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Publication date: 2 May 2024

Hussein Abdoh and Aktham Maghyereh

This study aims to validate the link between production manipulation and a firm’s performance variability (fundamentals and stock returns). It explores whether executives'…

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Abstract

Purpose

This study aims to validate the link between production manipulation and a firm’s performance variability (fundamentals and stock returns). It explores whether executives' risk-taking incentives encourage production deviations around the normal level during uncertainty.

Design/methodology/approach

Utilizing panel data of manufacturing firms from Compustat over three decades, the study investigates production management practices during economic uncertainty. The Economic Policy Uncertainty Index (EPU) is employed as a key metric. The empirical strategy involves documenting the effect of economic uncertainty on overproduction and underproduction, examining the role of executive compensation and assessing the impact on risk.

Findings

The research finds that risk-taking incentives increase over/underproduction, particularly amplifying the extent of underproduction during uncertainty. Production deviation rises, indicating that firms take greater risk by engaging in abnormal business operations. The study’s results are robust against various econometric methods, emphasizing the influence of risk-taking incentives on corporate production decisions.

Research limitations/implications

While providing valuable insights, the study acknowledges inherent limitations, including factors influencing production decisions beyond risk-taking incentives. Further research could explore additional determinants for a comprehensive understanding.

Practical implications

The findings highlight the potential dark side of executive compensation that motivates suboptimal risk-taking decisions, impacting risk, cost of capital and firm performance. Policymakers and compensation committees can use these insights to design efficient systems that mitigate moral hazard problems associated with productivity changes.

Social implications

The study emphasizes the broader social implications of production manipulation under uncertainty. It prompts discussions on the ethical considerations of managerial opportunism, its potential consequences for stakeholders and market dynamics.

Originality/value

This study contributes to the literature by examining the role of economic uncertainty on production manipulation and the influence of risk-taking incentives. It extends the earnings management literature by considering real activity manipulation and emphasizing the importance of decomposing production deviation into positive and negative values.

Details

International Journal of Managerial Finance, vol. 20 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

Available. Open Access. Open Access
Article
Publication date: 10 February 2021

Megha Agarwalla, Tarak Nath Sahu and Shib Sankar Jana

This study aims to establish the dynamic relationship between international crude oil prices and Indian stock prices represented by the Bombay Stock Exchange (BSE) energy index.

1947

Abstract

Purpose

This study aims to establish the dynamic relationship between international crude oil prices and Indian stock prices represented by the Bombay Stock Exchange (BSE) energy index.

Design/methodology/approach

Using Johansen’s cointegration test, vector error correction (VEC) model, impulse response function and variance decomposition test the study tries to ascertain the short-term and long-term dynamic association between the oil price shock and the movement of stock price and Granger causality test is applied to find out the nature of causality.

Findings

Considering vector autoregression estimation, the present study analyzes the relationship between the variables and tries to make a valid conclusion. The result of the co-integration test exhibits the presence of a long-term association between these two macro-economic variables during the period under study. Also, in the short-run VEC Granger causality result reveals that the movement of international crude oil price significantly influences the Indian stock price.

Research limitations/implications

To get a more robust result the study can be further extended by taking a longer time period with data of shorter time-frequency such as daily or weekly and further by using more sophisticated econometric and statistical tools. Further, the study can be extended to firm-level investigation considering the forward trading concentration with the Indian oil basket.

Social implications

In today’s globalized era, forecasting of share price movement helps investors in predicting the market and invest accordingly. Through this liquidity of the markets enhance and markets become more active in the global arena.

Originality/value

This study represents fresh findings in the changing time period the linkage between crude oil prices and stock prices which are of value to the academicians, researchers, policymakers, investors, market regulators, etc.

Details

Vilakshan - XIMB Journal of Management, vol. 18 no. 2
Type: Research Article
ISSN: 0973-1954

Keywords

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