In a case of no good deed going unpunished, a new working paper published by Harvard Business School finds that the media come down harder on companies with a good record on corporate social responsibility when those companies run into trouble.
Excerpted from No News is Good News CSR Strategy and Newspaper Coverage of Negative Firm Events by Jiao Luo, Stephan Meier, and Felix Oberholzer-Gee.
One of the benefits of Corporate Social Responsibility (CSR) programs, it has been argued, is that they build up a reservoir of public good will, shielding companies in times of trouble. In this paper, we test the view that CSR provides protection from public ire by analyzing the media’s response to corporate crises. Our application is spills in the oil industry.We find the media far more likely to report accidents if they occur at a company with a superior CSR record.
Rather than acting as an effective form of insurance, our results suggest that a strong CSR record can be a liability.
Moreover, the tone of coverage is no less critical for organizations with a greener reputation. At the same time, firms with substantial past environmental problems are also more likely to find their corporate failings broadcast in the news. Companies hoping to minimize the risk of media attention to accidents need to be careful not to place their organizations at the very top or the very bottom of CSR rankings. This result has important implications for thinking about CSR and the privately optimal level of such activities.
Technorati Tags: corporate social responsibility, corporate-governance, CSR
Adopting International Financial Reporting Standards (IFRS) should benefit capital markets by reducing insiders’ ability to exploit private information, according to a new working paper published by Harvard Business School.
The study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability.
UK domestic standards are considered very similar to IFRS (Bae et al. 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders’ ability to benefit from private information.
Consistent with these expectations, we find that abnormal returns to insider purchases―used to proxy for private information―are reduced following IFRS adoption.
Similar results are derived across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders’ ability to exploit private information.
Excerpted from Mandatory IFRS Adoption and Financial Statement Comparability by Francois Brochet, Alan D. Jagolinzer and Edward J. Riedl
Technorati Tags: accounting, corporate-governance, IFRS, insider trading
Buy-side analysts tend to recommend stocks that are less volatile and more liquid than those recommended by sell-side analysts, according to a new working paper from Harvard Business School.
While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds).
The study finds that buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts’ clients) prefer that buy-side analysts cover less volatile and more liquid stocks.
The study also finds that the buy-side firm analysts’ stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest.
For stocks covered by both buy- and sell-side analysts, there were no differences in the buy recommendations’ performance.
The failure to find that buy-side research out-performs that of sell-side analysts raises questions about whether investment firms should continue to rely on their own research rather than using research from sell-side analysts.
Resolving whether buy-side research creates value is highly relevant to managers at buy-side firms who are faced with the challenge of allocating limited research resources.
For details see THE STOCK SELECTION AND PERFORMANCE OF BUY-SIDE ANALYSTS
Technorati Tags: analyst-conflicts, analysts, trading-strategy
Firms with lower disclosure on their anticorruption efforts may make more sales in corrupt countries than their high-disclosure peers, but they are likely to make less money from them, according to a new working paper from Harvard Business School.
The study examines 480 of the world’s largest companies, using ratings by Transparency International of firms’ public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Key concepts include:
- While firm-level research on corruption is still at the formative stage, findings suggest that disclosure is more than cheap talk.
- Firms with high disclosure on their anticorruption efforts are committed to fighting corruption. The policies and enforcement actions reflected in their disclosures help to protect their public reputation and profitability, but at the cost of slower sales growth in high corruption risk markets.
- Firms with abnormally low disclosure have roughly 15 percent higher sales growth in corrupt country markets than their high disclosure peers. But this higher growth is accompanied by lower profit margins and return on equity.
- Firms with abnormally high anticorruption ratings have a lower frequency of subsequent allegations of corruption in the media, suggesting that disclosures reflect their commitment to fighting corruption.
- Future research could examine (among other issues) what factors, other than monitoring/enforcement costs and risk exposures, explain the differences in firms’ level of disclosure and commitment to fight corruption.
Fore details, see Causes and Consequences of Firm Disclosures of Anticorruption Efforts
Technorati Tags: corporate-governance, corruption, disclosure
Companies that manage for the short term present their investors with more risk, according to a new working paper from Harvard Business School.
Short-Termism, Investor Clientele, and Firm Risk, by Francois Brochet, Maria Loumioti, and George Serafeim finds that for one thing, short-term firms have share prices that are more volatile than companies managing to a longer time horizon.
Firms focused on near-term results are characterized by “high absolute discretionary accruals, high likelihood of just beating analyst forecasts, reporting very small positive earnings, and just avoiding violating loan covenants.
“From Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors. We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not mitigated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Overall, our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation.”
Technorati Tags: corporate-governance, Earnings-Surprise, investment-strategy, management
Despite continuing criticism of the big credit ratings agencies, the challenges facing potential competitors to the big three – Fitch, Moody’s and Standard & Poor’s, remain significant.
A new Harvard Business School case study suggests new entrants effectively face a “Catch 22″ situation.
Morningstar and Meredith Whitney Advisory Group are attempting to make inroads, focussing on corporate and municipal bonds, respectively. Now comes Kroll Bond Rating Agency, founded by Jules Kroll, a pioneer of the corporate risk consulting and privacy security industry. Kroll’s initial focus is on commercial mortgage-backed securities and other structured and public finance.
The HBS case notes that:
- Many users of ratings were obliged to look only at ratings issued by Nationally Recognized Statistical Ratings Organizations, so any serious entry into ratings would require NRSRO designation.
- However, getting through the SEC application process could be a slow and expensive. In particular, a ratings agency had to be in business for at least three years and provide a list of bona fide customers to apply for NRSRO status. But getting customers interested would pose a challenge without that status.
- An alternative to getting a brand new certification would be to join forces with one of the smaller NRSROs.
Other challenges facing new entrants include hiring enough skilled analysts and support staff quickly enough.
The full HBS Case Study on Kroll can be purchased here.
Technorati Tags: CMBS, credit-rating-agencies, Fitch, Kroll Credit Rating Agency, Meredith Whitney, Moodys, Morningstar, municipal-bonds, public-finance, Standard & Poor's, structured-finance
The International Monetary Fund has issued more credit in the past three years than in all previous decades since its inception and its role is set to expand even further in Europe and perhaps beyond, writes Oxford Analytica.
Regardless of the agreement on some kind of fiscal supervision at the EU summit, in the short-term more cash is urgently needed to supply liquidity to European banks and to assist sovereigns struggling to finance debt, including Italy and Spain. This will probably require the intervention of the International Monetary Fund as well as the European Financial Stability Facility (EFSF) — reinforcing a G20 call for closer cooperation between the Fund and Regional Financial Arrangements (RFAs).
during the 2008 global financial crisis, the IMF emerged as by far the most active lender of last resort to troubled economies, supplemented by bilateral swaps offered by the US Federal Reserve and others.
The euro-area crisis has highlighted the difficulties that can arise when an RFA — in this case the EFSF — lacks clear operating and funding principles, fuelling confusion (especially among important potential investors) about its role and even the functioning of bail-out mechanisms.
The attractiveness and importance of RFAs, which had increased substantially in Asia, Latin America, Arab countries and Africa as well as in Europe in recent years, could be set back by the seeming inability of the EFSF to cope with the euro-area crisis.
This has revived the role of both IMF expertise and its fundraising capacity, showing the latter to be essential in cases of large-scale financial difficulties.
For details, see Euro-area woes strengthen the IMF
Technorati Tags: EFSF, Eurozone, International-Monetary-Fund, Regional Financial Arrangements
Private firms continually weigh the pros and cons of going public. New research from John Asker, Joan Farre-Mensa, and Alexander Ljungqvist suggests there may be another reason to remain private: increased willingness to invest to become more competitive.
We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.
In evaluating the investment practices of stock market-listed and privately held firms in the US, the researchers discovered that “private firms invest substantially more than do public firms matched on size and industry ” (10 percent of total assets versus 4 percent), and that private firms “are 3.5 times more responsive to changes in investment opportunities than are public firms….”
Public firms may suffer in this regard because of conflicting interests between management and investors, and because shareholders use their liquidity to sell when times get tough rather than to pressure management. Read the working paper, Comparing the Investment Behavior of Public and Private Firms
Technorati Tags: corporate-governance, privately-held-business, public companies
CEO bonus compensation usually begins and ends around some form of equity scheme, which can motivate executives to manipulate results in any given quarter. “Annual bonus plans can destroy value by providing incentives to withhold effort, to shift earnings and cash flow unproductively from one period to another, and to manipulate earnings counterproductively in other ways,” write Kevin J. Murphy and Michael C. Jensen in their working paper, CEO Bonus Plans: And How to Fix Them.
One proposal: Make CEOs subject to “negative bonuses” that would draw down from a bonus bank when performance measures aren’t achieved.
Technorati Tags: bonuses, CEO-compensation, corporate, executive-pay
Crowdsourced ratings do have a measurable impact on diners’ behavior, with a positive review being especially beneficial for independent restaurants, according to a new HBS working paper Reviews, Reputation, and Revenue: The Case of Yelp.com.
Harvard Business School professor Michael Luca determined that each ratings star added on a Yelp review translated to anywhere from a 5 percent to 9 percent effect on revenues (depending on the control variables and means of estimation)—more than he had expected.
Even more interestingly, within that number not all restaurants were created equal. Chain restaurants, in particular, were largely unaffected by the ratings, while the greatest effect was shown for independent restaurants. That makes sense according to economic theory, says Luca, since diners presumably already have some knowledge about chain restaurants, but can benefit from more information about their neighborhood spots.
Yelp is somewhat of a substitute for traditional forms of reputation. People are not using Yelp to find out about McDonald’s.
But Luca says the big chains should not be comforted by the findings. Indeed, he believes the data suggests that local eateries are starting to siphon off customers from the “Big Boys.” Why? The Applebee’s and the T.G.I. Friday’s of the world have been safe bets for diners because their fare is of an expected quality and their menu well-known—thanks in part to big-budget advertising behind the chains. But review sites are leveling the playing field by allowing consumers to learn as much about independent restaurants as they know about the chains. “This is one reason why consumer demand is shifting from chain to independent restaurants in the period following the introduction of Yelp,” Luca writes.
Technorati Tags: (MCD), crowdsourcing, mcdonald's, restaurants
