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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 corporate…

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

Keywords

Article
Publication date: 18 August 2021

Shailesh Rastogi, Vikas Tripathi and Sunaina Kuknor

The paper aims to explore the informational role of futures volume in the simultaneous relationship between option volume and spot volatility to forecast the volatility of the…

Abstract

Purpose

The paper aims to explore the informational role of futures volume in the simultaneous relationship between option volume and spot volatility to forecast the volatility of the underlying asset.

Design/methodology/approach

The generalized method of moments is used to estimate the simultaneous equations of endogeneity between spot volatility and option volume. Futures volume is specified as an exogenous variable in both legs of the estimation of simultaneous equations. However, the future volume is also tested as a dependent variable to prove preference for investment by informed investors in futures along with options.

Findings

The result indicates that futures volume has a significant association with the bi-directional simultaneous equation estimation between spot volatility and option volume. Moreover, the result of this paper proves that informed investors also prefer futures markets over the spot market. However, there is no change observed in the relationship between option volume and spot volatility due to either call or put options or moneyness.

Originality/value

The possible role of futures volume in the simultaneous equations between spot volatility and option volume has not yet been researched. This paper pioneers in demonstrating that futures volume is an exogenous variable in the simultaneous equation modeling between spot volatility and option volume. Moreover, in the contemporaneous as well as predictive relationships between spot volatility and option volume, futures volume as an exogenous variable is significant in forecasting spot volatility. In addition to this, the current paper uniquely provides evidence of investment in futures also over the spot market by informed investors.

Details

Pacific Accounting Review, vol. 34 no. 1
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 1 February 2004

Pervaiz Alam and Anibal Báez‐Díaz

This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade…

Abstract

This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade as American Depository Receipts (ADRs). The Hausman test shows that price changes and earnings changes are endogenously determined, thus the simultaneous equations approach is used to estimate the earnings response coefficient (ERC) and the returns response coefficient (RRC). Under the ordinary least squares (OLS) estimation, the parameter estimates are biased downward because the OLS fails to correct for endogeneity. In general, our results show that the joint estimation procedure mitigates some of the single‐equation bias. The estimated ERC and the RRC are higher under the three stage least regression (3SLS) than under the OLS regression. In addition, the product of the ERC and the RRC coefficients approaches its theoretical value of one when using the 3SLS estimation. The evidence also shows that institutional factors affect the way the market value information for these firms. We find that the ERC and RRC are insignificant for the common law non‐ADR firms and significantly positive for common law ADR firms.

Details

Review of Accounting and Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1475-7702

Article
Publication date: 22 July 2019

Sorour Farokhi, Emad Roghanian and Yaser Samimi

The purpose of this paper is to identify the accurate cause and effect relationships among strategic objectives and also to demonstrate how decision makers can be guided in the…

Abstract

Purpose

The purpose of this paper is to identify the accurate cause and effect relationships among strategic objectives and also to demonstrate how decision makers can be guided in the process of defining quantitative strategic target values in the framework of balanced scorecard (BSC) and performance measurement system.

Design/methodology/approach

Based on the proposed method in this research, after determining strategic objectives and developing an initial strategy map according to decision makers’ opinions, simultaneous equations system (SES) was used to determine the significance of the relationships among strategic objectives in higher perspectives of the BSC and corresponding strategic objectives in lower perspectives. Afterward, desirable values for performance measures were determined based on the equations and relationships obtained through SES and were optimized by goal programming method.

Findings

By applying the proposed method, a clearer picture of the associations among strategic objectives is obtained and the influence of strategic objectives on one another is determined. Afterward, optimal values for strategic objectives are determined to achieve the organization’s goals.

Research limitations/implications

This paper proposes a framework for constructing a strategy map and setting quantitative targets in the framework of BSC. Indeed, this paper presents a case study to demonstrate the applicability and effectiveness of the proposed approach. However, SES technique requires a greater amount of data to generate more accurate results. Although the advent of the Information Age has forced organizations’ decision makers to provide sufficient information and data for business analysis, the data requirements are met.

Practical implications

The presented quantitative approach is a supporting approach for improving decision makers’ opinions and enabling them to reach a more accurate picture of the relationships, valuing strategic objectives and achieving strategic goals. This research also presents a case study to demonstrate the applicability of the proposed approach. The application and implication of the proposed method in banking services show that the contributions of the paper are not only theoretical, but also practical.

Originality/value

The proposed method provides a novel approach for determining the most appropriate targets and applies a comprehensive and scientific model together with decision makers’ opinions and experiences and has two main contributions: first, the associations among strategic objectives are investigated and obtained in an effective way by conducting the SES for the first time in the framework of BSC. Second, quantitative targets have been determined to help in achieving the long-term goals. This task has been accomplished through a combination of SES, the three-stage least squares regression analysis and optimization by using weighted goal programming method.

Details

International Journal of Productivity and Performance Management, vol. 69 no. 9
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 16 August 2013

Ajang Tajdini, Jafar Ghajebeigloo and Mehran Roohnia

Veneer is one of the most important products in the wood‐based panel industry, therefore, to provide needed information for the development of this industry, it is necessary to…

Abstract

Purpose

Veneer is one of the most important products in the wood‐based panel industry, therefore, to provide needed information for the development of this industry, it is necessary to provide better understanding of the forces driving the demand and supply of veneer. The purpose of this paper is to describe how supply and demand can be estimated by using a simultaneous equations model.

Design/methodology/approach

A theoretical framework is proposed based on a systematic approach of iterative 3‐stage least squares (I3SLS). The reason for using simultaneous equations is the existence of reciprocal relations between economic variables in this research.

Findings

Applying this theoretical framework is a useful tool to study the situation of veneer as one of the most important wood‐based panel products in Iran. For example, based on the results, it can be understood that veneer is a normal and essential commodity, and any increase in the price of veneer can lead to a considerable rise in total income for producers. To satisfy the excess demand, extensive investment is needed in establishing new plants.

Research limitations/implications

There are many restrictions in applying other approaches, because of no access to research data. The present study provides a starting‐point for further research using other econometric models on different aspects of forest products marketing.

Originality/value

The framework (econometric models especially simultaneous equations) has proven to be useful in studying and improving forest products marketing. The use of such procedures was new and this research was done for the first time in Iran.

Details

Journal of Business & Industrial Marketing, vol. 28 no. 7
Type: Research Article
ISSN: 0885-8624

Keywords

Article
Publication date: 1 February 1994

Paul D. Koch and Timothy W. Koch

The observation that different national stock markets are interrelated to different degrees is well established in the literature on global market integration. This literature…

107

Abstract

The observation that different national stock markets are interrelated to different degrees is well established in the literature on global market integration. This literature documents that different national markets display more or less sensitivity to movements in other national equity markets, depending on various factors such as: their geographic proximity, their trade relationships, their relative importance to world economic activity, and the time period under scrutiny. While equity values in a few major markets, such as Japan, the UK and the US, tend to lead global price movements, the nature of these intermarket relationships appears to vary at different points in time. Roll (1989), for example, documents that October 1987 is the only month in recent experience during which all markets moved in the same direction. This result suggests that intermarket price relationships differ in periods of normal market activity from those in periods of extreme price moves, such as October 1987.

Details

Managerial Finance, vol. 20 no. 2
Type: Research Article
ISSN: 0307-4358

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 question by…

2528

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

Keywords

Article
Publication date: 11 September 2009

Ismail Adelopo

The purpose of this paper is to examine modelling issues in the research of the relationship between audit and non‐audit fees by comparing the outcome of a single‐equation model

771

Abstract

Purpose

The purpose of this paper is to examine modelling issues in the research of the relationship between audit and non‐audit fees by comparing the outcome of a single‐equation model of fees to the results of simultaneous equation model (SEM) of these interactions for a sample of UK listed companies and also by exploring the benefits of using a panel data approach.

Design/methodology/approach

The paper is an empirical analysis of audit and non‐audit fees for a sample of 2,072 UK companies. Three types of models, single linear equation, SEM and panel data, are compared and the strengths and weaknesses of each discussed.

Findings

The results indicate possible mis‐specification in the single linear equation model and the potential for simultaneous equation basis in the SEM. The panel data analysis confirms the findings of prior literature that there is a relationship between audit and non‐audit fees but statistically insignificant.

Research limitations/implications

The implication of these findings is that previously published findings on audit fees, which used single equation, may have overstated the case for a relationship between audit and non‐audit fees due to problems in the econometric models.

Practical implications

The issues addressed in this paper are very pertinent to a better understanding of the role of the auditor in the corporate environment. In particular, the findings are relevant to the debate on auditor independence and corporate governance.

Originality/value

The study contributes to knowledge of the behaviour of audit fees and non‐audit fees, cross‐sectionally and through time and the most appropriate models for describing that behaviour.

Details

Journal of Applied Accounting Research, vol. 10 no. 2
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 1 August 2004

M.M. Metwally

This paper develops a simultaneous equations model to test the process of interaction between foreign direct investment (FDI), exports and economic growth in three Middle Eastern…

4587

Abstract

This paper develops a simultaneous equations model to test the process of interaction between foreign direct investment (FDI), exports and economic growth in three Middle Eastern countries: Egypt, Jordan and Oman, and tests for any possible feedback effects. Most of the FDI in these countries flows from the European Union. The simultaneous equations model results suggest that higher rates of economic growth result in a greater inflow of foreign capital. The regression results also suggest that interest rate differentials exert a much stronger effect than economic growth on the attraction of foreign capital in the case of Egypt. However, this variable does not seem to play a significant role in the case of Oman. Moreover, the simultaneous equations model results suggest that there is a feedback effect in the relationship between economic growth and capital inflow in all sample countries. A greater inflow of foreign capital leads to growth in the exports of good and services. The expansion in exports leads to growth in gross national product that, in turn, encourages the attraction of more foreign capital.

Details

European Business Review, vol. 16 no. 4
Type: Research Article
ISSN: 0955-534X

Keywords

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 on a…

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

Keywords

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