Pornanong Budsaratragoon and Boonlert Jitmaneeroj
The purpose of this study is to investigate the causal interrelations among the four pillars of corporate sustainability, which indicate a firm’s contribution to environmental…
Abstract
Purpose
The purpose of this study is to investigate the causal interrelations among the four pillars of corporate sustainability, which indicate a firm’s contribution to environmental, social, governance and economic activities. Moreover, this study identifies the critical drivers of corporate sustainability by focusing on the levels of market developments and geographical regions.
Design/methodology/approach
Based on corporate sustainability data of 2,725 global companies in 2016, this study uses a combination of analytical techniques including cluster analysis, data mining, partial least square path modeling and importance performance map analysis.
Findings
This study finds that companies in European developed markets exhibit the highest-ranking of corporate sustainability. In line with the social impact hypothesis, environmental, social and governance performance positively affects economic performance. Moreover, there is strong evidence of causal relationships and synergistic effects among the four pillars of corporate sustainability. In accordance with the institutional theory, the patterns of causal directions and the critical pillars depend on levels of market developments and geographical regions. Overall, social and environmental pillars are among the most critical drivers of corporate sustainability.
Research limitations/implications
The methodology does not aim to provide a new weighting scheme for calculating the corporate sustainability index.
Practical implications
Corporate managers should consider sustainability practices in all dimensions to benefit from synergistic effects among environmental, social, governance and economic activities. Furthermore, corporate sustainability strategies should not be generalized across countries with different levels of market developments and geographical regions.
Originality/value
This study prioritizes environmental, social, governance and economic pillars of corporate sustainability in emerging and developed markets across geographical regions.
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Corporate social responsibility (CSR) has several dimensions that are inherently unobservable or measured with errors. Due to measurement errors of CSR proxies, regression…
Abstract
Purpose
Corporate social responsibility (CSR) has several dimensions that are inherently unobservable or measured with errors. Due to measurement errors of CSR proxies, regression analysis seems inappropriate for investigating the relationship between CSR and firm value. Accounting for CSR measurement errors, the purpose of this paper is to use a latent variable analysis to examine whether CSR affects firm value.
Design/methodology/approach
This study applies a latent variable model that directly takes into account the measurement errors of CSR proxies. Moreover, the inclusion of firm-fixed effects in the model controls for time-invariant unobservable firm-specific characteristics that may drive both CSR and firm value. CSR is measured by environmental, social, and corporate governance activities.
Findings
Based on data of US firms between 2002 and 2014, this study finds conflicting evidence of a direct association between each CSR proxy and firm value. When all CSR proxies are incorporated into a latent variable model, CSR significantly positively impacts firm value. Therefore, CSR strategies based on a single measure of CSR or the equal weighting of CSR measures tend to underestimate the influence of CSR on firm value.
Practical implications
Corporate managers should enhance firm value by simultaneously engaging in environmental, social, and corporate governance activities because there is a synergistic effect with firm value. Furthermore, investors who downplay CSR factors in firm valuation can lead to significant errors in making equity investment choices.
Originality/value
This study presents a novel examination of the price-earnings ratio in the CSR valuation by using the latent variable model with firm-fixed effects.
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A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern…
Abstract
Purpose
A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern that stock valuation is also driven by investor sentiment. This paper aims to extend the existing literature by exploring whether investor sentiment impacts the P/E ratio.
Design/methodology/approach
The paper examines the determinants of P/E ratio by applying latent variable models with investor sentiment as a latent variable and several fundamental factors as control variables. Investor sentiment is proxied by trading volume, advance-decline ratio and price volatility.
Findings
Using annual data of the US industries over the period of 1998-2014, the current paper produces new empirical evidence that investor sentiment significantly affects the P/E ratio. This result is robust to the inclusion of several control variables that have been documented to explain the P/E ratio.
Practical implications
The findings have important implications for investors, as downplaying sentiment can lead to significant errors in making equity investment choices based on the P/E ratio.
Originality/value
The analytical framework of the current paper is differentiated from the conventional analysis in which the P/E ratio is regressed against control variables and proxies for sentiment, thus falling into the trap of implicitly presupposing that proxies are perfect measures of investor sentiment. As all proxies may have measurement errors to the true but unobservable investor sentiment, the current paper uses latent variable models to shed new light on the influence of investor sentiment on the P/E ratio.
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Although the Social Progress Index offers a thorough overview of the top-ranked countries with a highly developed social performance, it assigns the same weight to all component…
Abstract
Purpose
Although the Social Progress Index offers a thorough overview of the top-ranked countries with a highly developed social performance, it assigns the same weight to all component scores, implying that each component has identical and independent contribution to the SPI. By removing these flawed assumptions, the purpose of this paper is to examine the causal relationships among component scores and identify the critical components for reform priorities.
Design/methodology/approach
The authors propose an alternative approach to exploring the causal relationships and prioritizing the underlying components of the SPI. The four-step methodology comprises cluster analysis, data mining, partial least square path modeling, and importance-performance matrix analysis.
Findings
The authors find evidence of causal interrelations between the 12 components of the SPI. To accelerate social progress, the authors suggest that policy makers should allocate resources in order of priority to personal freedom and choice, personal rights, access to advanced education, water and sanitation, access to information and communications, tolerance and inclusion, personal safety, shelter, ecosystem sustainability, nutrition and basic medical care, health and wellness, and, finally, access to basic knowledge.
Practical implications
Policy makers in government, business, and civil society should become aware of causal relationships among the 12 components of the SPI and select an appropriate methodology to prioritize areas where social improvement is most needed.
Originality/value
Allowing for unequal weighting and causal relationships between component scores of the SPI, the authors’ methodology is the first attempt to offer a concrete way to identify which areas of social progress should constitute priorities for policy reforms.
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This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear…
Abstract
Purpose
This paper aims to examine the conditional and nonlinear relationship between price-earnings (P/E) ratio and payout ratio. A common finding of previous studies using linear regression model is that the P/E ratio is positively related to the dividend payout ratio. However, none of them investigates the condition under which the positive relationship holds.
Design/methodology/approach
This paper uses the fixed effects model to investigate the conditional and nonlinear relationship between P/E ratio and payout ratio. With the inclusion of fundamental factors and investor sentiment, this model allows for nonlinear relationship to be conditioned on the return on equity and the required rate of return.
Findings
Based on the annual data of industries in the USA over the period of 1998-2014, this paper produces new evidence indicating that when the return on equity is greater (less) than the required rate of return, the P/E ratio and dividend payout ratio exhibit a negative (positive) relationship and positive (negative) convexity.
Practical implications
Due to the curvature relationship between P/E ratio and payout ratio, the corporate managers and stock investors should pay more attention to the reduction in payout ratio than the rising payout ratio and the companies with low payout ratios than the companies with high payout ratios.
Originality/value
No previous study has tackled the issue of conditional and nonlinear relationship between P/E ratio and payout ratio. This paper attempts to fill the gap by allowing for nonlinear relationship conditional on the relative values of the return on equity and the required rate of return.
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In an introductory finance course, business school students often report difficulty in dealing with several variables and regression equations in testing the forward market…
Abstract
Purpose
In an introductory finance course, business school students often report difficulty in dealing with several variables and regression equations in testing the forward market efficiency and its relevant hypotheses: forward rate unbiasedness, rational expectations, risk neutrality and homogeneous expectations. The paper aims to discuss these issues.
Design/methodology/approach
Although each of these hypotheses may be relatively easy to understand one by one, it is harder to see their linkages. Thus, the author develops the loop diagram for supplementing traditional instruction methods.
Findings
The author finds that a significant majority of students prefer the loop diagram approach. Furthermore, students using loop diagram display more understanding of the forward market efficiency than those with access to a conventional instruction.
Originality/value
The loop diagram provides students a simple visual aid for formulating a complete set of regressions and enables them to analyze a richer set of relationships between several hypotheses than what they typically see in finance textbooks.
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Most companies rarely work on sustainable development as a whole, which includes environmental, social, governance, and economic pillars. The purpose of this paper is to explore…
Abstract
Purpose
Most companies rarely work on sustainable development as a whole, which includes environmental, social, governance, and economic pillars. The purpose of this paper is to explore causal relationships between pillar scores and overall score of sustainability and identify the most critical pillar to which policy makers should allot limited resources with the highest priority.
Design/methodology/approach
Based on Thomson Reuters ASSET4 database of global corporate sustainability, this paper examines the causal relations between pillar scores and overall score of sustainability by using the three-stage integrative methodology consisting of cluster analysis, data mining, and partial least square path modeling.
Findings
This paper finds that each pillar has unequal effects on the overall corporate sustainability and that the overall score is affected by not only the direct effects from pillar scores but also the indirect effects from the causal interrelations among pillars. Moreover, the patterns of causal directions and the most critical pillar are sensitive to industries. Social performance is the most critical pillar for the majority of industries, followed by environmental performance, and economic performance, respectively. The governance performance, however, is not the most critical pillar in any industry.
Practical implications
To construct a roadmap for reform priorities, policy makers should follow the top-down approach which involves hierarchical decisions. Using the three-stage methodology, the policy makers first decide on the most critical pillar score before selecting the most critical category score underneath.
Originality/value
Relaxing traditional assumptions of simple average overall score of corporate sustainability, the three-stage integrative framework allows for causal interrelations among pillars and different weights on individual pillars.
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Despite their important role for small and medium-sized enterprise (SME) policy reform, the individual scores of the ten categories of business regulations in the World Bank’s…
Abstract
Purpose
Despite their important role for small and medium-sized enterprise (SME) policy reform, the individual scores of the ten categories of business regulations in the World Bank’s Doing Business report are often overshadowed by the equal-weighted overall score and ease of doing business ranking. The purpose of this paper is to examine the causal interrelations between category scores and pinpoint the critical categories for reform.
Design/methodology/approach
Based on the latest 2016 Doing Business report, this paper applies the four-stage integrative framework to investigate the causal relationships between category scores and the overall score for business regulations for SMEs. The four-stage analysis includes cluster analysis, data mining, partial least square path modeling, and importance-performance map analysis (IPMA).
Findings
The overall score for business regulations is not only influenced by the direct effects of the category scores but also by the indirect effects of the causal interrelations between these scores. The IPMA suggests that policy-makers should examine the priorities of the category scores before making a decision about business regulatory reforms for SMEs. This paper suggests that policy-makers should allocate resources in order of priority – to resolving insolvency, getting credit, trading across borders, registering property, protecting minority investors, paying taxes, enforcing contracts, getting electricity, dealing with construction permits, and, finally, starting a business.
Originality/value
This four-stage methodology is the first attempt to construct a roadmap for business regulatory reforms for SMEs that addresses the problem of equal weighting and subjective causal relationships between category scores.