The Business Review

The Impact of Firms’ Aggregate Risk on Long-Run Performance:

IPO Versus Matched Non-IPO equities

Dr. Marie-Claude Beaulieu, Université Laval, FSA, Qc, Canada

Dr. Habiba Mrissa Bouden, Université Laval, FSA, Qc, Canada

ABSTRACT

This paper focuses on the long-run performance of issuing versus comparable non-issuing firms. While most of the previous literature only accounts for the common risk factors to compute abnormal returns, this paper investigates a new approach that also considers the firms’ aggregate volatility processes to measure the long-run performance of their calendar-time portfolios. Our findings show that the firms’ aggregate risks differently affect IPO and comparable non-IPO equities’ returns during the first three years of IPO trading. Our results also reveal that when controlling for the portfolio’s volatility risk, the apparent underperformance of IPOs with respect to non-issuing firms is a reflection of a lower response to the volatility risk of IPOs relative to their matched non-issuing peers. Previous research on initial public offerings (IPOs) reveals a long-term anomaly of IPO underperformance (Ritter, 1991 and Loughran and Ritter, 1995), which challenges our understanding of asset pricing. These authors report that IPOs underperform the market (or/and similar non-issuing firms) in the long-run when they compare IPOs’ returns to common market index returns¹ (and/or long-run returns of comparable firms²). Behavioral³, financial⁴, agency problems⁵ and IPO market timing⁶ are proposed explanations for this phenomenon. Meanwhile, empirical studies on IPO long-run performance present mixed evidence. Brav and Gompers (1997) and Gompers and Lerner (2003) did not find evidence of long-run IPO underperformance. Barber and Lyon 12 (1997), Kothari and Warner (1997) and Gompers and Lerner (2003) documented that the IPO long-run performance depends on the methodology used to measure abnormal returns, which could explain the mixed evidence in the behavior of IPO performance. We note that the previous IPO literature does not consider firm risk in the measurement of IPO abnormal returns. Previous studies, such as Ritter (1991), often use the cumulative abnormal returns⁷ (CARs) and the buy-and-hold abnormal returns⁸ (BHARs) that are used in classic event studies.

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The Value of Creativity: Creativity as a Valuable Form of Symbolic Capital in Organizations

Dr. Frederik Hertel, Aalborg University, Aalborg, Denmark

Dr. Irina A. Weisblat, Ashford University, San Diego, CA

ABSTRACT

Previous analysis (Hertel, 2015) indicates that workers doing industrial cleaning in the food industry are forced to be creative in their everyday organizational life. Hertel and Wicmandy (2017) show that everyday creativity becomes a tool for reducing time consumption and, thereby, enables the workers to solve additional cleaning tasks that were not initially included in their work load. According to Richards (2010), there is a lack of scientific methods for assessing everyday creativity. We conducted a case analysis in order to clarify whether such creativity can be compared to and understood as a new kind of symbolic capital originally explored by Bourdieu (1990, 2002) and Portes (1998). It is our hypothesis that a method for valuing everyday creativity must be based on a three-dimensional model involving: the economic contribution, the social impact, and the character of the creativity involved. The first dimension is economic and it aims to rate the contribution to the production of surplus. The second dimension intends to rate the social impact of the everyday creativity produced. The third dimension is the character of the creativity and it rates the complexity of the everyday creativity involved. The aim of this article is to contribute to the development of a method for valuing everyday creativity. Before addressing this question, we would like to illustrate why it is of interest to deal with valuing creativity. Our interest in the subject started when we were working on the case study (Hertel & Wicmandy, 2017) conducted in a company specialized in industrial cleaning in the food industry. We realized that industrial cleaners must be considered creative. However, it was not a big “C” (Richards, 2007) but a small “c”, also known as everyday creativity. We studied the team of cleaners composed of a mix of ethnic Danes with traditional attitudes and migrants from the Eastern European countries. The study began three years ago and the purpose of it was to understand the management style and methods used in developing strong teams of industrial cleaners. We observed the team manager who faced several challenges of daily operations. The case study provided a wealth of ethnographic material about the everyday work environment and team management. Before conducting the case study, we had an expectation that the team members received on-the-job-training and followed some specific instructions when performing their job duties. What we actually saw was a management style that allowed each individual team member to plan their work, execute the work activities, and evaluate the work performed.

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Is Corporate Social Responsibility a Guarantee of Financial Performance?–

With the Multi-faceted Analysis on FTSE Global Index as an Example

Dr. Ming-Jian Shen, Takming University of Science and Technology, Taiwan

ABSTRACT

Is there an inevitable contradiction between the pursuance of shareholder’s profit maximization and corporate social responsibility behaviour? This study uses the panel data model to analyse the FTSE Global Index of constituent stocks, based on various aspects such as industry characteristics, scale, country difference, and taxation; explores, in detail, the relationship between the CSR practised by the corporation, its levels, and financial performance as well as validates whether or not the implementation of CSR results in a tax-saving effect for the business and a time lag effect on financial performance. The results of the empirical analysis aid in the clarification of the perceived shortfall between CSR and performance in the past; for example, research showed that there is a variation in the performance of the return on assets and return on equity in financial industries, and verified that CSR indeed has a tax-saving and lag effect on financial aspects. Overall, the empirical results tend to support the hypothesis on the influence brought about by society and the implementation of CSR results in a positive influence on financial performance. The subprime mortgage crisis in the United States in late 2007 and the filing of a formal request for bankruptcy protection in September 2008 by Lehman Brothers, an American investment company, led to a financial tsunami, the need to rebuild the global economy and a significant decline in economic growth. This was mainly due to the real estate bubble and high financial leverage on financial engineering operations, affecting the economy all over the world. Significant losses were experienced by investors which led them to conduct protests in the streets and accuse the banks of violating the role of a virtuous keeper. As a channel for trading financial commodities, the banks aimed to achieve optimal profits but neglected risks and the obligation to provide honest information to its investors, thus creating a lose-lose situation for both the investors and the banks in a time when the economy was declining, which shows the importance of social responsibility between financial credits and investor protection.

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Creating Synergies in Cross-Border M&A – Case Studies of Japanese Outbound Acquisitions

Dr. Shigeru Matsumoto, Professor, Kyoto University, Japan

ABSTRACT

The success or failure of mergers and acquisitions (M&A) is determined by the synergies the company generates after the acquisition. In this paper, we explore the mechanism of synergy creation from overseas M&A. After investigating horizontal acquisitions from existing research and their relationship with synergies, we examine, in the form of case studies, three Japanese companies that have successfully realized synergies from their acquisitions of European businesses. We find that these companies achieved sustainable growth and used economies of scope, rather than of scale, by expanding their products and regional coverages in cross-border operations. In 2016, the number of overseas acquisitions by Japanese companies reached 635, which was a record high for the third consecutive year; moreover, the amount spent on them exceeded 10 trillion yen, a record high for the second consecutive year. Due to the maturity of the domestic market, an increasing number of Japanese corporate managers are seeking growth overseas. Internal reserves of Japanese companies exceeding 400 trillion yen (Ministry of Finance, 2017) combined with a historically unprecedented monetary easing policy meant that the acquisition activity has continued. On the other hand, the management of several companies became deadlocked after acquisition. Even recently, reviewing synergies and profit plans, leading companies such as Japan Post, Toshiba, and Kirin have reported significant impairment losses in relation to overseas acquisitions. An acquisition starts with negotiations in which the buyer offers the target company a price that includes a premium on the standalone value of the business. If the sellers, or in other words, the shareholders of the target company are not satisfied with this premium amount, they will not agree to the acquisition, and it will not proceed. For the buyer, this premium is a payment for control and, partly, a prepayment for the value that will be created after the acquisition. As the acquiring company expects to add greater value to the target, it incorporates these synergies and justifies the premium. Accordingly, an impairment loss after an acquisition can be considered a recognition of an overly optimistic outlook in relation to synergies. How can overseas acquisition lead to sustainable growth in profits?

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The Relationship Among Research Quotient, Firm Performance, and Biotechnology Industry

Dr. Han-Ching Huang, Chung Yuan Christian University, Taiwan R.O.C.

Calista Amelia Irawan, Chung Yuan Christian University, Taiwan R.O.C.

ABSTRACT

Innovation is one of the drivers of economic growth since innovation can increase the market value by producing new products with competitive advantage. Traditionally, innovation is proxied by patent. Nonetheless, patent is not universal, since more than 50% companies in COMPUSTAT do not patent their new products (Cooper, Knott, and Yang, 2017). Therefore, we use Research Quotient (RQ) provided by Cooper, Knott, and Yang (2017) as an indicator of innovation to avoid the above flaws since RQ is not based on patent or citation data. Specifically, the RQ measure is better at capturing the value creation of a firm owing to innovation. In this paper, we explore the differences between biotechnology industry with higher level of R&D intensity and other industries with lower level of R&D intensity. We find RQ has a positive impact on firm value, proxy by Market-to-Book Value. Contrary to our hypothesis, we find that the relation between RQ and future stock return (or firm value) is lower in biotechnology industry than in other industries. Firm innovation are important to firm growth and performance. Nevertheless, Lev and Zarowin (1999) document that a firm must allocate some budget for R&D spending, which is calculated as incurred expense, to commit to research-based innovation. Because R&D may have negative effect on earnings in short term period, some managers are not prone to invest in R&D. MacKenzie (2005) argues that there is an uncertain time lag between initial research spending and product revenue, which could result in unprofitability for that firm. Patents have traditionally been associated with innovation of countries and firms (Van der Eerden and Saelens, 1991). Patents can be defined as indicators of important technology positions and innovative activity, which can help policy makers and analysts to measure weak and strong areas in national or firm innovation systems. Hirshleifer, Hsu, and Li (2013) argue that patent information enables a firm to estimate other characteristics, such as R&D efficiency and stock market value. Therefore, we can use the number of patents controlled by a firm to value a firm’s intangible assets. The higher patent grant is associated with a higher probability of future profit since patent grant is usually represented potential a new product in the future. Nonetheless, the marketability of a patent is still uncertain. Usually, the patent grants do not directly produce future profitable products, and they just bring a small effect on market value. However, Patel and Ward (2011) find that the patent system provides some information to indicate which patents are more likely to generate future profits.

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