Why Are Firms with Lower Performance More Volatile and Unpredictable? A Vulnerability Explanation of the Bowman Paradox

2021 ◽  
Author(s):  
Manuel Becerra ◽  
Garen Markarian
Keyword(s):  
Alternative Explanation ◽  
Global Financial Crisis ◽  
Negative Relationship ◽  
Theory Of The Firm ◽  
External Shocks ◽  
Firm Risk ◽  
Accounting Performance ◽  
Risk Return ◽  
Lower Performance ◽  
Inherent Vulnerability

This study investigates the negative relationship between firm risk and accounting performance known in the strategy field as the Bowman paradox, which has been generally attributed to differences across firms in their willingness to take risk. Most research to date relies on the behavioral theory of the firm to suggest that underperformers take greater risks to increase their performance to their reference point. As an alternative explanation, we suggest that the Bowman paradox may result from the inherent vulnerability of low performers to negative external shocks. Our panel analysis of 2,681 U.S. firms from 1980 to 2010 confirms that firms with lower performance within their industry are more affected by negative shocks to the economy. The asymmetric vulnerability of low performers to external events makes their overall accounting performance more volatile and difficult to predict by market analysts, even if all firms have a similar attitude toward risk taking and capabilities to manage change. Our vulnerability explanation is also supported by our empirical analysis of the 2008 global financial crisis as a natural experiment. Furthermore, we find strong evidence of a negative risk–return relationship using different methods to control for their endogeneity.

On Resilience of Constitutions. What Makes Constitutions Resistant to External Shocks?

ICL Journal ◽  
2015 ◽  
Vol 9 (1) ◽  
Author(s):  
Xenophon Contiades ◽  
Alkmene Fotiadou
Keyword(s):  
Global Financial Crisis ◽  
Fundamental Rights ◽  
Constitutional Theory ◽  
External Shocks ◽  
Making Choices ◽  
Legal Responses ◽  
Multiple Pressures ◽  
The Global Financial Crisis ◽  
The Relationship ◽  
Rule Making

AbstractOver the last years resilience has become a key concept in understanding how rule-making choices are made in the context of risk prevention and disaster. This paper probes the relationship between constitutions and resilience in light of the way constitu­tions responded to the shock of the global financial crisis. What makes constitutions able to anticipate and resist external shocks, or bounce back after a disaster that affects core constitutional functions such as the balance of powers and the protection of fundamental rights? The ability of a constitution not only to withstand a severe shock, but also to enable the legal order whose ground rules it sets out to seek recovery within the constrains of these ground rules, lies at the heart of constitutional resilience. Analysing constitutional functions in terms of resilience could offer a new prism through which to look at national constitutions in an increasingly complex globalized environment. The recent crisis, through the interconnectedness of the multiple pressures it put on the legal orders it struck and the multiplicity of legal responses it demanded, allows exploring how resilience thinking can affect constitutional theory.

Toward an Alternative Explanation for the Resource Curse: Natural Resources, Immigration, and Democratization

2011 ◽  
Vol 44 (6) ◽  
pp. 689-718 ◽  
Author(s):  
David H. Bearce ◽  
Jennifer A. Laks Hutnick
Keyword(s):  
Alternative Explanation ◽  
Causal Effect ◽  
Negative Relationship ◽  
Resource Curse ◽  
The Political ◽  
Significant Negative Relationship ◽  
Political Resource ◽  
Per Capita ◽  
Per Se ◽  
Rich Countries

Why do many resource-rich countries maintain autocratic political regimes? The authors’ proposed answer focuses on the causal effect of labor imports, or immigration. Using the logic offered by Acemoglu and Robinson’s democratization model, the authors posit that immigration makes democratization less likely because it facilitates redistributive concessions to appease the population within an autocratic regime. This immigration argument applies directly to the political resource curse since many resource-rich countries tend to also be labor scarce, leading them to import foreign laborers. Consistent with this understanding, the authors find a statistically significant negative relationship between net immigration per capita and democratization in future periods. Their results also show that when controlling for this immigration effect, the standard resource curse variables lose significance in a democratization model. This latter result suggests that much of the so-called resource curse stems not from resource endowments per se but rather from the labor imports related to resource production.

Further evidence on idiosyncratic risk and REIT pricing: a cross-country analysis

2016 ◽  
Vol 29 (1) ◽  
pp. 34-58
Author(s):  
Lin Mi ◽  
Karen Benson ◽  
Robert Faff
Keyword(s):  
Global Financial Crisis ◽  
Statistical Significance ◽  
Idiosyncratic Risk ◽  
Content Type ◽  
Risk Return ◽  
Risk Variable ◽  
The Us ◽  
Country Analysis ◽  
Cross Country ◽  
The Global Financial Crisis

Purpose The purpose of this study is to provide new cross-country evidence on the relation between real estate investment trust (REIT) returns and idiosyncratic risk for samples of listed and unlisted REITs in the US and Australia. Design/methodology/approach Five alternative models with exponential GARCH enhancements were employed, in a Fama-MacBeth (1973) setup. The authors assess the statistical significance of the idiosyncratic risk variable and interpret the outcomes. Findings The results show that listed REITs in the US and Australia demonstrate a positive idiosyncratic risk-return linkage over the long period of January 1980-November 2013 and April 1994-December 2012, respectively. A further examination by sub-period reveals that this positive relation is only evident in the new REIT era (January 1993-September 2001), absent in the vintage era (before December 1992) and maturity era (November 2001-August 2008). The unlisted REITs in both countries show no relation with idiosyncratic risk. Further, the global financial crisis has no effect on the relation between idiosyncratic risk and REIT returns. Originality/value A key motivation of this paper stems from the mixed findings documented in the literature. Also very little research has been done on the idiosyncratic risk-REIT returns linkage in the Australian context. This study offers unique insights from comparisons: Australia vs the US; and listed vs unlisted REITs.

Employment performance in times of crisis

2015 ◽  
Vol 25 (4) ◽  
pp. 371-391 ◽  
Author(s):  
Julian Kahl ◽  
Christian Hundt
Keyword(s):  
Firm Growth ◽  
Global Financial Crisis ◽  
Linear Regression Analysis ◽  
Economic Benefits ◽  
Levels Of Analysis ◽  
External Shocks ◽  
Economic Resilience ◽  
Content Type ◽  
Regional Clusters ◽  
The Impact

Purpose – The purpose of this study is to elucidate the determinants of economic resilience at various levels of analysis. While the economic benefits of regional clustering are well-documented, the impact of external shocks on regional clusters has only recently gained attention. This study explores the antecedents of economic resilience, defined as sustained employment growth, prior to and during the global financial crisis within the German biotechnology industry. Design/methodology/approach – This study combines multilevel linear regression analysis with egocentric network analysis. This allows us to distinguish micro- and context-level effects in the analysis of economic resilience. Findings – The findings of this study indicate that while specialization at the network and context-level is conducive to firm growth prior to the crisis, these configurations seem to be particularly susceptible to external shocks. Conversely, diversity (diversified regional agglomerations and diverse networks) seems to be associated with economic resilience during the crisis. Moreover, we find that economic resilience is connected to adaptive capability at the micro-level, that is, the ability to expand and diversify a firms’ portfolio of network ties in the face of an external shock. Finally, we show that these adaptive processes are facilitated by geographical proximity among collaborating organizations. Originality/value – This study contributes to the existing literature by showing that the antecedents of economic resilience are located at multiple levels of analysis. An important implication of this study is that the examination of the resilience of regional clusters may thus be significantly enhanced by disentangling effects at the firm, network and regional (i.e. context) level.

scholarly journals Managing External Volatility

2020 ◽  
Vol 20 (288) ◽  
Author(s):  
Helene Poirson Ward ◽  
Nathan Porter ◽  
Ghada Fayad ◽  
Itai Agur ◽  
Ran Bi ◽  
...  
Keyword(s):  
Global Financial Crisis ◽  
Policy Instruments ◽  
Unintended Consequences ◽  
External Shocks ◽  
Policy Tool ◽  
Financial Conditions ◽  
Trade Offs ◽  
External Pressures ◽  
Highly Sensitive ◽  
The Global Financial Crisis

Since the global financial crisis, non-reserve-issuing economies (NREs) have been highly sensitive to episodes of external pressures. With monetary policy independence constrained by this sensitivity, many NREs have utilized other policy instruments. This paper confirms the vulnerability of NREs to external shocks and finds that in some circumstances managing such shocks with multiple instruments can both lessen the policy response required from any one policy tool to financial and external shocks and increase the effectiveness of policies in stabilizing macro-financial conditions. Effectiveness however does not always imply appropriateness, which rests on an evaluation of potential trade-offs and unintended consequences.

scholarly journals Caught in the Crosswinds

2020 ◽  
Vol 20 (225) ◽  
Author(s):  
Ghada Fayad ◽  
Helene Poirson Ward
Keyword(s):  
Financial Stability ◽  
Global Financial Crisis ◽  
Flexible Exchange Rate ◽  
External Shocks ◽  
Case Study Approach ◽  
Macroeconomic Conditions ◽  
Study Approach ◽  
Management Measures ◽  
The Global Financial Crisis

A case study approach is used to assess the multi-pronged policy response of seven small financially open economies with flexible exchange rate regimes to external shocks following the global financial crisis. FX intervention was frequently used— including during outflow episodes to prevent disorderly depreciation and preserve financial stability. Monetary policy often considered both financial and external stability. Capital flow management measures were sometimes calibrated symmetrically over the cycle while macroprudential measures were mostly deployed during inflow episodes. Assessment of the macroeconomic conditions paints an inconclusive picture on the benefits or costs of such policies, suggesting the need for further analysis.

scholarly journals The Net Worth Trap: Investment and Output Dynamics in the Presence of Financing Constraints

Mathematics ◽  
2020 ◽  
Vol 8 (8) ◽  
pp. 1327
Author(s):  
Jukka Isohätälä ◽  
Alistair Milne ◽  
Donald Robertson
Keyword(s):  
Global Financial Crisis ◽  
Negative Relationship ◽  
Risk Exposure ◽  
Financing Constraints ◽  
Net Worth ◽  
Empirical Modelling ◽  
The Great Depression ◽  
Preference Functions ◽  
The Global Financial Crisis ◽  
The Relationship

This paper investigates investment and output dynamics in a simple continuous time setting, showing that financing constraints substantially alter the relationship between net worth and the decisions of an optimizing firm. In the absence of financing constraints, net worth is irrelevant (the 1958 Modigliani–Miller irrelevance proposition applies). When incorporating financing constraints, a decline in net worth leads to the firm reducing investment and also output (when this reduces risk exposure). This negative relationship between net worth and investment has already been examined in the literature. The contribution here is providing new intuitive insights: (i) showing how large and long lasting the resulting non-linearity of firm behaviour can be, even with linear production and preferences; and (ii) highlighting the economic mechanisms involved—the emergence of shadow prices creating both corporate prudential saving and induced risk aversion. The emergence of such pronounced non-linearity, even with linear production and preference functions, suggests that financing constraints can have a major impact on investment and output; and this should be allowed for in empirical modelling of economic and financial crises (for example, the great depression of the 1930s, the global financial crisis of 2007–2008 and the crash following the Covid-19 pandemic of 2020).

When capital markets discount R&D expenditures: the problemistic search effect

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dmitri G. Markovitch ◽  
Jonathan O'Brien
Keyword(s):  
Capital Markets ◽  
Design Methodology ◽  
Alternative Explanation ◽  
Theory Of The Firm ◽  
Management Research ◽  
Market Reactions ◽  
Content Type ◽  
High Performing ◽  
Econometric Methods ◽  
Future Performance

PurposeResearch finds that investors initially under-react to increases in R&D intensity. The phenomenon is commonly viewed as mispricing. We draw on behavioral theory of the firm (BTF) to propose an alternative explanation that increased R&D intensity is often indicative of problemistic search in firms. We empirically explore three contextual factors that may help discriminate between mispricing and problemistic search effects when capital markets frown on increased R&D intensity.Design/methodology/approachWe use econometric methods to analyze longitudinal data on 4,561 US manufacturing firms.FindingsWe find that market reactions to R&D investments are consistent with the view that managers often engage in R&D-based search to correct anticipated problems. We show that increased R&D intensity is a stronger indicator of diminished expected future performance for firms with greater inertia, including larger firms and high-performing firms. However, greater R&D intensity is less indicative of problemistic search in slack-rich firms.Originality/valueWhilst the BTF has been used extensively in management research, ours is one of the few studies which link the BTF to stock market phenomena.

Introduction

2019 ◽  
pp. 1-8
Author(s):  
Caroline Krafft ◽  
Ragui Assaad
Keyword(s):  
Economic Growth ◽  
Financial Crisis ◽  
Rapid Growth ◽  
Arab Spring ◽  
Global Financial Crisis ◽  
External Shocks ◽  
Civil Conflicts ◽  
The Global Financial Crisis ◽  
The Arab Spring

After a period of fairly rapid growth for most of the 2000s, Jordan’s economy was exposed to a series of external shocks, starting with the global financial crisis in 2008. This crisis was followed by regional instability brought about by the Arab Spring and civil conflicts in neighboring countries, including Iraq and Syria. These shocks resulted in a dramatic slowdown of economic growth, which dropped to an average of 2.5 percent per annum after 2010, as compared to 6.5 percent per annum from 2000 to 2009 (...

Likely winners and losers in upcoming COVID-19 economic crisis – lessons learned from the GFC

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jan Čadil ◽  
Marek Beránek ◽  
Vladimír Kovář
Keyword(s):  
Global Financial Crisis ◽  
Recovery Phase ◽  
Lessons Learned ◽  
Government Support ◽  
Economic Downturn ◽  
External Shocks ◽  
Content Type ◽  
Shock Impact ◽  
The Global Financial Crisis ◽  
The Impact

Purpose The COVID-19 pandemic and subsequent efforts to contain it have started economic downturn that may even surpass the global financial crisis (GFC). The purpose of this study is to uncover the features of enterprises’ resilience during and after an external shock such as the GFC might be helpful in predicting the shock impact on enterprises and setting proper policy measures for the upcoming COVID-19 crisis. Design/methodology/approach The authors analysed the impact of the GFC on the entrepreneurial population in/of the Czech Republic using marginal effects method on a large random sample of 4,478 enterprises. In this analysis, the authors defined two groups of enterprises – “winners” and “losers” – based on the company’s dissolution and performance indicators. Findings The GFC struck the enterprise population asymmetrically in terms of the enterprises’ characteristics but also in terms of time. Micro and small size companies are the most vulnerable to external shocks such as the GFC. Technological level plays an important role in the recovery phase, especially in the case of manufacturing micro enterprises. Research limitations/implications Although there are differences between the GFC and the COVID-19 crisis, the GFC was the only comparable shock in modern history in its global nature, depth and unpredicted occurrence. It can be expected that the impact on enterprises can be partly similar. Practical implications Government support of micro size companies should be the priority in the upcoming COVID-19 crisis. Supporting the innovation and technology progress might accelerate the recovery phase after the crisis especially in micro companies as well. Originality/value This paper presents interesting insights into the impact of external shocks such as the GFC or COVID-19 on enterprises. It uncovers typical features of “winners” or “losers” of such shocks.

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