression models, the use of IV techniques with poor-quality instruments can produce very poor parameter estimates, in some circumstances even worse than those that result from ignoring the endogeneity problem altogether. The literature has not addressed the consequences of using poor-quality instruments to remedy endogeneity problems in non-linear models, such as logit-based demand models.

Design/methodology/approach

Using simulation methods, the authors investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models applied to finite-sample data sets. The results show that, even when the conditions for lack of parameter identification due to poor-quality instruments do not hold exactly, estimates of price elasticities can still be quite poor. That being the case, the authors investigate the relative performance of several non-linear IV estimation procedures utilizing readily available instruments in finite samples.

Findings

The study highlights the attractiveness of the control function approach (Petrin and Train, 2010) and readily available instruments, which together reduce the mean squared elasticity errors substantially for experimental conditions in which the theory-backed instruments are poor in quality. The authors find important effects for sample size, in particular for the number of brands, for which it is shown that endogeneity problems are exacerbated with increases in the number of brands, especially when poor-quality instruments are used. In addition, the number of stores is found to be important for likelihood ratio testing. The results of the simulation are shown to generalize to situations under Nash pricing in oligopolistic markets, to conditions in which cross-sectional preference heterogeneity exists and to nested logit and probit-based demand specifications as well. Based on the results of the simulation, the authors suggest a procedure for managing a potential endogeneity problem in logit-based demand models.

Originality/value

The literature on demand modeling has focused on deriving analytical results on the consequences of using poor-quality instruments to remedy endogeneity problems in linear models. Despite the widespread use of non-linear demand models such as logit, this study is the first to address the consequences of using poor-quality instruments in these models and to make practical recommendations on how to avoid poor outcomes.

Details

Journal of Modelling in Management, vol. 9 no. 3
Type: Research Article
ISSN: 1746-5664

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Book part
Publication date: 1 October 2008

Anabela Carneiro and Pedro Portugal

In this paper a simultaneous-equations model of firm closing and wage determination is specified in order to analyse how wages adjust to unfavorable product demand shocks…

Abstract

In this paper a simultaneous-equations model of firm closing and wage determination is specified in order to analyse how wages adjust to unfavorable product demand shocks that raise the risk of displacement through firm closing, and to what extent an exogenous wage change affects the exit likelihood. Using a longitudinal matched worker-firm data set from Portugal, the estimation results suggest that, under the existence of noncompetitive rents, the fear of job loss leads workers to accept wage concessions, even though a compensating differential for the ex ante risk of displacement might exist. A novel result that emerges from this study is that firms with a higher incidence of minimum wage earners are more vulnerable to adverse shocks due to their inability to adjust wages downward. Indeed, minimum wage restrictions were seen to increase the failure rates.

Details

Work, Earnings and Other Aspects of the Employment Relation
Type: Book
ISBN: 978-1-84950-552-9

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Article
Publication date: 1 April 1995

Mokhtar M. Metwally

Develops and tests a simultaneous equation model to assess theeffect of growth in exports to the EU on the economic development offive South‐East Asian countries…

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961

Abstract

Develops and tests a simultaneous equation model to assess the effect of growth in exports to the EU on the economic development of five South‐East Asian countries. Emphasizes the role played by economic interdependence and estimates the degree of feedback effects between each Asian economy and the EU.

Details

European Business Review, vol. 95 no. 2
Type: Research Article
ISSN: 0955-534X

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Article
Publication date: 5 May 2015

Santi Gopal Maji and Utpal Kumar De

– This paper aims to examine the association between regulatory capital and risk of Indian commercial banks and the impacts of other relevant variables on them.

Abstract

Purpose

This paper aims to examine the association between regulatory capital and risk of Indian commercial banks and the impacts of other relevant variables on them.

Design/methodology/approach

The study is based on a secondary data set on Indian commercial banks collected from “Capitaline Plus” corporate database and annual reports of the respective banks. Total 41 major Indian banks (21 public and 20 private sector banks) are considered in this study. Here absolute values of capital and risk are used as dependent variables along with some relevant bank specific explanatory variables in a system of a two-equation model. Based on the nature of interrelationship and identifiability of the equations, three-stage least squares (3SLS) technique is used to estimate the relationship.

Findings

Risk and capital of Indian commercial banks are inversely associated. The influence of profitability on both capital and risk is significantly positive. Moreover, human capital efficiency is negatively associated with the undertaking of risk by the banks. In this respect, Indian private sector banks are found to be more efficient in utilizing human capital for reducing credit risk.

Originality/value

It is the first comparative study in India examining the relationship between capital and risk of Indian public and private sector commercial banks covering both Basel I and II periods. Further, the role of human resource in managing risk is considered as a relevant variable in this study.

Details

Journal of Financial Economic Policy, vol. 7 no. 2
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 1 February 2010

Jorah Ramlan and Elsadig Musa Ahmed

This study measures the impact of ICT on Malaysia’s aggregate output in the period 1965‐2005. It closes a gap in existing literature by using the 3SLS technique on a…

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1553

Abstract

This study measures the impact of ICT on Malaysia’s aggregate output in the period 1965‐2005. It closes a gap in existing literature by using the 3SLS technique on a country specific study. Telecommunication penetration rate is used as a proxy for ICT and analysed in both macro‐economic and micro‐economic perspectives. The findings of this study suggest that there is a causal relation between ICT and aggregate output in Malaysia and that the MSC and the privatisation policy of the telecommunication sector, are found to be indifferent to achieving expected economic growth in Malaysia.

Details

World Journal of Science, Technology and Sustainable Development, vol. 7 no. 1
Type: Research Article
ISSN: 2042-5945

Keywords

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