Sarbanes-Oxley, agency conflicts and the marginal value of capital expenditure

2019 ◽  
Vol 46 (2) ◽  
pp. 237-253
Author(s):  
Gurmeet S. Bhabra ◽  
Jacob Rooney
Keyword(s):  
Stock Returns ◽  
Firm Value ◽  
Capital Expenditure ◽  
Capital Expenditures ◽  
Agency Conflicts ◽  
Firm Level ◽  
Content Type ◽  
Marginal Value ◽  
Fama And French ◽  
The Impact

Purpose The purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage of the Sarbanes–Oxley (SOX) Act of 2002 and the associated changes to the listing requirements of major stock exchanges. In particular the authors seek to examine potential changes in the market’s assessed value of capital expenditures after the passage of the SOX Act relative to before. Design/methodology/approach The authors employ a difference-in-difference methodology, centred on the year of the passage of the SOX Act to test for the role of governance on the marginal value of capital expenditures. Excess stock returns are calculated by subtracting Fama and French (1993) size and book-to-market portfolio value-weighted returns from the firms’ annual stock returns. Each firm is grouped into one of 25 size and book-to-market portfolios for each year in the sample, with size and the book-to-market ratio proxying for sensitivity to common risk factors in stock returns (Fama and French, 1993). Findings The authors find that markets responded to the change in governance brought about by the new regulation by altering the value of firm-level capital expenditures in a way that is generally consistent with predictions of agency theory. While the overall findings imply a reduction in agency conflicts post-SOX, there is some evidence that certain firms may have suffered excessive costs of compliance, while still others saw managers become excessively risk averse. Research limitations/implications The study has implications related to the efficacy of legislation. Cross-sectional variation in the effect of SOX on the marginal value of capital expenditures suggests that one-size-fits-all legislative approach can have both expected as well as unintended consequences. The study limits its analysis to examining the impact of three significant provisions of the Act. While, the value implications of the Act are largely captured by the selected three, a more comprehensive study could expand on the set of provisions studies to obtain a more granular level impact. Practical implications This research should add to the growing body of the literature examining the effect of SOX on firms’ real activities and decisions, as well as contribute to the debate on whether the Act was beneficial or costly to firms. With particular reference to the impact of capital expenditure on firm value, the research contributes to the sparse literature examining the contribution of capital expenditures to firm value and the role that agency conflicts play in this relationship. Additionally, this research adds to the growing body of the literature that examines the costs and benefits of the sweeping new regulations brought on by the adoption of SOX. Social implications Given the importance of investment policy for economic productivity and growth, the insights provided by findings in this research should benefit lawmakers both within the USA as well as in countries where corporate misconduct and fraud is a concern. Originality/value This is the first study that examines the impact of the SOX Act on the way capital markets value firm-level investment in capital expenditures. Since use of corporate resources by managers is fraught with agency conflicts, the role of SOX in potentially alleviating this conflict as revealed by the tests in this study are very valuable.

Corporate governance mechanisms and corporate investments: evidence from India

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Samridhi Suman ◽  
Shveta Singh
Keyword(s):  
Corporate Governance ◽  
Dynamic Model ◽  
Capital Expenditure ◽  
Agency Problem ◽  
Agency Problems ◽  
Static Model ◽  
Capital Expenditures ◽  
Content Type ◽  
Empire Building ◽  
The Impact

PurposeThe purpose of this paper is to empirically investigate the influence of corporate governance variables relating to the board of directors, audit and ownership on the agency problems that inflict a firm's investments in capital and research and development (R&D) expenditures. This study posits that the R&D investments are inflicted by the agency problem of “quiet life” whereas “empire-building” agency problem affects capital expenditure decisions.Design/methodology/ approachThis study analyses the investment behaviour of non-financial and non-utility firms listed on NIFTY 200 from FY 2009 to FY 2018 using a static and dynamic model.FindingsThe results from the static model suggest that ownership concentration mitigates the agency problem of the “quiet life” that affects R&D expenditures. However, no corporate governance attribute has a significant impact on R&D investments under the assumption of the dynamic model. In respect of capital expenditures, the analysis of static model yields that audits by large auditor firms and usage of non-audit services ameliorate the agency problem of “empire-building”. The results from the dynamic model show that independent boards worsen it. They also continue to provide empirical evidence in favour of large auditors.Originality/valueThis paper contributes to the literature on the corporate governance-investment association by simultaneously examining the impact of multiple corporate governance attributes on the agency problems of “quiet life” and “empire-building” that affect R&D and capital expenditures, respectively, in a static and dynamic context for a sample of Indian firms.

Assessing the impact of dividend policy on the sustainability of distressed firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mina Sami ◽  
Wael Abdallah
Keyword(s):  
Stock Returns ◽  
Dividend Policy ◽  
Dynamic Panel Data ◽  
Fiscal Year ◽  
Policy Management ◽  
Wealth Status ◽  
Firm Level ◽  
Content Type ◽  
Distressed Firms ◽  
The Impact

Purpose The paper uses firm level data for the top listed firms in New York exchange stock over the period 2000–2017. The analysis is mainly based on 237 firms that already experienced losses at the end of the fiscal year. The study aims to use the properties of the dynamic panel data, specifically the methodology proposed by Arenllo and Bond (1991), to fulfill the objectives of the paper. Design/methodology/approach This paper focuses on the dividend policy management of the firms when they experience a loss at the end of the fiscal year. The objective is to examine how such a policy management affects the sustainability of the firm (measured by the future sales and total factor productivity[TFP]) and the wealth of its shareholders (measured by the Stock Returns). Findings The results show that the distressed firms that distribute dividends at the end of the loss period are able to maintain sustainability and to reach more favorable wealth situation of their shareholders relative to the firms who abstain to pay; the dividend policy during periods of loss is still able to send positive signals about the firm in the market; and the dividend policy can be considered as a predictive indicator for a sustainable firm whose shareholders can also predict their capital gains. Originality/value Agreed upon the literature that the firms during the period of crisis are likely to change their dividend policy, this study offers robust evidence that the dividend policy of distressed firms affects their sustainability (measured by sales and TFP) and the wealth status of their shareholders (measured by the Stock Returns).

The impact of industry concentration on the market’s ability to anticipate future earnings

2016 ◽  
Vol 24 (4) ◽  
pp. 443-475 ◽  
Author(s):  
In-Mu Haw ◽  
Bingbing Hu ◽  
Jay Junghun Lee ◽  
Woody Wu
Keyword(s):  
Stock Returns ◽  
Market Power ◽  
Information Transfer ◽  
Positive Impact ◽  
Product Market ◽  
Industry Concentration ◽  
Firm Level ◽  
Content Type ◽  
Future Earnings ◽  
The Impact

Purpose The existing literature has established the importance of industry concentration in explaining firm performance and information environments. However, little is known about whether and how industry concentration affects investors’ ability to anticipate future earnings. This paper aims to investigate this query by identifying and testing two channels, product market power and intra-industry information transfer, through which industry concentration affects the informativeness of stock returns about future earnings. Design/methodology/approach The paper measures the informativeness of stock returns about future earnings by the future earnings response coefficient (FERC)). This study estimates the FERC using a firm-level sample from 38 economies. Findings The authors find that industry concentration significantly enhances investors’ ability to predict future earnings. Further tests show that both product market power and intra-industry information transfer contribute to explaining the positive association between industry concentration and the FERC, with the former playing a more salient role. Finally, the authors show that a country’s effective competition law attenuates the positive impact of industry concentration on the FERC by weakening the economic impact of the two underlying channels. Originality/value This study contributes to the growing literature on the price-leading-earnings relation, industry concentration and international corporate governance.

Does customer satisfaction matter to managers’ earnings forecasts and stock returns?

2018 ◽  
Vol 52 (9/10) ◽  
pp. 2026-2051 ◽  
Author(s):  
Jenny (Jiyeon) Lee ◽  
Youngdeok Lim ◽  
Hyung Il Oh
Keyword(s):  
Customer Satisfaction ◽  
Stock Returns ◽  
Firm Value ◽  
Earnings Forecasts ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Marketing Metrics ◽  
Content Type ◽  
Study Results ◽  
The Impact

PurposeThe purpose of this study is to examine the relevance of American Customer Satisfaction Index (ACSI) to management voluntary forecasts of earnings. The authors further investigate whether the market reacts to such forecasts in respect of satisfaction.Design/methodology/approachThe authors’ econometric models are constructed from previous work in accounting to specify the effect of ACSI on the issuance and optimism of management forecasts. Our model also specifies the impact of management optimism with respect to ACSI on stock returns. The data consisting of US firms in the 2001-2010 is collated from several databases and analyzed using multiple regression procedures.FindingsResults indicate that ACSI is positively associated with the likelihood of issuing management forecasts and boosts management optimism. It is also found that investors react negatively to management optimism that is inherent in forecasts and results from satisfaction.Research limitations/implicationsThe authors’ research findings not only complement prior work on the linkage between customer satisfaction and firm value by incorporating a managerial perspective but also respond to the recent call for further work on how relevant marketing metrics drive organizational decisions and firms’ financial performance. It should be noted that findings are limited to firms that release both a voluntary issuance of management forecasts and ACSI.Practical implicationsThe study results shed light on the justification of marketing expenditures and provide a response to the call for marketing accountability. The study results also enable managers to make better decisions about whether and when to issue a forecast. The authors’ research further calls stakeholders’ attention to the presence of management forecast optimism with respect to satisfaction.Originality/valueDespite the importance of managers as primary information generators and disseminators in the capital markets, there appears to be little discussion on the satisfaction’s relevance to market participants, particularly in relation to the role of managers. Therefore, this investigation is the first to empirically show the relevance of ACSI to management earnings forecasts that have been ignored in the marketing literature.

Corporate governance and the variability of stock returns

2014 ◽  
Vol 10 (4) ◽  
pp. 494-510 ◽  
Author(s):  
Hardjo Koerniadi ◽  
Chandrasekhar Krishnamurti ◽  
Alireza Tourani-Rad
Keyword(s):  
Corporate Governance ◽  
Stock Returns ◽  
Stock Option ◽  
Data Availability ◽  
Firm Level ◽  
Policy Makers ◽  
Content Type ◽  
Governance Quality ◽  
The Impact ◽  
Practical Implications

Purpose – The purpose of this paper is to analyze the impact of firm-level corporate governance practices on the riskiness of a firm's stock returns. Design/methodology/approach – The authors constructed an index of governance quality incorporating best practices stipulated by regulators. The authors employed regression analysis. Findings – The empirical evidence, using an index of corporate governance, shows that well-governed New Zealand firms experience lower levels of risk, ceteris paribus. In particular, the results indicate that corporate governance aspects such as board composition, shareholder rights, and disclosure practices are associated with lower levels of risk. Research limitations/implications – A limitation of the study is that the corporate governance index constructed is somewhat arbitrary and due to limitation of data availability the authors may have excluded some factors such as share trading policy of directors and policies regarding provision of non-auditing services by auditors. The research supports the view that institutional context could have an impact on governance outcomes. The work has three implications for managers, investors, and policy makers. First, the results imply that well-governed firms have lower idiosyncratic risk and that this reduction is most likely due to the reduction in agency costs and information risk. Second, in the absence of features like an active corporate control market and stock option based managerial compensation, managers have little incentives to take on risky projects that increase firm value. Third, the results suggest that the managers of well-governed firms are not more risk averse with respect to investment decisions compared to poorly governed firms. Practical implications – The work has practical implications for managers, investors, and policy makers. Well-governed firms face lower variability in stock returns compared to poorly governed firms. Firms that have independent boards that protect its shareholders’ rights and disclose its governance-related policies experience lower firm-level risk, other things being equal. Originality/value – This study is the first one to examine the impact of a composite measure of corporate governance quality on stock return variability in a non-US setting. The results suggest that firms can use specific corporate governance provisions to mitigate firm-level risk. The findings of the paper are therefore relevant and useful to corporate managers, investors, and policy makers.

How do Islamic equities respond to monetary actions?

2019 ◽  
Vol 14 (4) ◽  
pp. 503-522 ◽  
Author(s):  
Zaheer Anwer ◽  
Wajahat Azmi ◽  
Shamsher Mohamad Ramadili Mohd
Keyword(s):  
Monetary Policy ◽  
Stock Returns ◽  
Strong Impact ◽  
Market Conditions ◽  
Firm Level ◽  
Content Type ◽  
Stock Indices ◽  
Level Data ◽  
Negative Effect ◽  
The Impact

Purpose The purpose of this paper is to appraise the effectiveness of monetary policy actions in variant market conditions for Islamic stocks. These stocks offer ground for a natural experiment as they have restrictions on the line of business and their distinguished capital structure does not allow them to combat the liquidity crisis through the use of leverage. Design/methodology/approach The paper uses the quantile regression approach for a multi-country sample of Islamic stock indices to assess the impact of domestic as well as US expansionary monetary policy on stock returns of Islamic indices at various locations of distribution of returns. Findings It is found that, at lower return levels, an expansionary monetary policy has a negative effect on the returns. In other cases, there is no significant impact of policy rate change on index returns. Research limitations/implications It is more appropriate to use firm level data of Islamic stocks instead of stock indices. However, the information regarding index constituents is not publicly available. Practical implications The paper offers useful information to investors and policy makers. It shows that central banks should improve their credibility for monetary policy to be effective and their policies must be designed keeping in view the strong impact of US rate on global monetary environment. Originality/value This paper provides first empirical evidence of the impact of discount rates on the returns of Islamic stocks in different market conditions.

Abnormal trading around common factor pricing models

2019 ◽  
Vol 12 (4) ◽  
pp. 317-334
Author(s):  
Jiexin Wang ◽  
Xue Han ◽  
Emily J. Huang ◽  
Christopher Yost-Bremm
Keyword(s):  
Stock Returns ◽  
Portfolio Management ◽  
Stock Price ◽  
Common Factor ◽  
Trading Strategies ◽  
Short Term ◽  
Content Type ◽  
Portfolio Strategies ◽  
Fama And French ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of factor-based trading strategies on pricing and volume. Design/methodology/approach The authors employ a regression discontinuity approach to identify abnormalities in volume or pricing around expected portfolio changes. In addition, the authors characterize more granular effects on pricing and volume as a result of portfolio re-classification through Fama and Macbeth (1973) regressions. Findings The authors find that firms which are predicted to transfer among the factor portfolios of Fama and French (1993) exhibit strong and statistically significant short-term variation in stock price and volume. Short-term returns around the cutoff values comprising SMB and HML tend to be temporarily high if the firm is predicted to move into a long component of a factor-mimicking portfolio, and temporarily low if moving into a short component. Similar results are apparent when examining movement in and out of the 25 size and book-to-market sorted test asset portfolios. Practical implications The use of portfolio strategies formulated on the basis of sorting procedures, while once upon a time a niche market in the portfolio management industry, is now ubiquitous. The results of this study raise interesting methodological questions about the pricing implications arising from these common methodologies. Originality/value This study makes a number of contributions. First, it contributes to the idea that the publication or dissemination of trading strategies or – more generally – common portfolio sorting methods, leads to effects on pricing and volume through commonly motivated trading pressure. In other words, recipe-like discoveries of advantageous trading strategies lead to a synthetic creation of demand. Second, by noting that a lot of factor-focused trading activity begins around July and August of each year, the study relates to existing literature which documents seasonal variation in stock returns and volume. The findings raise questions about what guides institutional investors’ portfolio allocation decisions and whether these are optimal in aggregate.

CEO inside debt and the value of excess cash

2018 ◽  
Vol 19 (2) ◽  
pp. 225-244 ◽  
Author(s):  
Mohamed Belkhir ◽  
Sabri Boubaker ◽  
Kaouther Chebbi
Keyword(s):  
Firm Value ◽  
Cash Holdings ◽  
Future Research ◽  
Content Type ◽  
Marginal Value ◽  
Inside Debt ◽  
Excess Cash ◽  
Fama And French ◽  
The Relationship ◽  
Practical Implications

PurposeThe purpose of this paper is to investigate the relationship between corporate debt-like compensation and the value of excess cash holdings.Design/methodology/approachThe sample comprises 876 US firms covered by ExecuComp over the period 2006-2013. The authors apply the valuation regression of Fama and French (1998) to examine the marginal value of excess cash as a function of CEO inside debt holdings.FindingsThis paper proposes one hypothesis. The results constitute evidence that the value of excess cash to shareholders declines as CEO inside debt increases. More interestingly, excess cash holdings contribute less to firm value when shareholders expect their value to be destroyed due to managers’ conservative behavior.Research limitations/implicationsThe sample comprises only US firms, owing to a lack of firms data from other countries. It would be interesting to conduct future research on an international sample.Practical implicationsThis paper contributes to a deeper understanding of investor valuation of excess cash in the presence of CEO inside debt. The findings complement previous studies on US firms by confirming the existence of a relationship between the agency costs of debt and firm policy decisions.Originality/valueThis work is, to the best of the authors’ knowledge, the first to examine the relationship between debt-like compensation and excess cash valuation, and it supports the view that the conflict between shareholders and debtholders largely affects firm cash policy, and hence, cash valuation.

scholarly journals Do overconfident CEOs stay out of trouble? Evidence from employee litigations

2019 ◽  
Vol 11 (4) ◽  
pp. 441-467
Author(s):  
Blake Rayfield ◽  
Omer Unsal
Keyword(s):  
Firm Value ◽  
Labor Relations ◽  
Litigation Risk ◽  
Firm Level ◽  
Data Set ◽  
Content Type ◽  
National Labor Relations Board ◽  
Governance Practices ◽  
Case Outcome ◽  
The Impact

Purpose The authors study the relationship between CEO overconfidence and litigation risk by examining employee-level lawsuit data. The purpose of this paper is to better understand the executive characteristics that potentially affect the likelihood of employee litigations. Design/methodology/approach The authors employ a unique data set of employee lawsuits from the National Labor Relations Board – “Disposition of Unfair Labor Practice Charges” – which includes complaints, litigations and decisions. The data spans the years 2000–2014. The authors employ the option-based CEO overconfidence metric of Malmendier et al. (2011) as the primary explanatory variable. Findings The authors find that overconfident CEOs are less likely to be subjected to labor-related litigations. The authors document that firms with overconfident CEOs have fewer lawsuits opened by both labor unions and individuals. The authors then investigate the effect of employee litigations on firm performance to understand why overconfident CEOs are less prominent among lawsuits. The authors show that litigations lower corporate investment and value of capital expenditures for responsible firms, which may limit overconfident CEOs’ ability to invest. Therefore, the results may reveal the fact that overconfident CEOs may prefer to align with the interest of their employees to avoid reduced investment opportunities. Originality/value The paper makes three main contributions. First, it provides the first large-sample evidence on CEO overconfidence and labor relations. The authors employ data on firm-level labor litigation that contains both the case reason and case outcome. Second, this paper adds to the growing literature of CEO overconfidence and governance practices in the workplace. Finally, the study highlights the importance of employee treatment and explores the impact of labor lawsuits on firm value.

Information risk, stock returns, and asset pricing: Evidence from China

2017 ◽  
Vol 30 (4) ◽  
pp. 379-394 ◽  
Author(s):  
Raheel Safdar ◽  
Chen Yan
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Empirical Literature ◽  
Firm Level ◽  
Cross Sectional ◽  
Market Pricing ◽  
Content Type ◽  
Information Risk ◽  
Accruals Quality ◽  
Three Factor

Purpose This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China. Design/methodology/approach The authors used accruals quality (AQ) as their measure of information risk and performed Fama-Macbeth regressions to investigate association of AQ with future realized stock returns. Moreover, two-stage cross-sectional regression analysis was performed, both at firm level and at portfolio level, to test if the AQ factor is priced in China in addition to existing factors in the Fama French three-factor model. Findings The authors found poor AQ being associated with higher future realized stock returns. Moreover, they found evidence of market pricing of AQ in addition to existing factors in the Fama French three-factor model. Further, subsample analysis revealed that investors value AQ more in non-state owned enterprises than in state owned enterprises. Research limitations/implications The study sample comprises A-shares only and the generalization of the findings is limited by the peculiar institutional and economic setup in China. Originality/value This study contributes to market-based accounting literature by providing further insight into how and if investors value information risk, and it seeks to fill gap in empirical literature by providing evidence from the Chinese capital market.

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