Sebahattin Demirkan

Network Characteristics and Patenting in Biotechnology, 1990-2006:

In this study, the authors focus on specifically which types of networks and what types of relationships matter most for the focal firm’s innovative performance in biotechnology patenting. They suggest that certain network characteristics, such as quality and the source of knowledge, and the quality of relationships among actors may have a profound effect on the knowledge exchange and hence the number of patents granted to the firm. The authors focus on the research coauthorship networks of 381 firms in the U.S. biotechnology industry over a span of 17 years, from 1990 to 2006. In the biotechnology industry, firms depend heavily on the social network of academic scientists for the exchange and production of knowledge, with firm-level patenting closely linked to it. Their findings largely support the hypotheses, suggesting the necessity to consider the characteristics of the actors and the qualitative nature of the relationships in the network while assessing the role of the firm’s networks on its patenting.

Exploring the Role of Network Characteristics, Knowledge Quality, and Inertia on the Evolution of Scientific Networks

Despite decades of network research, the crucial question, “How do networks evolve?” has not been sufficiently explored. The authors explore this question by analyzing the co-authorship networks in the U.S. biotechnology firms. Building on network management and network inertia perspectives, the authors build a model predicting that the structural changes in the firms’ co-authorship networks are dependent on the specific characteristics of firms’ initial networks, the firm’s age and size. The authors then extend the model by incorporating a measure of the impact of the quality of the knowledge produced by the network ties using the prominence and inertia perspectives, which lead to the incorporation of competing hypotheses and moderating relationships in the model of scientific network evolution. The authors then test the model using longitudinal analysis of 367 U.S. biotechnology firms over a span of 17 years. The authors find that firms’ existing tie-specific characteristics in the form of a firm’s existing network size, tie strength, and the knowledge quality are significant determinants of network evolution, but that this influence is tempered by organizational inertia.

Discretionary Accruals Quality, Cost of Capital, and Diversification

This study examines the discretionary accruals quality of single- and multiple-segment firms. The authors hypothesize and find that the discretionary accruals quality is lower for multiple-segment firms than single-segment firms, and for the same level of discretionary accruals quality, the cost of capital is higher for multiple-segment firms than single-segment firms. These findings suggest that more severe agency problems in multiple-segment firms compared with single-segment firms may lead to poor discretionary accruals quality and agency risk is priced-in as a higher cost of capital.

Free Cash Flow, Enterprise Value, and Investor Caution

By analyzing actual cash flows in comparison with enterprise values (market capitalization plus debt minus cash), this article documents that the market dramatically undervalues companies. The findings suggest that the equity market has an extraordinarily high discount rate that negates future earnings in the calculus of company value. That is, the discount rate is so high that the vast majority of future cash flows are virtually ignored. The research finds that stock prices do not reflect future corporate earnings. This contrasts with the well-known statement in finance textbooks that “the value of a firm equals the present discounted value of future cash flows.” While the DCF method is normally applied to “estimated” cash flows, it provides a familiar framework with which to test the equity market values against actual cash flows. The authors find that enterprise values are substantially less than the present discounted value of actual future cash flows. A one-dollar increase in actual future cash flows produces only a 75-cent increase in a company?s enterprise value (only 15 cents per dollar of future cash flows when company size is controlled). The implication is clear: companies are worth far more than the market believes. This provides strong support to the private equity industry. Yes, of late private equity firms have overpaid for acquisitions and may lose their entire investment during the current phase of deleveraging. Yet if private equity firms acquire companies at reasonable prices using less debt, they are likely to create substantial value as a consequence of the fact that companies are so undervalued by the market relative to their cash flows. There are no previous research efforts following the authors’ methodological design based on actual cash flows. Rather, prior research studies have focused on the relationship between forecasted cash flows (by market analysts) and enterprise value. The approach of this article focuses on a different question: the relationship between discounted actual future cash flows and the current market value.

Audit Pricing for Strategic Alliances: An Incomplete Contract Perspective

We study the pricing of audit services for strategic alliances, a governance structure involving an incomplete contract between separate firms. Since incomplete contracts do not specify all future contingencies, we expect that the nonverifiability of information and potential agency behavior in alliances increase audit complexity, resulting in higher audit fees. Our findings support this prediction. We then separate strategic alliances into joint ventures and contractual alliances, as the latter involve more complexity. We find that our audit fee results are largely driven by contractual alliances. We perform additional tests to rule out the concern that our audit fee results might be attributable to the impact of strategic alliances on distress risk, audit risk, or control risk. Contrary to the distress risk argument, we find that auditors are less likely to issue going-concern modified opinions when there is an increase in strategic alliances. Contrary to the audit risk argument, we find that an increase in strategic alliances is unrelated to the likelihood of financial misstatements. Contrary to the control risk argument, we find that an increase in strategic alliances is unrelated to internal control weakness opinions.

Explaining Stock Price Volatility with Terminal ValueEstimates

Stock price volatility has become more extreme and, as a consequence, investor’s portfolios have grown more risky and many investors have given up on the stock market. Undoubtedly, geopolitical turmoil and natural disasters played a major role in heightening the volatility of equities. Another argument for this volatility is presented in this article: analysts’ near-uniform reliance on discounted cash flow methodology with its oversized terminal value estimate is responsible for large stock price movements, both upward and downward, when new information causes analysts to modify their assumptions.