The response of majority employee-owned firms during the pandemic compared to other firms

PurposeThe purpose of this study is to understand how majority employee-owned firms responded to the pandemic compared to firms that were not majority employee-owned. The Employee Ownership Foundation partnered with Rutgers University and the SSRS survey firm to survey ESOP and non-ESOP firms about their responses to the COVID-19 pandemic. A key purpose of the survey was to estimate firm-level changes in employment from mid-January to August (current employment figures were adjusted to August 5 using BLS industry employment trends). The survey also looked at other forms of adjustment and responses to the pandemic as reviewed below. The focus in this study is on the differences between firms that are majority owned by ESOPs and those that are not.Design/methodology/approachThe survey included 247 executives from ESOP Association member companies and 500 executives from an SSRS business panel constructed to be representative of US companies with 50 or more employees. The survey started on August 5 and ended on September 23, 2020.Findings(1) Majority ESOP firms had employment declines from January to August that were on average only one-fourth as large as for other firms. The difference is maintained when controlling for industry membership. (2) Majority ESOP firms were more likely to be declared “essential,” but the lower employment cutbacks among majority ESOP firms remain among essential and non-essential businesses. As essential businesses, majority ESOP firms were more likely receive Paycheck Protection Program or other government pandemic assistance, but both assistance recipients and non-recipients had lower employment cutbacks among majority ESOP firms. (3) The extent of employment cutbacks was higher for non-managers than for managers, but the manager/non-manager gap was higher among other firms than among majority ESOP firms.Research limitations/implicationsThis study supports empirical findings done previously.Practical implicationsThis study suggests to non-EO firms what they can do.Social implicationsThis study suggests strengths of EO firms.Originality/valueA very original and one-of-a-kind dataset.

Public versus Private: New Insights into the Private Company Discount

We examine whether private companies are valued with a discount compared to publicly traded companies. The analysis is based on a comparison of private company transactions with those of public companies. Whereas prior studies build pairs based on industry membership, we match private companies with public counterparts that are comparable in value relevant firm characteristics, i.e. profitability, risk, and growth, to calculate the percentage difference in valuation multiples. We find that private companies are valued on average with a discount on the EBITDA-multiple of 13% compared to their public counterparts. Private companies sell at lower discounts, if the acquirer firm is publicly listed. As size is associated with lower risk, we show that larger private companies sell at lower discounts.

Materiality Thresholds: Empirical Evidence from Change in Accounting Estimate Disclosures

This paper provides empirical evidence on the materiality thresholds adopted in "change in accounting estimate" (CAE) disclosures. We also investigate the characteristics of the disclosing firms and their auditors, as well as the characteristics of the CAEs, such as the effect on income, the accounts affected, and disclosure venue. U.S. GAAP requires firms to disclose a CAE if its effect on the financial statements is deemed to be "material" (ASC 250-50-4). We analyze 4,335 CAE disclosures from 2006 to 2016 and provide the first descriptive evidence of the actual materiality thresholds used for CAE disclosures in practice. Our main finding is that quantitative materiality thresholds for CAE disclosures are significantly lower than conventional materiality thresholds, such as 5 percent of pretax income, and that firms may not only apply quantitative materiality thresholds more conservatively, but that other qualitative considerations play an important role in determining CAE materiality. Our results also show that there exists considerable variation in CAE disclosure across firm size, industry membership, auditor, financial statement account effected and the direction of the effect on income.

Managerial perceptions of the strategic relevance of resources and capabilities and its configuration for firm competitiveness: an exploratory study

Purpose Highlighting the important role of managerial action in resource orchestration, the purpose of this paper is to explore how differences in managerial perceptions about the strategic relevance of resources and capabilities influences the resource configurations in SMEs from an emerging economy context. Design/methodology/approach Using a survey-based instrument that was developed by the Global Competitive project (www.gcp.org), the authors identify 62 Mexican SMEs and perform a cluster analysis based on firm size and age and estimate the competitiveness of the SMEs in each cluster. Findings The results of our cluster analysis indeed suggest the existence of four configurations of SMEs based on the managerial perceptions of the value creating potential of the different resources and capabilities at the firms' disposal. The authors find evidence that managerial perception of the strategic relevance of resources and capabilities at a firm's disposal could influence firm-level competitiveness. Managers of firms that perceive high value or importance to the resources and capabilities, considered the ten resource pillars for competitiveness in this study, are also likely to be the most competitive. Research limitations/implications This study is exploratory in nature and intends to provide an initial and more descriptive analysis of SME competitiveness in an emerging economy context. Additionality, the study does not take into account the effect of industry membership. Originality/value The choice of an emerging economy that are often characterized by asymmetric information and informal rules and regulations provides an original context for an understudied area of research in firm-level competitiveness.

Opening Fields: A Methodological Contribution to the Identification of Heterogeneous Actors in Unbounded Relational Orders

Institutional scholarship studies how individuals coexist and interact with social structures. Organizations and inter-organizational relations within industries are a central focus of these studies. Hence, empirical research has so far largely relied on the observation of individual actors identified by their organizational attributes, and organizations identified by their industry characteristics. The flourishing of new types of social structures has sent an invitation to observe a broader range of actors beyond organizations stricto sensu, and to define the arena of interest beyond the boundaries of industry membership. However, in practice, these remain a favorite starting point of empirical investigations. In this article, we present a new method for the study of organizational fields that facilitates the identification of a large number and varied types of actors in a given field, provides a characterization of the relational structure of the field, and offers a content analysis on different sub-regions of the field. We test the method by replicating a previous study in the field of ‘social impact of nonprofits’, and show how it can contribute to operationalize mechanisms at play in the field. We conclude by noting that the principles of this method can extend beyond the dataset it is originally built on and facilitate a comparative approach to the study of fields. This contribution should enhance the value of the field as a theoretical construct by extending its operational reach.

Did the Adoption of IFRS Affect Corporate Tax Avoidance?

This article investigates whether the adoption of international financial reporting standards (IFRS) affected corporate tax avoidance in Canada. Based on a 3,200 firm-year data set of 400 publicly listed Canadian firms that adopted IFRS and 400 listed US firms, matched one-to-one using propensity score matching, the authors' regression results show that IFRS adoption was followed by a decrease in corporate tax avoidance in Canada, at least in the short run. The study finds a significant increase in cash tax paid in the post-adoption period by Canadian firms that adopted IFRS compared to US firms that used US generally accepted accounting principles. Additional regression results based on a small control sample of Canadian firms that did not adopt IFRS present collaborative evidence. The authors further test specific taxpayer attributes and accounting issues identified in Canada Revenue Agency internal memorandums—in particular, concerns that the adoption of IFRS may increase the risk of tax avoidance. While the authors find evidence that the IFRS firms that engaged in accrual management paid more taxes in the post-adoption period, their analysis provides no evidence of statistically significant relationships between IFRS adoption and tax avoidance associated with revenue management, ownership of foreign operations, industry membership, profitability, or impairment losses or writeoffs. Taken together, the authors' findings present preliminary but strong empirical evidence that IFRS adoption is associated with a decrease in corporate tax avoidance, at least in the short run.

Making investment decisions using XBRL filing data

Purpose The Securities Exchange Commission mandated eXtensible Business Reporting Language (XBRL) filing data provide immediate availability and easy accessibility for both academics and practitioners. To be useful, this data should provide information for decisions, specifically, investment decisions. The purpose of this study is to examine whether the XBRL database can be used with models, developed in previous studies, predicting the directional movement of earnings. The study does not attempt to examine the validity of these models, but only the ability to use the data in the analysis of financial statements based on these models. Design/methodology/approach The study analyzes New York Stock Exchange companies’ XBRL data using a two-step logistic regression model. The model is then used to arrive at the directional movement of earnings between current and subsequent quarters. Additional models are created by dividing the sample into industry membership. Findings The results classified companies as realizing an increase or a decrease in earnings. The final model indicated a significant ability to predict earnings changes, on average about 65 per cent of the time, for the entire model, and 71 per cent, for the industry-based models (higher than those of previous studies based on COMPUSTAT). The investment strategy created average quarterly return between 2.8 and 10.7 per cent. Originality/value The originality of this study is in the way it examines the quality of XBRL data, by examining whether findings from prior research which relied on traditional databases (such as COMPUSTAT) still hold using XBRL data. The use of XBRL allows not only easier and less-costly access to the data but also the ability to adjust the models almost immediately as current information is posted, thus providing a much more relevant tool for investors, especially small investors.

Managerial Ability and Extreme Investment Behavior

This paper examines whether, why, and how managerial ability is associated with firms’ investment behavior. Specifically, we focus on the effect of managerial ability on extreme investment behavior. We define expansionary (contractionary) investments as investing significantly more (less) than what is expected based on the firm’s sales growth and industry membership. The baseline results reveal that more able managers are less likely to make contractionary investments, while they are more likely to make expansionary investments. We further propose and test the strategic investment hypothesis, which predicts that more able managers time the product markets and invest aggressively to ensure firms’ future competitiveness. The evidence is supportive of this hypothesis: More able managers are more (less) likely to make expansionary (contractionary) investments when the industry (1) becomes more competitive, and (2) is at the onset of R&D growth. Moreover, expansionary investments by more able managers are indeed their strategic investments, which lead to superior future abnormal returns.

Tone of earnings announcements in sin industries

Purpose The purpose of this paper is to investigate the empirical association between the tone of earnings announcements and a company’s membership in a sin industry. Design/methodology/approach This study constructs a model of the determinants of earnings announcement tone to examine the impact of sin industry membership on earnings announcement tone. An interaction term between CEO power (CEO–chairman duality) and sin industry membership is used to test whether CEO power moderates the strength of the association. The earnings announcements tone is measured using the spread in the proportion of positive and negative words. The category of sin industry includes not only industries such as tobacco, gambling and alcohol, but also industries associated with emerging environmental, social, and ethical issues (i.e. firearms, oil and cement). Findings The analysis of a sample of US firms from the 1994 to 2013 period shows that the tone of earnings announcement is less optimistic for companies in sin industries, but this association is weaker for companies that are led by powerful CEOs. The results remain robust to alternative definitions of sin industry membership and CEO power (CEO tenure) and to alternative model specifications. Originality/value The findings suggest that although sin companies cannot change the nature of their business, the management of such companies, in general, uses a less aggressive tone in their earnings announcements. These results further investors’ understanding of sin companies’ reporting behavior.

Why Do Firms in Emerging Markets Report? A Stakeholder Theory Approach to Study the Determinants of Non-Financial Disclosure in Latin America

Even though literature studying the determinants of non-financial disclosure (NFD) is pervasive, Latin America has been overlooked in this tradition. In this sense, scholars have not evidenced which factors compel companies in this context to report this information despite its voluntary nature. Drawing on Stakeholder Theory as a basis, we derive eight possible antecedents of NFD from extant literature and test them in a sample of 643 Latin American firms for a 10 year span (2006–2015). Using a logit panel model, our evidence indicates that firm size, market-to-book ratio, systematic risk, and industry membership are factors that pressure companies to report. However, contrary to our conceptual development we find that profitability and regulatory quality inversely affects NFD. This leads us to posit that Latin America is unique in terms of reporting because agency costs may arise when disclosing data and also that feeble regulations could summon firms to fill this void through NFD. We thus contribute to this strand by revealing that stakeholders in this milieu are essentially different than in developed countries, and therefore the underlying reasons to engage in NFD also differ.