Board monitoring, product market competition and firm performance

2019 ◽  
Vol 27 (4) ◽  
pp. 1036-1052 ◽  
Author(s):  
Monika Singla ◽  
Shveta Singh
Keyword(s):  
Firm Value ◽  
Market Competition ◽  
Product Market ◽  
Business Group ◽  
Product Market Competition ◽  
Governance Mechanisms ◽  
Content Type ◽  
Board Monitoring ◽  
Moderating Role

Purpose This paper aims to analyze the monitoring role of board and product market competition in relation to firm performance. Further, this paper analyzes the moderating role of product market competition in influencing the board monitoring and firm value relationship in the context of an emerging economy, India. Design/methodology/approach A large sample of 3,854 firm-year observations has been used over a period of 10 years (2007-2016). Industry and year-fixed effect regression methodology has been used to test the hypothesized relationships. Findings The empirical findings indicate that board monitoring adds negatively to the firm value. The results also indicate that product market competition bears an insignificant moderating effect on the effectiveness of board monitoring in India. However, a more in-depth analysis reveals that product market competition complements the weak board monitoring of business-group firms. Further, the effectiveness of the board monitoring (which is relatively stronger in business-group firms) is weakened by the increased level of product market competition for stand-alone firms. Research limitations/implications A significant negative effect of board independence on the firm value raises the effectiveness of various policies advocating the board independence to strengthen the governance structure of the firms. The findings relating to the moderating role of product market competition for the business-group and stand-alone firms are helpful in understanding the governance behavior of the firms in relation to the external product market competition. Originality/value External governance mechanisms such as the market for corporate control and product market competition have been described as significant corporate governance mechanisms. However, the empirical efficacy of these governance mechanisms has not been explored in a greater detail in the context of the emerging markets. This study aims to address this research gap.

Capital structure, competitive intensity and firm performance: evidence from Pakistan

2019 ◽  
Vol 16 (5) ◽  
pp. 796-813 ◽  
Author(s):  
Naveed Ahmed ◽  
Talat Afza
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Market Competition ◽  
Product Market ◽  
Debt Financing ◽  
Product Market Competition ◽  
Competitive Intensity ◽  
Content Type ◽  
Moderating Role

Purpose The purpose of this paper is to explore the moderating role of competitive intensity between the existing relationship of capital structure and firm performance. Design/methodology/approach Using the balanced panel data of listed non-financial firms of Pakistan, the present study adopts both the panel and OLS estimation techniques to draw the inferences. Findings The results exhibit that high debt ratio is harmful for the accounting performance of the selected sample firms of Pakistan. In addition, product market competition negatively moderates the relationship between capital structure and firm performance which suggests that high product market competition can be used as a substitute of debt financing to align the interests of a firm’s managers and shareholders. Practical implications The findings of the research provide evidence for the policy makers/regulators that the sample firms should discourage the high debt financing in the presence of competitive intensity in the product marketplace. Originality/value The core contribution of the current research is to examine the moderating role of product market competition on the leverage–performance relationship because, to the best of the authors’ knowledge, no single study has previously explored this relationship in the context of Pakistan.

Corporate governance, product market competition and firm performance: evidence from Iran

Humanomics ◽  
2017 ◽  
Vol 33 (1) ◽  
pp. 38-55 ◽  
Author(s):  
Mahdi Moradi ◽  
Mohammad Ali Bagherpour Velashani ◽  
Mahdi Omidfar
Keyword(s):  
Corporate Governance ◽  
Board Of Directors ◽  
Market Competition ◽  
Product Market ◽  
Research Literature ◽  
Product Market Competition ◽  
Governance Mechanisms ◽  
Management Performance ◽  
Content Type ◽  
The Board Of Directors

Purpose The purpose of this study is to investigate the effect of product market competition and corporate governance on firm’s management performance in the Tehran Stock Exchange market. According to the research literature, the governance mechanisms used in this study consist of ownership structure, structure of the board of directors and capital structure. In addition, Herfindahl–Hirschman Index and market size were used to measure the product market competition. Design/methodology/approach This study used one selected sample among the firms in the capital market of Iran from 2004 to 2012. Findings The results of this study indicated that there is a significant relation among the major governance mechanisms (including ownership concentration, independence of the board of directors and debt ratio) and product market competition and management performance. The findings of this study also showed that product market competition is effective on the relation between corporate governance and the performance, and this is what has been ignored in most of the conducted studies. Originality/value In general, the results of this study supported the idea that product market competition is effective on implementation and efficiency of governance mechanisms.

Agency problems and the value of advertising expenditures in an emerging market: role of product market competition

2020 ◽  
Vol 46 (9) ◽  
pp. 1123-1143
Author(s):  
Omar Farooq ◽  
Zakir Pashayev
Keyword(s):  
Positive Impact ◽  
Emerging Market ◽  
Market Competition ◽  
Agency Problems ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Financial Firms ◽  
The Impact

PurposeThis paper documents the impact of product market competition on the value of advertising expenditures.Design/methodology/approachThe authors use the data for non-financial firms from India and the pooled regression procedure to test their arguments during the period between 2009 and 2018.FindingsThe results show that advertising expenditures of firms operating in sectors with relatively high competition are more valuable than advertising expenditures of firms operating in sectors with relatively low competition. The results of the study are robust across various proxies of advertising expenditures and firm performance. Furthermore, the results also show that the positive impact of product market competition on the value of advertising expenditures is confined only to firms that already have lower agency problems.Originality/valueThe results of the study highlight the importance of product market competition on the value of advertising expenditure in the emerging market setting, where agency problems are supposed to be high.

Product market competition, cash flow and corporate investments

2018 ◽  
Vol 44 (2) ◽  
pp. 207-221 ◽  
Author(s):  
Hussein Ali Ahmad Abdoh ◽  
Oscar Varela
Keyword(s):  
Cash Flow ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Growth Firms ◽  
Capital Spending ◽  
The Difference ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects. Design/methodology/approach The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method. Findings The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms. Practical implications The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency. Originality/value Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

Modeling product market competition and reporting quality: the transitional economy of China

2017 ◽  
Vol 43 (2) ◽  
pp. 154-166 ◽  
Author(s):  
Amjad Iqbal ◽  
Zia-ur-Rehman Rao ◽  
Muhammad Zubair Tauni ◽  
Khalil Jebran
Keyword(s):  
Market Competition ◽  
Reporting Quality ◽  
Product Market ◽  
Transitional Economy ◽  
Product Market Competition ◽  
Absolute Level ◽  
Content Type ◽  
The Absolute

Purpose The purpose of this paper is to examine the role of product market competition in shaping a firm’s reporting quality (RQ). Design/methodology/approach This research uses an aggregate measure of a firm’s RQ, considering both the absolute level of discretionary accruals (DA) and the quality of accruals, using modified Jones model and Francis et al. (2005) accruals quality model, respectively. Whereas, the Herfindahl-Hirschman index and the Lerner index are used to measure product market competition. Further, this study considers the transitional economy of China and employs panel data estimation techniques for testing the hypothesized relationships. Findings This study finds that firms operating in more competitive industries are associated with higher RQ. This association still prevails when analysis is done using the component measures of RQ (i.e. the absolute level of DA and the quality of accruals). Overall, the empirical results provide evidence on the disciplining role of product market competition among Chinese firms. Practical implications Given the complex governance structures and specific kind of agency problems in Chinese corporations, this study suggests that product market competition may play an external disciplining role to improve the corporate information environment. Originality/value This research explores the role of product market competition for a firm’s RQ in Chinese-listed companies, while the prior studies on the same topic are mostly from the developed countries.

Competition and exposure of returns to the C-CAPM

2018 ◽  
Vol 35 (4) ◽  
pp. 525-541
Author(s):  
Hussein Abdoh ◽  
Oscar Varela
Keyword(s):  
Market Competition ◽  
Systematic Risk ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Capm Beta ◽  
The Relationship ◽  
Consumption Fluctuations ◽  
Tariff Reductions

Purpose This study aims to investigate the effect of product market competition on the exposure of firms’ returns to consumption fluctuations (C-CAPM beta). Design/methodology/approach The C-CAPM beta comes from a regression of a stock’s returns against consumption growth, with controls for the Fama–French three factors and momentum. The Herfindahl–Hirschman index of concentration measures competition, with other measures like deregulation and tariff reductions used for robustness tests. Industries are categorized using different SIC digits, with the NAICS measure used for robustness tests. The C-CAPM beta is regressed to competition, with appropriate control variables, to find its relationship. Findings Higher levels of competition reduces the C-CAPM beta. The results are consistently robust to different measures of product market competition and industry identification. Practical implications Product market competition influences the sensitivity of systematic risk, as measured by the C-CAPM beta, to consumption, such that higher levels of competition reduce systematic risk. Originality/value This research contributes to a literature that admittedly is still murky, as the relationship between competition and systematic risk is still unsettled. No study (to the authors’ knowledge) examines the effect of competition on firms’ exposure to consumption. This research adds to the literature on the role of competition in risk, specifically with respect to consumption.

Accounting for derivatives and risk management activities

2016 ◽  
Vol 24 (1) ◽  
pp. 82-96 ◽  
Author(s):  
Abiot Mindaye Tessema
Keyword(s):  
Risk Management ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Management Behavior ◽  
Content Type ◽  
Derivative Instruments ◽  
Sfas 133 ◽  
The Impact

Purpose – The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies provide mixed evidences on the economic consequences of mandatory derivative instruments ' recognition and disclosure. This paper aims to provide empirical evidence on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. More importantly, this paper aims to investigate the role of product market competition on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. Design/methodology/approach – This paper tests the author ' s hypotheses using the fixed-effects estimation technique, where it includes firm dummies in all the regressions. This approach enables to control for unobserved firm effects (fixed effects) on firms’ risk-management behavior that are assumed to be constant through time but vary across firms. Findings – The author finds that mandatory recognition and disclosure of derivative instruments and hedging activities, on average, decreases firms’ market rate risk exposure. This finding suggests that after the implementation of the recognition and disclosure of derivative instruments and hedging activities required by Statement of Financial Accounting Standards No. 133 (SFAS 133), firms engage in more prudent risk-management activities to mitigate the potential cost of earnings volatility imposed by the standard. However, the decrease in market rate risk exposure is lower when the level of product market competition is higher. This finding is consistent with the idea that the recognition and disclosure of derivative instruments and hedging activities required by SFAS 133 unintentionally forces firms in competitive industries to engage in significant risk-taking. The result suggests that more disclosure in risk management may change risk-management incentives in undesirable ways if firms face the threat of entry in their product markets. Practical/implications – The results provide a new understanding on the role of product market competition on the effectiveness of mandatory derivative instruments ' recognition and disclosure. The findings imply that standard setters should take product market competition into consideration before making derivative instruments and hedging activities ' recognition and disclosure mandatory for all firms. Originality/value – The paper contributes to the accounting literature by providing a new insight into the moderating role of product market competition in the accounting recognition and disclosure regulation and firms’ reporting behavior relation. Moreover, the paper extends the current literature on the effects of SFAS 133 on risk-management activities and sheds light on the impact of accounting regulations on firms’ real economic behavior.

Product market competition and corporate investment decisions

2015 ◽  
Vol 14 (2) ◽  
pp. 128-148 ◽  
Author(s):  
Indrarini Laksmana ◽  
Ya-wen Yang
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Investment Decisions ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Term Survival ◽  
Content Type ◽  
Risky Investment

Purpose – The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored. Design/methodology/approach – The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable). Findings – Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations. Originality/value – The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

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