Dev R. Mishra

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Manuscript Type: Empirical. Research Question/Issue: Prior literature suggests that weak external governance mechanisms negatively affect corporate risk taking (CRT). However, strong internal governance is likely to mitigate the shortcomings of external governance. In a sample of East Asian firms, we examine whether the presence and voting power of multiple large shareholders (MLS) beyond the dominant shareholder effectively manage internal governance and mitigate agency problems, as measured by their effect on CRT. Research Findings/Insights: In a sample of 1,686 firms from nine countries, while the presence of a dominant shareholder is associated with a lower CRT, the presence and voting rights of the MLS are strongly associated with a higher CRT. Furthermore, the effect of the MLS on CRT is strongly positive in family dominated firms (as opposed to non‐family dominated firms). Theoretical/Academic Implications: We interpret these findings as evidence that in firms featuring a dominant shareholder with the power and incentives to extract private benefits of control by undertaking a conservative investment policy, the power and presence of MLS improve internal governance by mitigating agency problems between the dominant shareholder and minority shareholders and help promote a more optimal non‐conservative investment policy. Practitioner/Policy Implications: In countries where financial markets are still developing and in countries where the dominant shareholder structures are widespread, the policy makers may encourage MLS structures in general and in the privatization of state enterprises.

The Dark Side of CEO Ability: CEO General Managerial Skills and Cost of Equity Capital

CEOs with substantial general managerial ability (generalist CEOs) possess a substantial share of organization (human) capital and have different risk-taking incentives than do their counterpart specialist CEOs. Using an index increasing in CEO general managerial skills as a proxy for general managerial ability, we find that investors require higher returns from firms featuring CEOs who have profuse general managerial ability. Furthermore, expected returns are significantly increasing with CEO general managerial ability in firms with high organization capital, that belong to M&A-intensive industries and that have complex operations, high agency problems and high anti-takeover provisions. These findings are consistent with arguments that organization (human) capital has significant expected return implications and that CEOs with higher general managerial skills may lead to higher agency problems, feature different risk-taking incentives and be more costly to retain in times of need.

Post-innovation CSR Performance and Firm Value

Analyzing a sample of 13,917 US firm–years from 1991 to 2006, we find that more innovative firms demonstrate high corporate social responsibility (CSR) performance subsequent to a successful innovation. These high-CSR innovative firms enjoy significantly higher valuation post-innovation. These findings imply that firms with demonstrated potential growth opportunities, as evident from the number of registered patents and their citations, benefit by strategically investing more in CSR activities; that is, CSR investment entails ‘doing well by [strategically] doing good.’

An examination of US dollar risk management by Canadian non‐financial firms

Purpose – The purpose of this paper is to examine the impact of US dollar exchange rate risk on the value of Canadian non‐financial firms.Design/methodology/approach – The sample, from the Compustat database, includes all non‐financial Canadian firms with sales over

Should Managers Estimate Cost of Equity Using a Two-Factor International CAPM?

100 million. The study segregates firms into hedging and non‐hedging groups and applies statistical techniques to test if hedging enhances value.Findings – The results demonstrate that Canadian firms that have higher levels of US

Foreign Exchange Exposure and Cost of Equity for U.S. Companies: Local Versus Global CAPM

sales tend to use derivatives more frequently through higher levels of US

Industry Merger Intensity and Cost of Capital

exposure. Firms that have both US sales and assets appear less likely to use hedging. Firms with an American subsidiary and use financial instruments to hedge have higher values. When operational hedging is used with financial hedging, it is a value enhancing activity increasing their market‐to‐book by 14 per cent and market value‐to‐sales by 40 per cent. Incremental impact of these two hedging strategies is to enhance value by 7 per cent.Res...

Strategic Risk-Taking and Value Creation: Evidence from the Market for Corporate Control

Purpose - The purpose of this paper is to assess how much difference it makes for US firms to use the two-factor ICAPM to estimate their cost of equity instead of a single-factor CAPM. Design/methodology/approach - For a large sample of US companies, the authors compare the empirical cost of equity estimates of a two-factor international CAPM with those of the single-factor domestic CAPM and the single-factor global CAPM. Findings - The authors find that the cost of equity estimates of the two-factor ICAPM are reasonably close to those of either single-factor model for US firms with low-to-moderate foreign exchange exposure; and second, perhaps surprisingly, for US firms with extreme foreign exchange exposure, that the cost of equity estimates of the two-factor ICAPM tend to be very close to those of the domestic CAPM, and even closer than to those of the single-factor global CAPM. Research limitations/implications - The papers findings might prove useful to academic researchers wanting to resolve the seemingly contradictory empirical results on the pricing of FX risk. Practical implications - The findings will hopefully help managers decide whether they should go to the trouble of estimating a US firms cost of equity with the two-factor international CAPM instead of a traditional single-factor CAPM. Originality/value - The paper extends the existing literature by focusing on the two-factor ICAPM, and finds some new and surprising empirical results.

Financial restatements, litigation and implied cost of equity

For U.S. firms with extreme foreign exchange (FX) exposure levels, we ask whether the single-factor global CAPM yields significantly different cost of equity estimates from the local CAPM. For a sample of U.S. firms from 2000-2007, we find a clear and statistically significant relation between the differences of the two models’ cost of equity estimates and the firms’ FX exposure estimates. However, the economic significance is questionable, even for firms with extreme FX exposure levels.

Marriage and CEO's Concern for Corporate Social Responsibility

Using a panel of industry‐average implied cost of equity capital and the value of prior year aggregate industry mergers, we find strong evidence that the industry cost of equity capital is negatively associated with industry merger activity. Our evidence is consistent with greater media coverage, analyst following, or increase in investor attention associated with industry merger activity lowering the required return on equity for firms in an industry that is not involved in merger activity via the ‘information risk’ or ‘incomplete information’ channels.