Vishwanatha S.R. and Durga Prasad M.
The case was developed from secondary sources and interviews with a security analyst. The secondary sources include company annual reports, news reports, analyst reports, industry…
Abstract
Research methodology
The case was developed from secondary sources and interviews with a security analyst. The secondary sources include company annual reports, news reports, analyst reports, industry reports, company websites, stock exchange websites and databases such as Bloomberg and CMIE Prowess.
Case overview/synopsis
Increasing competition in product and capital markets has put tremendous pressure on managers to become more cost competitive. To address their firms' uncompetitive cost structures, managers may have to consider dramatic restructuring of their businesses. During 2014–2017, Tata Steel Ltd (TSL) UK considered a series of divestitures and a merger plan to nurse the company back to health. The case considers the economics of the restructuring plan. The case is designed to help students analyze a corporate downsizing program undertaken by a large Indian company in the UK and to highlight the dynamic role of the CFO and governance issues in family firms. It introduces students to issues surrounding a typical restructuring and provides students a platform to practice the estimation of value creation in a restructuring exercise. While some cases on corporate restructuring in the context of developed economies are available, there are very few cases written in an emerging market context. This case bridges that gap. TSL presents a unique opportunity to study corporate restructuring necessitated by a failed cross-border acquisition. It illustrates the potential for value loss in large, cross-border acquisitions. It shows how managerial hubris can prompt family firm owners to overbid in acquisitions and create legacy hot spots. In addition, the case can be used to discuss the causes of governance failures such as weak institutional monitoring and poor legal enforcement in emerging markets that could potentially harm minority shareholders.
Complexity academic level
The case was developed from secondary sources and interviews with a security analyst. The secondary sources include company annual reports, news reports, analyst reports, industry reports, company websites, stock exchange websites and databases such as Bloomberg and CMIE Prowess.
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The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences…
Abstract
Purpose
The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship.
Design/methodology/approach
The study draws the sample of listed non-financial firms in the Indian market from the year 2011 to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact of real earnings management on earnings persistence. The firm-specific controlling variables are also included in the empirical model. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms.
Findings
The findings of the study reveal that opportunistic earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in the level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect.
Originality/value
This is the first study in the Indian context which tests the implications of real earnings management on earnings persistence by using three alternative measures of real earnings management. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.
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Asif Ali and Omar Masood
The primary objective of this study is to determine how concentrated ownership affects stock returns by country and scale (by market capitalization), like large, medium, and…
Abstract
Purpose
The primary objective of this study is to determine how concentrated ownership affects stock returns by country and scale (by market capitalization), like large, medium, and small-cap firms in selected developed economies of the world.
Design/methodology/approach
Using a dataset comprising 12,751 annual observations from 850 listed companies from developed economies from 2004 to 2018, the study employs panel data models and instrumental variable estimation to mitigate endogeneity bias.
Findings
The findings reveal a significant and positive correlation between ownership concentration and expected returns on corporate equities in developed economies. Furthermore, the study categorizes firms into distinct size categories and finds nuanced differences in the relationship between ownership concentration and stock returns across large, medium, and small-cap enterprises. The results of the study reveal that ownership concentration (by country) and scale (Large, medium, and small) have a significant and positive impact on the stock returns of firms in developed economies.
Practical implications
the practical implications of this study extend to investors, firms, policymakers, regulators, and other stakeholders involved in the financial markets. By considering these implications, stakeholders can make informed decisions to enhance market efficiency, investor protection, and overall market integrity.
Originality/value
To the authors' understanding, this study is the first to examine the impact of concentrated ownership on excessive stock returns across countries and scales, with an explicit focus on large, medium, and small companies in select developed economies worldwide.
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The study examines the IPO resilience grounded on the firm’s intrinsic factors.
Abstract
Purpose
The study examines the IPO resilience grounded on the firm’s intrinsic factors.
Design/methodology/approach
We examine the association of IPO performance and post-listing firm’s performance with issuers' pre-listing financial and qualitative traits using panel data regression.
Findings
IPOs floated in the Indian market from July 2009 to March 31, 2022, evince the notable influence of issuers' pre-IPO fundamentals and legitimacy traits on IPO returns and post-listing earning power. Where the pandemic’s favorable impact is discerned on the post-listing year earning power of the issuer firms, the loss-making issuers appear to be adversely affected by the Covid disruption. Perhaps, the successful listing equipped the issuers with the financial flexibility to combat market challenges vis-à-vis failed issuers deprived of desired IPO proceeds.
Research limitations/implications
High initial returns followed by a declining pattern substantiate the retail investors to be less informed vis-à-vis initial investors, valuers and underwriters, who exit post-listing after profit booking. Investing in the shares of the newly listed ventures post-listing in the secondary market can shield retail investors from the uncertainty losses of being uninformed. The IPO market needs stringent regulations ensuring the verification of the listing valuation, the firm’s credentials and the intent of utilizing IPO proceeds. Healthy development of the IPO market merits reconsidering the listing of ventures with weak fundamentals suspected to withstand the market challenges.
Originality/value
Given the tremendous rise in the new firm venturing into the primary market and the spike in IPOs countering the losses immediately post-opening, the study examines the loss-making and young firms IPOs separately, adding novelty to the study.
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Timm Gödecke and Dirk Schiereck
This paper aims to investigate the impact of the largest shareholder's voting stake on the firm's capital structure decision.
Abstract
Purpose
This paper aims to investigate the impact of the largest shareholder's voting stake on the firm's capital structure decision.
Design/methodology/approach
To empirically analyze the influence of the voting stake on leverage, a large sample of 814 exchange-listed firms is applied. The baseline regression analysis is complemented by several robustness tests and a difference-in-difference regression analysis to mitigate endogeneity concerns.
Findings
The authors find a negative relationship between the voting stake of the largest shareholder and leverage, consistent with the notion that large, undiversified shareholders have the incentive to reduce risk. Additionally, results reveal that family control has a positive moderating effect, indicating that the negative relationship is less pronounced for family controlled firms.
Research limitations/implications
The authors contribute to the research by suggesting ownership concentration as another determinant of capital structure. Further, the authors add to the literature by showing how the association between ownership concentration and leverage is moderated by family control and that the identity of the largest shareholder is of great importance.
Practical implications
The paper provides important insights to the current debate on the proposal of the European Commission to reintroduce shares with multiple votes as part of the Listing Act. The authors expect the regulation to exacerbate the concentration of voting rights, which results in lower leverage and thus limits corporate growth.
Originality/value
The authors differentiate from previous studies by focusing the largest shareholders' voting stake, instead of using the ownership stake, to assess the impact of ownership concentration on leverage.
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Abhishek Kumar and Seshadev Sahoo
Anchor investor (AI) regulation was introduced in 2009 by the Indian market regulator Securities and Exchange Board of India to facilitate the price discovery process during the…
Abstract
Purpose
Anchor investor (AI) regulation was introduced in 2009 by the Indian market regulator Securities and Exchange Board of India to facilitate the price discovery process during the book-building mechanism. This study aims to examine the aftermarket pricing performance of initial public offering (IPO) firms over the long-run period of up to 36 months after the listing date in the anchor investor regime.
Design/methodology/approach
The post-issue performance of 129 Indian IPOs issued from 2009 to 2014 is studied by using buy and hold abnormal returns, cumulative abnormal returns and wealth relatives approaches. This study presents the aftermarket performance indicators of Indian IPOs along with the comparative analysis between anchor-backed and non-anchor-backed IPO categories. Using multiple regression analysis, this study identifies the firm-level variables and issue characteristics that can explain long-term IPO performance.
Findings
This study reports that Indian IPOs continue to underperform in the long run in the anchor regulation era as well. However, anchor-backed IPOs are reported to underperform lesser than the IPOs not backed by anchor investment. Additionally, this study documents that the variables, i.e. offer size, grade, post-issue promoter holding and IPOs issued during hot IPO periods, are significant in explaining the 36-month aftermarket performance.
Originality/value
This study investigates the long-run aftermarket pricing performance of anchor affiliated IPOs in the Indian market context. Thus, it contributes to the limited primary markets’ research from emerging economies. Further, the results provide fresh evidence reaffirming the credibility of AI as an institutional investor for attestation of quality of the issues.
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Mehul Raithatha and Radha Ladkani
The purpose of this paper is to examine the moderating effect of the board of directors on the strategic decisions made by family firms, and to understand the board attributes…
Abstract
Purpose
The purpose of this paper is to examine the moderating effect of the board of directors on the strategic decisions made by family firms, and to understand the board attributes that can alleviate the aversion of family-owned firms toward mergers and acquisitions (M&A).
Design/methodology/approach
The study uses a sample of several firms listed in India from 2006 to 2019 with 19,813 firm-year observations. The empirical tests have been performed using logistic and negative binomial regressions. The study also tests for endogeneity with the help of Heckman (1979) two-step treatment effects model.
Findings
The study shows that board characteristics like smaller board-size, presence of outside directors, lower intensity of board activity, presence of busier board members and separation of board chair and CEO positions alleviate the inhibition of family firms toward M&A.
Research limitations/implications
The findings imply that investors and policymakers can encourage family firms to have smaller boards, more independent directors, passive boards and CEO nonduality to reduce their aversion toward risky activities. Family-owned firms could consider a board comprising members with multiple directorships who can bring wider knowledge and expertise which can reduce the perceived threat to socioemotional wealth (SEW) and alleviate their aversion toward M&A.
Originality/value
Ownership concentration in family firms posits a unique challenge in terms of their aversion toward M&A. This study is one of the few that highlight the relevance of the monitoring and advisory role of the board in alleviating this aversion in an emerging market like India.
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Irwan Trinugroho, Tastaftiyan Risfandy, Mamduh M. Hanafi and Raditya Sukmana
Using the Indonesian setting where the government formally limits the presence of busy commissioners, the authors investigate whether a board containing busy commissioners could…
Abstract
Purpose
Using the Indonesian setting where the government formally limits the presence of busy commissioners, the authors investigate whether a board containing busy commissioners could be beneficial or detrimental for firm performance.
Design/methodology/approach
The authors propose an econometric model focusing on the impact of busy commissioners on the firm's profitability. The authors are also interested in investigating whether the effect is different between small and large firms and between mature and non-mature firms. A sample of 392 Indonesian listed firms from 2014 to 2020 is used in this study.
Findings
The authors find a negative association between busyness and performance and this result is robust across different estimations and econometrics strategies. The authors also document that the negative impact of busy directors diminishes particularly in young and small firms. The authors also find that the impact is more pronounced in state-owned firms.
Practical implications
From a firm point of view, the result suggests that the companies should be aware that appointing busy commissioners in the board structure can detriment market-based performance. The listed firms should also understand that busy commissioners are inefficient, especially if these firms are large, mature and state-owned.
Originality/value
To the best of the authors’ knowledge, this is the first study investigating the relation between busy commissioners and performance by considering age, firm size and state-owned firms as a moderator in a sample of Indonesian listed firms.
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Sahil Narang and Rudra P. Pradhan
This study aims to examine the reaction of anchor investors (AIs) to pre-IPO earnings management (EM). The authors use the unique detailed bid data from the Indian anchor…
Abstract
Purpose
This study aims to examine the reaction of anchor investors (AIs) to pre-IPO earnings management (EM). The authors use the unique detailed bid data from the Indian anchor experiment. The authors also study the reputed AIs’ EM detection ability and pricing behavior in response to pre-IPO EM.
Design/methodology/approach
The authors use unique AI bid data for 169 Indian IPO firms. Utilizing the logistic regression and Tobit regression models with industry and year-fixed effects, the authors examine the relationship between various measures of AI participation and proxies of short-term and long-term discretionary accruals.
Findings
The authors document that pre-IPO EM is positively associated with the likelihood of anchor backing but negatively related to the likelihood of reputed anchor backing. The findings indicate that AIs are misled by pre-IPO EM, but reputed AIs are not. The authors also observe that reputed AIs, compared to the non-reputed, pay less than the upper band with increasing EM. The findings are robust to using various AI measures and EM proxies.
Practical implications
The findings have significant implications for regulators in the implementation of AI concept in non-anchor markets and better implementation of policies in existing anchor settings. Findings can also be relevant for non-institutional investors in the IPO domain.
Originality/value
This is one of the few studies on institutional investors' IPO bidding behavior in response to pre-IPO EM. However, this is the first study to analyze AIs' IPO bidding behavior in response to pre-IPO EM.
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The purpose of the study is to examine how operating efficiencies from incentive alignment compensate for rent extraction in family firms. The author asks whether ownership (1…
Abstract
Purpose
The purpose of the study is to examine how operating efficiencies from incentive alignment compensate for rent extraction in family firms. The author asks whether ownership (1) improves operating efficiencies to increase firm value, (2) positively affects related-party transactions (RPTs), or (3) destroys firm value. Finally, the author assesses whether the incentive effect dominates the entrenchment effect.
Design/methodology/approach
This study employs a panel of 333 listed family firms (and 185 nonfamily firms) and handles endogeneity using a dynamic panel system GMM and panel VAR.
Findings
Ownership decreases discretionary expenses and increases asset utilization to add firm value. The efficiency gains generate more value in family firms, especially majority-held ones, than in nonmajority ones. However, ownership is also related to increased RPTs (especially dubious loans/guarantees), reducing firm value. RPTs destroy value more severely in the family (or group) firms than in nonfamily (nongroup) firms. It could be why ownership's positive impact on value is lower in family firms than in nonfamily firms. Overall, the incentive effect dominates the entrenchment effect and is robust to controlling private benefits of control in the dynamic ownership-value model.
Research limitations/implications
(1) A family firm's ownership may not be optimal. (2) The firm's long-term commitment as a dynasty limits the scale of expropriation yet sustains impetus for long-term value creation. The paradox partly explains why large family holdings and firm-specific investments endure over generations. (3) This way, large ownership substitutes weak investor protection in India despite tunneling as skin in the game provides necessary investor confidence. (4) Future studies can examine whether extraction varies with family generations and how family characteristics affect the incentive effects.
Practical implications
(1) Concentrated ownership may not be a wrong policy choice in emerging markets to draw firm-specific investments. (2) Investors, auditors, or creditors must pay closer attention to loans/guarantees. (3) More vigorous enforcement, auditor scrutiny, and board oversight are needed.
Social implications
Family firms are not necessarily a bad organization type that destroys investor wealth. They can be valuably efficient due to their ownership and wealth concentration, and frugality. They matter in the economic growth of a developing market like India.
Originality/value
(1) Extends ownership-performance research to family firms and shows that although ownership facilitates tunneling, the incentive effect dominates; (2) family ownership is not impacted by firm value; (3) family ownership levels reduce discretionary expenses and increase asset utilization to create added value, especially in majority-held family firms; (4) RPTs and loans/guarantees increase with ownership; (5) value erosion from RPTs is higher in family (group) firms than in other firms.