Corporate diversification and firms' value in emerging economy: The role of growth opportunity
Rahmat Heru Setianto
"Purpose – This paper examines empirically how growth opportunities determine the relationship between corporate diversification and firm's value in an emerging economy.
Design/methodology/approach – This study employs annual data of Indonesian manufacturing firm's spanning five years. To test the potential nonlinear relationship between diversification and value, nonlinear regression model is employed. Baron and Kenny’s (1986) procedure is also employed to test the mediation role of the growth opportunities in the relation between diversification strategy and firm's value. This study also performs further robustness analysis on mediating role of growth opportunities on the relationship between diversification strategy and corporate value using path analysis approach.
Findings – The analyses reveal the U-shaped diversification and value relationship; this result suggests that the effect of diversification on value will vary across firms, the negative effect of diversification strategy on firm's value may reverse at higher levels of diversification. Further analysis indicates that such relationship is fully mediated by firm's growth opportunities.
Practical implications – Given the results, firms that are considering implementing diversification strategy should seek the optimal level of diversification to gain diversification premium. Furthermore, the manager should observe the best opportunities available for the firm before undertaking the diversification strategies.
Originality/value – This paper contributes to the existing literature on diversification strategy by extending the insight of this research area of a large emerging economy, on which prior studies have not reached conclusive results."
2023, Journal of Asian Business and Economic Studies
This paper examines how the degree of happiness affects corporate risk-taking and the moderating influence of family ownership of firms on this relationship.
The authors use an international sample of 17,654 firm-year observations from 24 countries around the world from 2008 to 2016.
Using the happiness index from the World Happiness Report developed by the United Nations Sustainable Development Solutions Network, the authors show that a country's overall happiness is negatively correlated with risk-taking behavior by firms. The findings are robust to an alternative measure of risk-taking by firms. Further analyses document that the negative influence of happiness on firm risk-taking is more pronounced for family-owned firms.
The paper is consistent with the notion that happier people are likely to be more risk-averse in making financial decisions, which, in turn, reduces corporate risk-taking.
This study contributes to the broad literature on the determinants of corporate risk-taking and the growing literature on the role of sentiment on investment decisions. The authors contribute to the current debate about family-owned firms by demonstrating that the presence of family trust strengthens the negative influence of happiness on corporate risk-taking, a topic that has been unexplored in previous studies.
2021, Journal of Asian Business and Economic Studies
This study investigates the impact of derivatives as risk management strategy on the value of Malaysian firms. This study also examines the interaction effect between derivatives and managerial ownership on firm value.
The study examines 200 nonfinancial firms engaged in derivatives for the period 2012–2017 using the generalized method of moments (GMM) to establish the influence of derivatives and managerial ownership on firm value. The study refers to two related theories (hedging theory and managerial aversion theory) to explain its findings. Firm value is measured using Tobin's Q with return on assets (ROA) and return on equity (ROE) as robustness checks.
The study found evidence on the positive influence of derivatives on firm value as proposed by the hedging theory. However, the study concludes that managers less hedge when they owned more shares based on the negative interaction between derivatives and managerial ownership on firm value. Hedging decision among managers in Malaysian firms therefore does not subscribe to the managerial aversion theory.
This study focuses on the derivatives (foreign currency derivatives, interest rate derivatives and commodity derivatives) and managerial ownership that is deemed relevant and important to the Malaysian firms. Other forms of ownership such as state-/foreign owned and institutional ownership are not covered in this study.
This study has important implications to managers and investors. First is on the importance of risk management using derivatives to increase firm value, second, the influence of derivatives and managerial ownership on firm value and finally, the quality reporting on derivatives exposure by firms in line with the required accounting standard.
There is limited empirical evidence on the impact of derivatives on firm value as well as the influence of managerial ownership on hedging decisions of Malaysian firms. This study analyzes the influence of derivatives on firm value during the period in which reporting on derivatives in financial reports is made mandatory by the Malaysian regulator, hence avoiding data inaccuracy unlike the previous studies on Malaysia. This study therefore fills the gap in the literature in relation to the risk management strategies using derivatives in Malaysia.
2021, Journal of Asian Business and Economic Studies
Purpose - The authors provide a comprehensive empirical examination on the impact of earnings quality on stock price crash risk in China.
Design/methodology/approach - The authors acknowledge and distinguish two-dimensional proxies for earnings quality – accounting-based (earnings management degree) and market-based (earnings transparency) known in accounting and finance literature.
Findings - The authors find that both generally indicate that better earnings quality is associated with less crashes. However, extremely high earnings transparency interacted with insider trading profit can also actually exacerbate stock price crashes.
Originality/value - This study is the first to highlight the pertinence of accounting-based measures to proxy for earnings quality in a fast-growing emerging market environment such as China.
2020, Journal of Asian Business and Economic Studies
"Purpose – This study aims to identify the impact of corporate governance on performance of sugar mills. In order to study this relation, a model is constructed in which ownership structure and independent directors are taken as independent variables. Whereas firm performance is analyzed by using proxy variables such as return on asset (ROA), return on equity (ROE) and sales growth. Moreover, size of board, working capital management (WCM) and philanthropy are taken as mediating variables between governance variables and firm performance.
Design/methodology/approach – The data of 32 sugar mills listed at Pakistan Stock Exchange for the period of four years (i.e. 2014–2017) is used for this research. Moreover, to investigate the model, generalized least squares statistical method is used to measure the relationship between variables.
Findings – The results revealed that there is significant but positive relationship between independent directors and ROA while ownership structure and ROE have significant but negative relationship. Thus, the board of directors should make it sure that all stakeholders and organizations should increase the nonfamily ownership in firms for better corporate performance. Moreover, philanthropy and WCM mediate the relationship between corporate governance and firms' performance.
Practical/implications – This research work will be helpful in the corporate governance, and further researchers can conduct their study by considering executive/nonexecutive director and institutional owners as governance variables.
Originality/value – This paper fulfills an identified need to study how Corporate Governance effect the performance of firm."
2020, Journal of Asian Business and Economic Studies
Purpose – The purpose of this paper is to investigate the simultaneous relationship among ownership concentration, innovation and firm performance of the small- and medium-sized enterprises (SMEs) in Vietnam during the 2011–2015. By employing a Conditional Mixed Process (CMP) model, the findings show that: there is no impact of ownership concentration on innovation, but it has a positive impact on sales growth; innovation positively affects firm performance; and there exists a positively reverse causality from sales growth to innovation.
Design/methodology/approach – In this study, the authors propose the adaption of CMP model (Roodman, 2011). The nature of the first stage dependent variable – Innovation – is a binary one while the dependent variable Performance is continuous. Therefore, a model that can adapt the binary nature of the dependent variable and perform the estimation of a system of equations such as CMP model is preferred. The CMP framework is substantially that of seemingly unrelated regression, but with application in a larger scope. This approach is based on a “simulated maximum likelihood method” suggested by Geweke–Hajivassiliou–Keane algorithm.
Findings – By applying CMP method, this study examines the simultaneous relationship among ownership concentration, innovation and firm performance of the SMEs in Vietnam from 2011 to 2015. The findings indicate that: there is no impact of ownership concentration on innovation, but it has a positive impact on sales growth; innovation positively affects firm performance; and there exists a positively reverse causality from sales growth to innovation.
Research limitations/implications – In spite of the efforts to explore the simultaneous relationship among ownership concentration, innovation and firm performance of the SMEs in Vietnam, the study still has some limitations which are promising further research directions. First, the SME surveys by Central Institute for Economic Management do not have much information about other types of ownership including state-owned and foreign ownership. Therefore, possible further studies with richer data sets may explore the impacts of different types of ownership on firm innovation and performance. Second, other types of innovation such as organizational innovation, marketing innovation can also be investigated in further studies in a richer data set for the case of Vietnam SMEs.
Originality/value – The findings show that: there is no impact of ownership concentration on innovation, but it has a positive impact on sales growth; innovation positively affects firm performance; and there exists a positively reverse causality from sales growth to innovation. The policy implications insist on facilitating SMEs with easier access to capital via loans with preferred interest or trust loans without collateral, training programs for the labor force and SME leaders, and reduction of unnecessary administrative procedure