Manohar Singh

The market effects of CEO turnover in Australian firms

Abstract We examine the relationship between the monitoring of CEOs by inside and outside directors and CEO turnover in the Australian market. Australian board structures and mechanisms are more similar to those in the US/UK but market activity characteristics are more similar to Japanese/German systems. The results suggest that there is a relationship between CEO turnover and lagged performance rather than current performance as found in the US. In addition, non-executive directors and independent directors are more likely to monitor management. However, there is a size effect as the results are driven by large firms. The difference in the results may be due to differences in the behaviour of United States and Australian institutional stockholders in solving corporate governance issues. Furthermore, a negative lagged market reaction is found on the announcement of the CEO change. However, the reaction is driven by a sub-sample of firms with non-independent boards and prior positive performance that may proxy for retirements.

Corporate diversification strategies and capital structure

Abstract Research shows that corporate leverage is positively related to diversification across product lines but negatively related to geographic diversification. Why this difference occurs is an important empirical question since diversification appears to be value destroying. After controlling for geographic diversification, asset turnover, and firm size as well as other variables, we find that diversification across product lines is at best unrelated to debt usage; it may be negatively related to debt usage in some instances.

The impact of corporate debt on long term investment and firm performance

Prior research indicates a linkage between debt, research and development (R&D) and physical investment, and that the relationship varies depending on the type of firm (science versus non–science). Leverage also plays a multidimensional role in corporate performance and growth. The relationship between financial leverage and R&D expenditure is analysed using a sample of large United States (US) manufacturing firms. Then, the impact of leverage on R&D expenditure is studied using corporate performance drivers as intermediate variables. The results indicate that there is a strong negative relationship between the degree of financial leverage and the level of R&D expenditure that firms undertake. The negative relationship is robust to changes in model specifications and sample periods. More importantly, the results show that it is higher leverage that leads to lower R&D expense rather than R&D causing variations in future leverage. In addition, the results indicate that higher leverage adversely influences future investment in R&D which may in turn lead to negative impact on long term operating performance and future growth opportunities.

Capital market impact of product marketing strategy: Evidence from the relationship between advertising expenses and cost of capital

To analyze the prospect of a firm’s advertising decision affecting shareholder wealth, this article investigates the relationship between a firm’s advertising expenditure and the market-imposed weighted average cost of capital. For a sample of U.S. firms, the results show that advertising expenditure is negatively related to the cost of equity and positively related to debt utilization, resulting in a lower weighted average cost of capital. A higher debt level, however, associates with a lower level of financial strength. In addition, and plausibly by lowering the cost of capital through product market advertising, firms with higher advertising expenditure experience higher performance in terms of market value added.

The evidence from Canadian firms on multinational diversification and performance

Abstract The purpose of this paper is to identify the effects of multinational diversification on corporate financial performance. This issue is examined for Canadian firms by using four years of individual as well as pooled time-series-cross-sectional data for the years 1992–1994 and 1997. Using three distinct measures of financial performance and two measures of multinational diversification and controlling for size, leverage, growth, and efficiency, we replicate the procedures in prior studies to show that, in general, lower performance is associated with multinationality. However, when a nonlinear specification is used, a hurdle level for foreign assets deployment is identified. Prior to this threshold level, financial performance is inversely related to degree of multinational diversification, but beyond this level, the relationship is positive. We provide an explanation for this U-shaped relationship.

Impact of US Macroeconomic Surprises on Stock Market Returns in Developed Economies

Macroeconomic conditions are known to affect risks factors and thereby influence asset returns within a given economy. We explore this link in a global setting. Given the dominant role the U.S. economy plays in the global economic environment, U.S. Macro economic shocks are expected to affect asset returns in other countries. The impact should be more pronounced in the developed economies where the U.S. is a large trading and capital-flows partner. Our results shows that residual returns and conditional volatilities in major developed economies are significantly impacted by US macroeconomic surprises. We identify U.S. macro economic shocks that have spillover impact on global asset returns over and above those transmitted through equity market returns. While return levels are significantly influenced by productivity and retail sales surprises, return conditional volatilities are mainly influenced by inflation, personal income, industrial production, leading indicators, and gross domestic product surprises.

Operational characteristics and performance gains associated with international licensing agreements: the US evidence

Licenses received, licenses given, and cross licenses are strategic responses by firms seeking to exchange proprietary information. This paper provides estimates of the capitalized value of gains associated with both domestic and international licensing agreements between non-affiliated firms, and identifies salient characteristics of firms engaged in licensing. In general, licensing agreements are found to have significantly positive capitalized values, for both domestic and international licensing agreements. We find that larger firms are more likely to receive than to give licenses, and that cross licensing firms enjoy superior profitability compared to firms that receive or give licenses. Also, US firms tend to license foreign partners of similar size and profitability, but with lower levels of research intensity. Higher levels of R&D intensity in the home and host countries and higher profitability levels lead to domestic licensing, while higher levels of firm specific sales and R&D expenses lead to international licensing agreements.

The Effect of Bank Ownership Concentration on Capital Adequacy, Liquidity, and Capital Stability (Basel II and Basel III)

We explore the effects of ownership concentration on the risk-taking behavior of banks. Our analysis focuses on East Asian countries because these nations have successfully implemented the Basel standards and demonstrate a high degree of regulatory convergence. For the period from 2005 to 2009, we analyze the relation between ownership concentration and capital adequacy (Basel II) and find that an increase in ownership concentration by one standard deviation results in an improvement in capital adequacy by 7.64%. Although Basel III does not go into effect until 2013, we retroactively apply the standards for capital stability on our sample. We find that ownership concentration would have been a significant determinant of capital stability. While at lower levels of ownership concentration, an increase in concentrated ownership would have reduced capital stability; at higher ownership levels, greater ownership concentration would have increased capital stability. We also find that concentrated ownership improves banks’ liquidity. Further, the recent financial crisis does not appear to change the fundamental associations among ownership concentration, capital adequacy, and liquidity.

Performance Impact of Business Group Affiliation: An Analysis of Corporate Diversification Strategy

To understand the performance implications of corporate strategies as conditioned by business group affiliations, we analyze the relationship between corporate diversification and performance for 889 Indian firms. We find that diversified firms perform significantly worse than focused firms and that there exists a significant negative relationship between the degree of diversification and firm performance. A comparative analysis of firms affiliated with Indian business groups and those affiliated with MNCs indicates that sources of negative impact of diversification on performance are conditioned by the nature of a firms affiliation. For multinational affiliates, diversification appears to be associated with poor asset quality and asset management, which is an indicator of possible agency conflict. For domestic business group affiliates, diversification appears to generate cost inefficiencies leading to poor performance.