Category Archives: Original Article

The role of social relations in supply chain decision‐making: Evidence from China

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Abstract

This study examines the extent to which firms in emerging markets build supply chains around social relationships. Most existing studies contend that companies decide who to buy (sell) products from (to) based on cost–benefit trade considerations of product quality, price, and other factors. We argue that companies make supply chain decisions around social relations to reduce possible risks. We empirically test this conjecture by using data from Chinese municipal party secretaries who served in different places from 2006 to 2017, and the primary customers of listed companies. The results show that after an official move from one jurisdiction to work in another, the firms in the latter jurisdiction will see an increase in customers from where the official previously served. Further investigation reveals that companies that are economically strong, face fierce competition, are state-owned, and are located in areas with low degrees of marketization are more likely to attract customers from the area where the official last served after the new municipal party secretary takes office. Making supply chain decisions based on the social relationships of the secretaries of the municipal party committees does not improve companies' profitability, but doing so will increase the turnover rate of accounts receivable and accounts received in advance.

Corporate risk disclosures in turbulent times: An international analysis in the global financial crisis

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Abstract

Focusing on the global financial crisis period, this paper examines risk disclosure patterns and outcomes in a cross-country setting. We build on prior risk disclosure literature and draw upon institutional and agency-based theoretical lenses to investigate the nature, comprehensiveness, evolution, and quality of disclosed risk information for matched samples of manufacturing firms in the United States, Canada, Germany, and China (Chinese Hong Kong-listed firms). The results show a high degree of heterogeneity in risk disclosure behavior and volume among the sample firms attributed to both institutional differences and corporate reporting incentives in the study period. Furthermore, we document significant associations between risk proxies, risk disclosures, and firm market performance suggesting that corporate risk disclosures are potentially informative and useful to investors and other stakeholders. The paper highlights the important joint role of corporate incentives and legal institutions in interpreting and implementing accounting standards and stock exchange listing regulations around the world and during turbulent times.

The role of financial affiliates in tax avoidance by business groups: Evidence from Korea

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Abstract

This study examines whether financial affiliates within a nonfinancial business group perform certain roles and functions in tax avoidance by other nonfinancial affiliates or the group as a whole. Financial institutions have tax-planning expertise and knowledge and thus may assist other affiliates of the same group in avoiding taxes. In addition, regulatory loopholes leave scope for tax avoidance involving financial affiliates. Using 10,659 firm-year observations from 866 nonfinancial listed firms affiliated with business groups in Korea over the period 2001–2019, I find that firms belonging to nonfinancial groups with financial affiliates exhibit higher levels of tax avoidance than those belonging to nonfinancial groups without financial affiliates. The same result is observed at the group-level tax avoidance as well as the firm-level tax avoidance. In addition, I provide evidence that KFTC-designated business groups subject to tighter regulation engage more in tax avoidance by utilizing financial affiliates in the blind spots of regulation and oversight, and that related-party transactions (i.e., intragroup transactions) are used as avenues for financial affiliates to help other affiliates in tax avoidance. This study is one of the first empirical studies to shed light on the role of financial affiliates of nonfinancial groups in tax planning.

Does SDG disclosure reflect corporate underlying sustainability performance? Evidence from UN Global Compact participants

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Abstract

The 2030 United Nations (UN) Agenda for Sustainable Development has posed unprecedented challenges to businesses to integrate Sustainable Development Goals (SDGs) concerns into their core operations and strategies and improve their transparency on SDG commitment toward investors and other stakeholders. However, prior studies have questioned the significance of firms' SDG disclosure practices, evidencing their inadequacy. Nevertheless, despite the burgeoning SDG disclosure literature, the extent to which SDG disclosure effectively reflects corporate sustainability performance is still unclear. Accordingly, using data from a large panel data set comprising 635 companies from 45 world countries and 8 industry sectors over the period 2016–2020, this study investigates the relationship between corporate environmental, social and governance (ESG) performance and sustainable development goals (SDGs) disclosure. Voluntary SDG disclosure has been measured using a disclosure index based on each company's response to the uniform and well-designed communication on progress (CoP) questionnaire drafted annually by business participants in the United Nations Global Compact (UNGC). Several panel Tobit regressions have been estimated to examine whether the level of SDG disclosure retrieved from the CoPs reflects underlying corporate sustainability performance measured by total and individual ESG scores provided by the Refinitiv Eikon database. The study's findings provide robust empirical evidence that sustainability performance positively affects SDG disclosure, especially through environmental and social channels. Therefore, in line with the voluntary disclosure theory's arguments, this study highlights that superior sustainability performers provide more SDG disclosure to prove their high performance and distinguish themselves in the eyes of investors and other stakeholders.

Value relevance of IFRS 9: The influence of country factors and heterogeneous strengths in the European banking sector

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Abstract

This study focuses on investor reactions to financial instrument recognition and measurement in the banking sector under the new International Financial Reporting Standard (IFRS) 9, Financial Instruments. The research tests the combined value relevance of accounting numbers before and after the mandatory transition to IFRS 9 in Europe. Furthermore, we verify the influence of country factors and heterogeneous strengths on the value relevance of the aforementioned standard. To this end, we adopt a sample consisting of 215 banks listed in Europe, for the years 2015–2020. We find a significant change in the explanatory power of value-relevance regressions in 2015–2017 compared to 2018–2020. In addition, we find that accounting numbers have incremental value relevance in countries characterized by “good” governance indicators and high heterogeneous strength, namely investors pay attention to the strength of the bank authority. This study makes three main contributions to the literature. First, it complements the IFRS 9 literature by providing new evidence. Second, its insights can be used to support investment decisions. Last, the findings help regulators and standard-setters to verify the impact of the new measures delineated by the standard.

Are co‐opted boards socially responsible?

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Abstract

Corporate resolution on environmental, social, and governance (ESG) communication informs firms' environmental commitment, a growing determinant of corporate risk profile perceived by the market. This study examines ESG reporting in the presence of board co-option, a phenomenon that paralyzes the dependency of the board of directors and impairs corporate transparency. Using data from 643 US-listed firms from 2007 to 2018, we investigate the relationship between board co-option and ESG disclosure practices and show that firms with a higher proportion of co-opted directors on board disclose less ESG information, though this relationship diminishes if firms are strong ESG reporters. Further analyses reveal that long-tenure board chairs, high attendance rates at board and audit committee meetings, and independent chairs of audit committees mitigate this adverse effect. In addition, we document an increasing inverse relationship among firms located in more corrupt and Democratic-leaning states and operating in heavy-emitting industries. Our results support the premise that co-opted directors insulate CEOs from ESG reporting pressure and highlight that corporate governance, environmental performance as well as state institutions play significant moderating roles in this relationship.

Interpreting IFRS: The Evolving Role of Agenda Decisions

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This study examines the evolution of the interpretative support provided by the IFRS Interpretations Committee (IC), the interpretative body of the International Accounting Standards Board (IASB), over the period 2002–2019. The study focuses on its most frequent output, agenda decisions (ADs), which can provide guidance that practice has long considered relevant and has been explicitly considered authoritative since 2020. We investigate whether the IC has provided additional guidance and changed the formulation of ADs over time in response to constituents’ criticism from the perspective of legitimacy theory. We find that the IC has progressively added more explanatory material and formulated ADs in a more complete and nuanced manner so as to gain consequential legitimacy by substantially addressing the constituents’ interpretation demands. This evolution points to the growing role of ADs, which strike a balance between difficult to reconcile objectives. Providing more substantial support to constituents’ submissions can be seen as a balancing act between a more explicit shift from principles to rules, and leaving room for local interpretations that could threaten the consistent application of International Financial Reporting Standards (IFRS). In shedding light on the IC's substantial response to the challenges posed by conflicting pressures and objectives, we add to the standard-setting literature by providing evidence-based insights into under-researched areas of IFRS interpretation. We also respond to calls for more policy-oriented research and offer two proposals to enhance the clarity of ADs in the light of their evolving content and increasing relevance.

Bankruptcy Resolution: Misery or Strategy

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Contrary to conventional wisdom, this study reports a positive relationship between large US firms' leverage levels and their likelihood of emerging from Chapter 11 bankruptcy. In anticipation of a favourable court outcome, which allows them to emerge from bankruptcy with reduced debt, firms tend to increase their leverage levels in the years preceding the bankruptcy filing year. This suggests strategic abuse of bankruptcy courts and creditors. Test results suggest that firms start acting strategically up to four years before filing for bankruptcy so that they can emerge with a reduced debt burden at the cost of creditors. Additionally, our study also contributes to the corporate bankruptcy literature by exploring a set of factors (related to the firm, judicial, case, geographic, and macroeconomic characteristics) explaining the likelihood of firms emerging from bankruptcy, and proposing a parsimonious multivariate model that best predicts the likelihood of surviving Chapter 11 bankruptcy.

How Systemic Crises Uproot and Re‐establish Investors’ Acquisition ‘Recipes’: A Temporally Bracketed Qualitative Comparative Analysis

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Abstract

We contribute to the literature on acquisitions by examining how investors’ cognitive schemata codifying their beliefs concerning the attributes of deal success (‘recipes’) are impacted by systemic crises. Specifically, we examine how and why configurations of attributes signalling deal attractiveness, acquirer competence, and acquirer corporate governance shape investors’ reactions to acquisition announcements before, during, and after the Great Financial Crisis of 2008–9. We apply temporally bracketed fuzzy sets qualitative comparative analysis (fsQCA) on a sample of 1867 acquisition announcements. Our results show that investors not only assess acquisition signals holistically, but also that their preferences change when a crisis uproots orthodox deal ‘recipes’ that were once believed to produce successful outcomes. We show that the explorative nature of investor behaviour changes when systemic crises strike, with investors becoming more explorative – as evidenced by a greater number of ‘recipes’ eliciting positive reactions – during crises than before or after. Second, we find that investors do not simply favour deals with a maximum number of safeguards, but rather employ a compensatory logic that matches attributes signalling deal risk with specific assurances. The importance of offering assurances increases following crises, suggesting that investors progressively prefer acquirers to protect their interests.

Minority state ownership and firm performance: Evidence from the Chinese stock market crash in 2015

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We examine the effect of minority state ownership on firm performance using the Chinese stock market crash in 2015. We find that treatment firms with minority state ownership accumulated from governmental purchases of equities experience significant reductions in operating performance. The negative impact is more severe in firms with higher riskiness and firms with less powerful large shareholders. We also find that treatment firms’ risk decreases and their employment increases after minority state shareholders step in, providing supportive evidence on the government's motives of reducing risk and preventing mass layoffs. Further tests reveal the channels through which minority state ownership impedes investment efficiency, productivity, and innovation. The negative impact diminishes when government institutions divest their shares in a timely manner. Overall, our results suggest there are unintended negative consequences of minority state ownership arising from the governmental rescue package in a market crisis.