Advances in Pacific Basin Business, Economics and Finance: Volume 6

We study institutional investors’ influence on the use of related party transactions (RPTs) in China. We test the significance of potential factors in the cross-sectional regression analysis of the amount of RPTs reported by Chinese listed companies. We also analyze intraday trading activities and stock prices in days around public announcements of RPTs. Our findings suggest that institutional investors do not have a significant influence on Chinese firms’ usage of RPTs but they react to RPT announcements through buying or selling shares.

This paper studies how a firm reacts to the threat from product market competition. Consistent with the strategic equilibrium model, we find that a firm increases investment in response to external product market threats. Further, the paper analyzes whether product market threats lead to an improvement in investment efficiency. When faced with product market competition, we find that firms that are otherwise likely to underinvest (overinvest) increase (increase) their investment significantly (less than the firms that are likely to underinvest) in the next period. However, firms that are predisposed to overinvest do not make cuts in capital expenditure, which indicates that strategic investment is a critical countermeasure for addressing competitive threats for all firms, their inclination to make suboptimal investment decisions notwithstanding. Overall, the evidence supports the predatory risk of waiting as well as competition and investment efficiency hypotheses. Additional tests suggest that product market threat partially substitutes for other external monitoring mechanisms designed to manage agency problems.

We identify a novel concept of discretionary idiosyncratic volatility proxied by the idiosyncratic volatility component not related to the non-systematic industry volatility as a source of agency problems that have implications for firms’ cash holdings and their investment decisions. We find that firms with low discretionary idiosyncratic volatility, which likely captures discretionary effort and risk-taking by managers, have smaller cash reserves. Moreover, while high discretionary idiosyncratic volatility firms spend cash internally (internal capital building), low discretionary idiosyncratic volatility firms use it for external acquisitions, consistent with the “quiet life” hypothesis. Our findings thus indicate a need for reinforcement of existing regulations and corporate laws to control for agency costs, which could in turn reduce firm risk and the probability of financial meltdown at the aggregate level.

Myopic going concern practice refers to the current audit going concern opinion that a firm is rewarded a favorable going concern opinion as long as it has the capability to satisfy its debt obligation in the following year. We show, via a structural agency problem we develop in the paper, that such a practice has a potential economic cost to the firm. We study Lucent Technologies Inc. in detail for its loss in economic value and also measure the magnitude of this impact with 500 companies. We find that Lucent should have lost its going concern status in 2002 as it had to sell off its assets to meet debt obligations and nearly 18% of the 500 firms suffer some degree of economic loss due to the agency problem.

This study suggests two new diversification strategies, i.e., tourism-related and tourism-unrelated diversifications which are specifically applicable to the hotel firms. This study aims to investigate which diversification strategy has better benefits toward firm performance. This study includes a complete set of public listed firms of the hotel industry from four Asian countries, namely, Hong Kong, Singapore, China, and Malaysia, covering from years 2001 to 2012. Revealing the advantage and disadvantage of both diversification strategies, the empirical evidence regarding its influences on hotel firm performance are investigated in this study. This study finds a nonlinear relationship between degree of diversification and firm performance. Confronting with the volatile earnings when crises strike tourism sector, this study further shows how the crises affect the relationship between tourism-related/unrelated diversification strategy and hotel firm performance.

Building upon the framework of the tradeoff model of capital structure and motivated by the equity market timing theory, we examine whether equity misvaluation is a source of adjustment “costs” that will affect a firm’s leverage adjustment speed toward target. We also investigate whether the quality of a firm’s long-term growth options will influence the decisions of managers to exploit the mispriced equity to converge to the optimum. Using a sample of listed Taiwanese firms during 1992–2014 and employing the market-to-book decomposition as developed by Rhodes-Kropf, Robinson, and Viswanathan (2005), we find that overleveraged and overvalued firms demonstrate faster adjustment speed than overleveraged but undervalued firms. Furthermore, controlling for the misvaluation status, high-growth firms converge to target faster than their low-growth counterparts. The effect of growth options on the relation between equity mispricing and adjustment speed does not mirror the effect of financing deficits. With the detailed financial information of the local companies across a rather long time series, this study provides incremental inputs to the literature of capital structure from the determinants of target leverage, the estimation of leverage adjustment speeds, to the identification of the sources of adjustment costs in an emerging market where institutional environment is strikingly different from the US.

As there is inclusive evidence on relationship between board characteristics and firm performance in the Thai context, and mixed findings of this relationship are usually reported from previous studies, this study tries to clarify a reason for the mixed finding by determining the impact of board structures on different quantile levels of firm performance. Building on extant literature and using a developed econometric technique, the Quantile Analysis, on a sample of 446 listed firms in Thailand for a 15-year period ranging from 2000 to 2014, empirical evidence is provided which is consistent with prior studies that some characteristics of the board as the core mechanisms of corporate governance, i.e., board independence, board size, board meeting frequency, and dual role leadership on board, have significant influence on performance of Thai firms. In particular, when considering different quantile levels of firm performance, board structures are found to have different effects across quantile of performance distribution. Board independence and dual role leadership on board are found to have a significant influence on only moderate-performing firms, while board size and board meeting frequency are revealed as having significant impact on only firms with high-performance which need more effectiveness of the board in overseeing and supervising decision-making of the executives. Thus, these findings indicate that considering different quantile levels of firm performance for the board structures and performance relationship should be a reason of previous mixed findings. Moreover, the findings should be important information in encouraging better understanding an optimal governance system in Thailand for related stakeholders such as policymakers, corporate firms, and investors.

The paper investigates whether firms’ exposure to information security risk influences firms’ costs of capital. Most IT firms highly rely on computer systems and network appliances; it may cause disasters if firms are involved in great information security risk. In the sample of Taiwan’s semiconductor firms during 2005–2016, we show that ISO 27001-certified firms (a well-known information security certificate) have lower costs of debt, but whether firms are ISO 27001-certified is not associated with firms’ costs of equity. Our findings are consistent with modern financial theories: debt holders, as put writers to firms’ value, benefit from firms’ lower information security risk, and better corporate governance, and thus lower firms’ costs of debt. On the other hand, equity holders should hold efficient portfolio through diversification and thus firms’ costs of equity should not be influenced by firms’ information security risk, which belongs to idiosyncratic risk in the portfolio theory.

This study examines whether investment horizons among institutional investors affect cash dividend payout policies among firms. We use institutional ownership volatility and persistence to measure institutional ownership stability. We find that cash dividend payout ratios are negatively correlated to volatility and positively correlated to persistence. The results suggest that firms with stable institutional investors encourage managers to pay cash dividends rather than invest in suboptimal projects or perquisite consumption. Furthermore, this study tests whether the impact of institutional ownership stability on cash dividend policy matters in firms with greater agency costs. This study finds that stable institutional ownership increases cash dividends for firms with severe or slight agency problems. These findings suggest that institutional ownership stability plays an important role in monitoring and hence in determining cash dividends.

This study aims to examine the Environmental Kuznets Curve (EKC) hypothesis in the case of 100 developed and developing nations by taking into account the role of institutional quality (IQ). Using generalized method of moments (GMM) estimators, we find an inverted U-shaped relationship between economic growth and carbon dioxide (CO₂) emissions only in the developed world but not in the developing nations. It is also revealed that control of corruption plays a vital role in reducing CO₂ emissions in high income countries. Furthermore, rule of law is found to have a beneficial effect on the environment in all countries except for low income countries. Overall, our results confirm the importance of IQ in reducing CO₂ emissions. Additionally, foreign direct investment contributes to CO₂ reduction in rich countries while deteriorates the environmental quality in developing nations. Trade openness was shown to exert a positive impact on environmental quality in developing countries. These findings can be of great importance to policy makers of different income groups in designing appropriate economic and environmental policies toward the dual goals of high growth and low pollution.

This study analyzes empirically the extent to which women’s employment affects the duration of first birth intervals among married women in Taiwan during the rapidly growing period. By employing the data from the 1989 Taiwan Women and Family Survey, our estimation results suggest that women’s employment strongly affects the duration of first birth intervals, and that various aspects of women’s employment affect first birth intervals differently. In terms of the number of working hours, women who work more than 30 hours per week tend to have an earlier first birth. On the other hand, work experience, as indicated by women’s labor force participation surrounding the first birth as well as their job tenure, is found to positively affect women’s first birth intervals. When the model is estimated on the basis of age cohorts, these implications remain the same. Given that the impact of labor market experiences and working hours act in opposite directions on the first birth interval, their effects may offset each other. Therefore, our findings provide an explanation to the earlier research result, which indicates that female employment is only weakly related to fertility behavior in Taiwan.