Category Archives: Journal of International Financial Management & Accounting

Institutional investors’ corporate site visits and aggressive financial reporting

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Abstract

This paper investigates the impact of institutional investors' corporate site visits on financial reporting aggressiveness. While prior research has shed light on the monitoring impact of institutional shareholding on firms' financial reporting practices, institutional investors' preference regarding financial reporting remains unclear. Using a sample of Chinese firms listed on the Shenzhen Stock Exchange from 2012 to 2019, we find that institutional investors' on-site visits significantly increase financial reporting aggressiveness of hosting firms. The on-site visit effect is more salient in firms that are more sensitive to the influence of institutional investors, for example, firms with a less powerful chief executive officer, financially constrained firms, and firms operating in competitive industries. Our study highlights that under a setting of weak minority shareholder protection such as in China, managers are likely to recognize revenue aggressively to please powerful shareholders who paid intensive attention to them.

International takeover laws and corporate cash holdings

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Abstract

We examine the impact on corporate cash holdings of international merger and acquisition (M&A) laws, which facilitate corporate takeovers. We use the staggered enactment of M&A laws from 1992 to 2005 and a sample spanning 34 jurisdictions, and find that levels of corporate cash holdings increase after passage of M&A laws. We also find that firms with better operating performance, higher earnings volatility, higher P/E ratio, and in jurisdictions with high M&A intensity hoard more cash after the enactment of M&A laws. These firms decrease dividends and capital expenditure and increase cash-based acquisitions in the post-M&A law period. Additional analysis shows that the effect is manifested in the subsample of firms in jurisdictions with better institutional environments. Lastly, we find that investor valuations of cash holdings decrease after the enactment of M&A laws. Collectively, our results suggest that managers hoard cash to finance M&A activities after the enactment of M&A laws, driven by the motive of empire-building, and that cash hoarding behaviors are viewed by investors as value-decreasing.

Are institutional investors colluding with manipulators?

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Abstract

This paper examines the trading behavior of institutional investors in Taiwan before, during, and after a manipulation event and determines whether institutional investors benefit from their trading behavior during the period from the year 2000 to 2020. We find that stocks with a low turnover and small market capitalization are the main targets of price manipulators. In addition, the stock price of manipulated firms increases from the start date of the manipulation event, peaks at the end of the event, then falls after the event. Foreign institutions collude with manipulators to exaggerate stock prices for self-benefit. In contrast, securities dealers counter the trading behavior of manipulators and act as market stabilizers, causing them to suffer losses. Moreover, foreign institutions earn higher returns on stocks of manipulated firms with a low turnover during and soon after manipulation; however, they earn a higher return on stocks of manipulated firms with a high turnover in the long run after manipulation.

IPO performance of portfolio ventures funded by impact investors versus venture capital investors

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Abstract

With the global rise of impact investments to achieve societal goals, an increasing number of new ventures that aim to create societal impact now seek to go public. However, while many conceptual studies suggest that impact investors are less likely to pursue financially oriented exit plans in exchange for generating societal impact, there is little empirical evidence to back up this claim. Using a propensity score matching approach, we draw on data from Crunchbase and empirically compare the initial public offering (IPO) performance of a large sample of 3398 investments by impact investors with 3398 investments by matched venture capital (VC) investors. We find that impact investor investments are less likely to lead to an IPO than VC investments. Besides, our results indicate that syndication by impact investors increases the likelihood of an IPO. This suggests that companies funded by impact investors benefit more from syndication than their VC-funded counterparts. Our findings have practical implications for impact investors, portfolio ventures, and policymakers.

Spillover effects within supply chains: Evidence from Chinese‐listed firms

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Abstract

There is increasing attention on information transfers along supply chain partners for firm (extreme) events. This growing literature finds spillover effects following certain types of firm events. Using data from credit rating actions of Chinese-listed firms over the period between March 2007 and May 2020, we examine the spillover effects of supply chains by focusing on the market reactions of event firms to the action announcements. We find strong evidence of spillover effects driven by the market reactions of event firms, which are enhanced through information diffusion channels as supply chain partners receive more investor attention. Moreover, the effects are stronger when event firms' market reactions are negative, event firms are non-stated-owned, the industry concentration of event firms is higher, or the supplier-customer business relationship is closer. Overall, these findings highlight the role of investor attention and network characteristics in supply chain spillovers.

National culture and the revenue‐expense matching

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Abstract

Prior studies on the link between country-level cultural aspects and firms' arbitrary accounting practices are scant, and they show mixed results. To gain more insight about the impact of national culture on earnings characteristics, we exploit the matching concept between revenues and expenses, which well reflects managerial estimation and discretion in earnings quality. Using a large sample of 57 countries over the period 1989–2012, we find that (1) the economic association between revenues and expenses becomes stronger in firms from collectivistic and high uncertainty-avoidant countries, (2) the impact of these dimensions of national culture on the matching is more salient for firms from countries characterized by a higher level of accrual accounting, a greater proportion of special-items, and limited openness, and (3) the cultural impact on matching is mainly driven by the correlation between revenue and discretionary expense (i.e., selling, general, and administrative expense). These findings are consistent with the view that national culture plays an informal governance role to influence firms' discretionary accounting choices.

What drives firms’ commitment to fighting corruption? Evidence from the UK

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Abstract

The recent leak of the FinCEN files has highlighted the widespread presence of corruption in developing and developed economies, including the UK. Accordingly, this study aims to investigate the factors that drive companies to implement measures for preventing corruption in developed countries using FTSE 350 nonfinancial firms. Specifically, the research examines the influence of corporate social responsibility (CSR) commitments, board structure, and shareholding structure on adopting strategies, policies, and procedures aimed at countering corruption. Drawing upon agency, stakeholder, and legitimacy theories, our empirical evidence supports that CSR commitments and board independence positively influence firms' engagement in anticorruption measures. Conversely, institutional and managerial shareholdings are found to have a negative association with firms' efforts to combat corruption. In addition, the study shows that the effect of board characteristics became more pronounced following the enactment of the UK Bribery Act 2010, indicating risk-averse behavior. Various models, including cross-sectional and two-stage least squares (2SLS), are employed to analyze the data. Our findings have significant implications for understanding the complex relationship between CSR, corporate governance, and the ethical infrastructure of organizations. Ultimately, our results provide valuable insights for policymakers, companies, and other stakeholders in developing effective strategies, policies, and procedures to combat corruption activities.

Does the famine experience of board chair hamper innovation?

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Abstract

This study examines whether and how the famine experiences of board chairs influence the innovation of their firms. Results using a sample comprising 8882 firm-year observations from Chinese firms during the period 2003 to 2017 reveal that the board chair's famine experience has a negative effect on innovation. This negative effect is strengthened by famine intensity and high uncertainty. The obtained results are robust to alternative measures, endogeneity issues, omitted variables, and sample selection bias. Additional analyses showed that the relationship between board chair's famine experience and innovation is mediated by cash holdings and R&D investment. The overall results contribute to imprinting theory by explaining that early-life famine experiences of board chairs create survival threat imprints among them, eventually affecting their later-life behaviors. The findings also provide implications by highlighting how the early-life traumatic experiences of executives adversely influence their firms outcomes.

Regulating the banking sector to support credit access: Evidence from small business

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Abstract

This study investigated the effectiveness of regulatory interventions in mitigating the harmful effects of financial crises on small firms. We examine the impact of a support factor implemented by European policymakers on Italian micro-, small-, and medium-sized enterprises (MSMEs) between 2007 and 2017. The analysis uses a difference-in-differences approach to assess the credit conditions of these firms. Contrary to expectations, our results show that MSMEs in Italy continue to face credit constraints even after the introduction of the support factor. In contrast, we find that structural factors and portfolio effects play a more important role in promoting favorable credit conditions for small firms. Our results highlight the importance of considering these factors in conjunction with regulatory interventions to achieve better outcomes. This study has implications for policymakers and stakeholders, particularly in assessing the appropriateness of extending support factors for different policy purposes.