Steve Toms

Growth, Profits and Technological Choice: The Case of the Lancashire Cotton TextileIndustry

Using Lancashire textile industry company case studies and financial records, mainly from the period just before the First World War, the processes of growth and decline are re-examined. These are considered by reference to the nature of Lancashire entrepreneurship and the impact on technological choice. Capital accumulation, associated wealth distributions and the character of Lancashire business organisation were sybiotically linked to the success of the industry before 1914. However, the legacy of that accumulation in later decades, chronic overcapacity, formed a barrier to reconstruction and enhanced the preciptious decline of a once great industry.

Refinancing and the Profitability of UK PFI Projects

Using information collected by the National Audit Office, a comparison of several aspects of performance on recent Private Finance Initiative (PFI) contracts is conducted. The first aspect is a sector by sector comparison of refinancing profits, bearing in mind differential risk levels and in house expertise when negotiating contracts. Secondly profits from refinancing are analysed at firm level. Thirdly the trend of profitability on refinancing contracts is examined through time. Fourthly relative public sector shares of refinancing profits by are analysed by sector and compared to private sector profits. Fifthly, differential levels of disclosure about the financial details of PFI contracts are compared by sector. An important reason why little analysis of this sort has been conducted hitherto is that the disclosure of information about the profitability of PFI contracts has been very limited. The information analysed here was, but even so produced very different levels of response to the request. Differential disclosure levels provide the opportunity to examine which sectors and which companies are concerned with greater relative secrecy. Results show that excessive returns were obtained in the Health sector where there was also greater secrecy. All private sector participants have made healthy profits from PFI refinancing deals, with the average private sector risk premium in the middle of a distribution of returns which are always positive. Much of the profit has been the result of using levels of leverage that would be unusual in private sector settings. From the point of view of government and public officials involved in PFI, there is little evidence of a learning curve in contract specification, at least as far as the trend in negotiated profit levels is concerned.

Economic Development, Climate Change and the Limitations of Corporate Social Responsibility

The chapter argues that the reform of the corporation to promote greater social responsibility is an unlikely solution to the crisis of climate change. The managers of business organisations are relatively powerless in the face of the powerful market forces which drive increasing consumption of the world’s resources. In particular the strong association between the development of oil resources, the worlds markets and productive capacity are noted as the key determinants of climate change. Responses to the challenges of climate change are best formulated through predictive analysis of its key determinants, along the lines of the 2007 Stern Report and the debate it has subsequently engendered. In view of the correlation between oil consumption, world and sustainable population, peak oil poses as strong a challenge to economic growth as does significant climate change.

Governance Thresholds, Managerial Ownership and Corporate Performance: Evidence from the UK

The paper examines the relationship between managerial share ownership and firm performance for British stock-exchange listed firms. We seek to establish a link between the predictions of agency theory and the corporate control environment using key governance and disclosure thresholds as determinants of the nonlinear relationship between managerial share ownership and performance. We also argue that the use of conventional accounting and market-based performance measures can be problematic in estimating managerial efficiency. The Clean Surplus Accounting Rate of Return is introduced as an alternative performance measure to Tobin’s Q and ROE.Our results indicate that relationships between managerial share ownership and corporate governance outcomes might be linked to key regulatory disclosure thresholds and minority shareholders rights of UK Company Law. We find that shareholder wealth is maximised when equity ownership by executive directors is below the 5% equity threshold of the Association of British Insurers’ dilution limit and sections 376 to 378 of Companies Act 1985 or above the 15% equity threshold of section 110 of Companies Act 1989 and section 127 of Companies Act 1985. Share ownership by executives between 5% and 15% is found to lead to declining firm performance.Our findings confirm the importance of testing thresholds based on corporate governance regulation rather than inductively deriving them from the data. We also show that it is desirable to decompose board ownership into executive and non-executive components. Our results further support the use of the Clean Surplus Accounting Rate of Return as an alternative performance variable.

Entrepreneurship, Business Strategy and Philanthropy: Competition and Regulation in Nineteenth Century British Cotton Textiles

The paper analyses the relationship between entrepreneurial philanthropy and the competitive process. In doing so, it constructs a typology of entrepreneurial philanthropic behaviour. Such behaviour is conditioned by a combination of ideology and business strategy variables. Ideological differences can be traced to nineteenth century philosophical responses to the ethical problems posed by the rapid emergence of factory production following the British Industrial Revolution. Attitudes to regulation and the labour process are used to identify the key differences and similarities with respect to competitive behaviour. Each type of entrepreneurial behaviour is explored using nineteenth century case studies and examples of philanthropy and competitive behaviour.

The Impact of Financial and Product Market Innovation on the Nature of Entrepreneurship: A Historical Perspective

It is well recognized that the nature of entrepreneurial activity varies by context and historical epoch. But are there systematic underlying factors that cause such significant differences in the entrepreneurial opportunity set? This paper presents a conceptualization of entrepreneurship based on the interaction of product market innovation and financial innovation. In line with traditional entrepreneurship theory, it argues that product market innovations create new entrepreneurial opportunities, adding that innovations within the financial system are also a source of entrepreneurial opportunity, potentially as creative, but which do not necessarily align themselves with developments in product markets. Through time, their state of parallel development, or misalignment, sets the context of entrepreneurial activity.Entrepreneurship is conceptualized in terms of opportunity recognition (whether discovered or created) and mobilization of resources to exploit those opportunities arising from product or financial innovation, and the process of managing any misalignment that evolves between them. These interactions give rise to four cases based on possible permutations of radical innovation. Conceptualized thus, entrepreneurship is necessarily a historical phenomenon, in terms of context and process. The paper considers selected historical cases that illustrate these permutations.

The Impact of Corporate Environmental Disclosures and Audit Committees on Environmental Reputation

We examine the impact of the volume and quality of environmental disclosures in corporate annual reports on the creation and sustenance of firms’ reputation for environmental responsibility, and the extent to which these effects are enhanced by the quality of audit committees. Using a sample of UK FTSE350 companies from 2007-2011, we find evidence that firms enhance reputations by the quality of their environmental disclosures and by virtue of the quality of audit committees. Higher disclosure volume alone does not lead to increased reputation. Audit committees that comply with Smith (2003) recommendations, complement higher quality, difficult to replicate disclosures, in promoting reputation.

Do Financial Analysts Care about Environmental Disclosures in Corporate Annual Reports

The paper examines the role of environmental disclosures and their effect on the accuracy of financial analysts’ forecasts. Specifically it examines and compares the effects of the volume and quality of disclosure. In doing so, it distinguishes between ‘greenwash’ and more specific, quantified and comparable disclosures that have the potential to provide more effective market signals. The paper demonstrates that there is a significant negative relationship between the quality of disclosure and analyst forecast error. The mere volume of disclosure meanwhile only adds to forecast accuracy in the absence of quality, and to a lesser degree. Disclosure quality therefore is valuable for investment decision makers when evaluating the financial consequences of firm level environmental policies, and potentially in wider contexts.

Chandler and the Theory of the Firm

The essay provides a review of Alfred Chandlers contribution to the theory of the firm in his three main works: Strategy and Structure (1962), The Visible Hand (1977) and Scale and Scope (1990). Focusing on the economic components of Chandlers analysis, it examines linkages to subsequent developments in the theory of the firm, including the resource based view. It discusses possible extensions of the Chandlerian perspective incorporating elements of capital market transaction cost theory.

Capital Market Efficiency in the British Industrial Revolution: The Case of the Lancashire Cotton Industry, 1760-1840

Recent debates on the industrial revolution have continued to showcase the role of the cotton textile industry. These discussions have centred on the Schumpeterian view of rapid growth based on a disequilibrium model in which capital market imperfections allow innovative firms to restrict entry, thereby earning long run super-normal profits. Neo-classical interpretations, in contrast, argue that firms were relatively untroubled by capital market imperfections and experienced few problems accessing finance, facilitating entry and rapid adjustments to equilibrium profit levels, with the gains from technological innovation transmitted through falling prices. Important questions can therefore be addressed by examining further the question of capital market efficiency. To operate efficiently, inter alia, a capital market should allow freedom of access, equalise rates of profit across sectors and accurately price the risk of economic activity. To investigate efficiency of the capital market in these respects, the paper uses firm level data to examine whether or not, first the firm’s access to capital was restricted by outdated business practices, second, whether capital goods suppliers were able to charge monopoly rents to textile firms and third, whether the cost of finance accurately reflected the risk of the enterprise. The research uses archival evidence for a sample of cotton textile firms and the steam engine manufacturer, Boulton and Watt. These records are investigated to examine how, and at what cost, firms accessed financial resources. The results show that an important source of disequilibrium was the slow pace of capital market development relative to the technological pace and demands of industrialisation. The underdeveloped capital market perpetuated pre-industrial methods of finance, including high dependency on bills of exchange at prescriptive interest rates. Although some entrepreneurs took advantage of the most efficient steam technology, returns did not systematically reflect underlying risk. At the same time, profitable opportunities remained for firms entering the market using old technology and traditional organisational networks. For these reasons, cotton firms had the potential of super-normal profits but these opportunities were dissipated by the costs of circulation arising from capital market inefficiencies and the rents associated with monopoly, asset mispricing, arbitrage and fraud. As a consequence, although the story of the industrial revolution is one of Schumpeterian disequilibrium, the apparent lack of sustained abnormal profits in manufacturing reflected embedded local networks of capital and transaction cost, rather than the neo-classical story of rapid adjustment to equilibrium.