A risk-return association under normal market conditions can be conventional positive (risk-averse) or "paradoxical" negative (risk seeking). This study has the objective to investigate whether such an association is stable across market trends (i.e., bull and bear) and for overall, industry-classified and partitions sub-samples after controlling for a firm's age, size, leverage and liquidity using operating performance risk-return measures. In total, this study analyses 2666 firms (1199 firms from 15 developed countries and 1467 firms from 12 emerging countries) for the period of 1999-2015. Results show that in the overall and bull sub-periods, firms across countries are showing conventional positive (superior firms) and "paradoxical" negative (poor firms) in most cases. However, in the bear sub-periods all firms from emerging countries are risk seeking in order to maintain their position in the pecking order.Empirical literature associates managers' risk behavior with assumptions of rational behavior, outcome weighing and utility maximization. Financial theory also posits that risk-averse behavior manifests when low risk is associated with low return, as well as when high risk is rewarded by high return (Fisher and Hall 1969). This risk-averse outlook also assumes that for each strategic alternative, firms and managers would choose the alternative which maximizes utility (Schoemaker 1982). Aaker and Jacobson (1987) find support for a positive association between performance and both systematic and unsystematic risk, when risk is defined using accounting data. A number of other studies have also found support for a positive risk-return relationship (Bettis 1981).To provide a theoretical lens to explain the negative association between risk and return, scholars have drawn motivation from prospect theory (Fiegenbaum and Thomas 1988;Kahneman and Tversky 1979) and behavioral theory of the firm (Bromiley 1991). Under the behavioral theory of the firm, managers undertake more risk when performance is below aspiration, and they take low risk when performance is above aspirations. Due to the contemporaneous association between risk-taking and low performance, this relationship could be negative. This is due to lower performance and higher risk in cross-sectional accounting data, or lagging effects of risk and performance would continue in the short-term in longitudinal accounting data. On the other hand, prospect theory (Kahneman and Tversky 1979) studies argue that managers in low performing firms face negatively framed prospects and are thus more likely to undertake high risk. In contrast, managers in high-performing firms face positively framed prospects and take low risk. Both of these results would cause negative correlation between high performance and low risk. Thus, prospect theory and behavioral theory of the firm provide possible explanations for the negative risk-return relationships.The research hypotheses in these studies emphasizes on manager's and/or firm's attainment of above (below) returns in compariso...
PurposeThe study examines the role of a country's legal system in predicting the corporate cash holdings using a sample of 18 countries inherited with distinct legal traditions. The central point of the study is the comparative assessment of legal frameworks in shaping the corporate finance policies.Design/methodology/approachThe authors employ host of regression techniques including dummy variables, panel data regression and Fama–MacBeth regressions to establish the relationship.FindingsThe study results support the idea of “theory of law and finance” that legal tradition is a key factor determining corporate behaviour and policy. In particular, the authors observe that firms operating in civil law systems hold significantly higher cash as compared to their peers from common law systems. Moreover, the authors report that the law system affects the corporate cash holdings through the channels of economic development and shareholder's protection, yet in opposite directions. This is because the authors find that in developed countries where civil law tradition prevails, firms hold reasonably higher cash. Moreover, if the firm belongs to high investors' protection country with civil law traditions, the cash holdings get substantially reduced. Besides, the authors find that the predictability of widely held determinants of cash holdings is not invariant of law traditions, and it holds true also when analysed in conjunction with the financial crisis. Overall, the authors find support for their postulation that corporate cash management policies are likely to be different across legal traditions. The study results are robust to the controls for various firm and country-specific antecedents of cash holdings and to the alternate econometric techniques.Practical implicationsThe study findings would encourage the government and firm policymakers and regulators in strengthening the investor protection rights which would further augment the legal system and firm-specific corporate governance mechanisms. This would mitigate agency issues and managers would be forced to undertake investor-friendly financial policies especially corporate cash holdings which would be resulting into shareholder value maximization.Originality/valueThe study contributes uniquely since the existing literature is largely silent on the role that legal tradition of a country has on the cash holdings of its firms.
PurposeUsing a sample of 1,517 multinational enterprises (MNEs) from 25 countries, this study aims to examine whether firm’s level of internationalization has a deterministic role for their engagement with sustainable development goals (SDGs). Additionally, this study aims to investigate the country- and industry-specific moderation effects on the relationship.Design/methodology/approachThis study employs negative binomial regression model along with the fixed effects for industry and time in the empirical estimation.Findings This study shows that MNEs’ internationalization is associated with their higher engagement in SDGs. This is owing to the pressures MNEs face from diverse stakeholders coupled with the need to build local legitimacy to overcome the liability of foreignness. The country-level results of this study suggest that this positive relation is stronger in countries with weak legal environment, countries with weak investor protection and in countries with higher SDG index scores. However, the industry-level results of this study indicate that the positive relation between MNEs internationalization and their SDG engagement are weaker in industries facing more competition and industries exposed to negative externalities. The results survive to controls for factors specific to firm and industry.Originality/valueThis study is one of the early studies which empirically examine the role of MNE internationalization and SDG engagement. Also, the findings of this study improve the understanding on country-specific and industry-specific challenges in implementing SDGs.
PurposeThe authors examine the stability of dividend payout and the consistency in its predictability using sample of firms from 18 different countries amid their prevailing heterogeneous formal institutions (such as the legal system, corporate governance), the distinct state of economic development (developing vs developed) and changing times (during the crisis vs the noncrisis periods).Design/methodology/approachThe authors use tobit regression models with distinct specifications for the authors’ investigations. The authors alternately analyze the study’s results using Fama–Macbeth (FM) (1973) and generalized least square (GLS) regressions.FindingsThe authors show a sharply declining stability in dividend payout with time using DeAngelo and Roll’s (2015) framework. In terms of predictive consistency, the authors report that only a few idiosyncratic factors predict dividends consistently, and these results hold qualitatively true across the robustness analysis. The firm's liquidity appears to be the most consistent predictor of dividends payout, whereas firm's size being on the other extreme. The results signify that the idiosyncratic factors that matter for firm's dividend policy are not country specific. Instead, it reveals commonality of predictors grounded on characteristics of countries such as legal environment, investor's protection, economic state (ES) and economic cycle.Originality/valueThe authors contribute to the dividends literature by providing the evidence of dividend instability through time and disapproving the stylized fact of sticky dividends. Besides, the authors provide international evidence of inconsistent predictability of dividends.
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