Chris Lo, Institute of Textiles and Clothing, The Hong Kong Polytechnic University (Faculty PhD graduate)
Christopher S. Tang, University of California, Los Angeles
Yi Zhou, Institute of Textiles and Clothing, The Hong Kong Polytechnic University
Andy Yeung, Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University
Di Fan, Macau University of Science and Technology
Environmental Incidents and the Market Value of Firms: An Empirical Investigation in the Chinese Context
Manufacturing & Service Operations Management, forthcoming
Although we all know that environmental incidents have a negative impact on the reputation of a firm, how Chinese investors react to environmental incidents of a firm is less commonly understood. Based on 618 environmental incidents of Chinese manufacturing firms between 2006 and 2013, Professor Andy Yeung and his team find that the environmental incidents of firms in China lead to a drop in market value of about 0.57%, which is much less significant compared to the results of similar studies in the western context. At the same time, they find that environmental incidents of a Chinese firm can have a negative impact on the stock prices of their major customers overseas. Surprisingly, the negative impact of environmental incidents on stock prices of their major overseas customers is actually much stronger than that of the Chinese firms themselves. This shows that Chinese investors seem to care much less about the environmental incidents of their invested firms. Instead, overseas investors care not only about the environmental performance of their invested firms, but also these firms’ suppliers in other countries. Based on these findings, the team believes that overseas stakeholders’ care about the environmental performance of the firms and their suppliers (i.e., purchasing ethics) can be used as a means to extend institutional pressure for environmental improvements to partners across the supply chain.
The team further examines how the negative impact of environmental incidents variates in different types of Chinese firms. It finds that firms with higher government shares and more recognition on social responsibility are less negatively affected. However, firms with stronger political ties (i.e., top management teams or board members with concurrent government appointments) can be more negatively affected in case of environmental incidents. This shows that political ties, which may be helpful for firms during good times, can also be a liability in the case of negative events like environmental incidents. Firms with personal political ties are more sensitive to negative publicity and perceived more negatively by stakeholders when environmental incidents happen.
* This paper won the 2017 Responsible Research in Management Award co-sponsored by the Community for Responsible Research in Business and Management, and the International Association for Chinese Management Research (IACMR).
Henry He Huang, Yeshiva University
Joseph Kerstein, Yeshiva University
Chong Wang, The Hong Kong Polytechnic University
The Impact of Climate Risk on Firm Performance and Financing Choices: An International Comparison
Journal of International Business Studies, 49 (5), 633-656 (2018)
Increasingly worse climate has attracted significant interests from the public, the media and academe. The effect of climate on economic performance has been studied intensively in the prior economic literature. However, these papers generally investigate the impact of climate events on geographic areas as a whole. Recent studies also examine the impact of carbon dioxide emission on firm valuation. In summary, the current literature does not directly examine how physical climate risk influences listed companies. A paper co-authored by Dr Chong Wang shows that climate risk influences firms’ performance and financial policies.
This study measures the country-level climate risk by using Global Climate Index published by Germanwatch. This measure captures the extent to which countries have suffered direct losses and fatalities associated with extreme weather events (e.g., storms, floods, and heat waves). This index is constructed by four indicators: (1) number of deaths, (2) number of deaths per 100,000 inhabitants, (3) sum of losses in US dollar at purchasing power parity (PPP), and (4) losses per unit of Gross Domestic Product (GDP). The index score of a country equals the country’s average ranking of all four indicators, absolute indicators (1) and (3) weighting 1/6 each, and relative indicators (2) and (4) weighting 1/3 each.
Using a sample of 353,906 observations from 55 countries, this study finds that firms with climate risk have lower and more volatile financial performance. To cope with climate risk, firms with higher climate risks are more likely to hold more cash, have lower short-term debt but greater long-term debt, and less likely to distribute cash dividends. The results are consistent with precaution incentive to hold cash, since extra cash holding can help the companies to mitigate the negative effects of climate events.
This paper also finds that the above effects are more pronounced for certain climate-sensitive industries, such as agriculture, energy (including mining and oil extraction), food products, healthcare, communications, business services, and transportation. This paper also suggests that insurance coverage can mitigate the relationship between climate risk and firm performance since firms can get loss covered to some extent by the insurance firms. The paper also finds that the results are robust to an instrumental variable method, propensity score matching, and alternative measures of climate risk. In the robustness check, the results are similar when US observations are dropped, when using country-weighted least squares regression to control for the different weights of countries in the sample, and when the financial crisis period is defined separately for each country.
This paper is one of the first to examine the global effects of climate risk on firm performance and firm policies. The study has important implication to investors. Given the importunate of climate risk, investors should pay attention to the impact of climate risk on firms’ operation. This paper is also a reminder for regulators that disclosure of the impact of climate risk might be necessary for firms’ financial reporting.
Dichu Bao, The Hong Kong Polytechnic University
Simon Yu Kit Fung, Deakin University
Lixin (Nancy) Su, Lingnan University
Can Shareholders Be at Rest after Adopting Clawback Provisions? Evidence from Stock Price Crash RiskContemporary Accounting Research, forthcoming
In the world of business, honesty should be the best policy but it sometimes isn’t. In recent years, so-called “clawback” provisions in executives’ contracts have enabled firms to seek the recovery of compensation awarded if numbers have been misstated in financial statements. Indeed, in the US the Dodd-Frank Act compels publicly listed companies to adopt clawback provisions to curb managerial opportunism. Although research has shown that clawbacks are beneficial, a paper co-authored by Dr Dichu Bao, shows that firms insisting on clawback provisions are more likely to experience significant declines in their stock prices than those which do not.
Comparing 352 companies that adopted clawback provisions from 2003 to 2013 with the same number that did not, the study finds that adopters saw an increase in their stock price crash risk, or the likelihood of extremely negative returns not related to the overall market. There is a fairly simple reason for this discrepancy: clawback measures come at a huge cost and force firms to conduct activities-based earnings management and write less readable financial reports in efforts to hide bad news and maintain their stock prices.
These findings suggest that the potential benefits to clawback provisions are outweighed by the incentives to conceal bad news, and that investors are not necessarily better off. Given that the Security and Exchange Commission is currently finalizing the rules for mandating clawbacks, the study is a timely reminder that regulators and policy makers make more informed decisions on the design and requirements of implementation rules.
Qu Qian, Singapore University of Social Sciences, and University of Science and Technology of China
Pengfei Guo, The Hong Kong Polytechnic University
Robin Lindsey, The University of British Columbia
Comparison of Subsidy Schemes for Reducing Waiting Times in Healthcare SystemsProduction and Operations Management, 26 (11), 2033–2049 (2017)
Population ageing is a problem worldwide, and nowhere more so than in public healthcare systems. Growing demand from ageing populations and the availability of new medical services have increased pressures on many countries’ systems, resulting in long patient waiting lists.
Long waits for key medical services often attract media headlines, ignite nationwide healthcare reform debates and put intense pressure on governments to fix the situation. As a result, governments are increasingly keen, and sometimes even forced, to subsidize patients to use private healthcare. In this way, the private healthcare system acts as a “safety valve” to absorb demand when the public system is overwhelmed.
A paper co-authored by Professor Pengfei Guo investigates subsidy schemes that are widely used in reducing waiting times for public healthcare services. It then puts forward a scenario in which patients can be subject to two healthcare policies. In the first, public patients are given a partial subsidy to use a private service if they have to wait beyond a specified time for public healthcare. The second policy involves giving public patients a full subsidy to use private healthcare, but they can only take the option if they have to wait for a much longer time than under the first policy.
The findings show that if all patients are equally sensitive to delay, the policy offering the smaller subsidy triggered sooner is more appealing to patients. The study then uses data from the Hong Kong Cataract Surgery Programme to compare the policies when patients differ in their sensitivity to delay, with the first policy still found to be more appealing to patients. However, the full subsidy policy can outperform policies that fall somewhere between the two stated here.
Celia Moore, Bocconi University
Sun Young Lee, University College London
Kawon Kim, The Hong Kong Polytechnic University
Daniel Cable, London Business School
The Advantage of Being Oneself: The Role of Applicant Self-verification in Organizational Hiring DecisionsJournal of Applied Psychology, 102 (11), 1493-1513 (2017)
The next time you approach a job interview, just relax and be yourself: if you’re good, this may be the best way to land the job. In a recent paper co-authored by Dr Kawon, the researchers found in three different studies that high-quality candidates who strived to present themselves accurately during the interview process were significantly more likely to receive a job offer.
While common wisdom has strongly encouraged job seekers to present only the best aspects of themselves to appear more attractive to interviewers, the authors found that it is more beneficial for individuals to present who they really are, particularly when they are high-quality candidates. The research was based on the concept of self-verification, the desire to present oneself accurately so that others understand one as one understands oneself. Self-verifying behaviour was already known to positively influence outcomes that unfold over time, such as the process of integrating into a new organization. This paper shows, for the first time, that self-verification can also have important effects on short-term interpersonal interactions, such as during the hiring process.
The first study, using a sample of teachers from around the globe applying for placements in the US, found that among candidates evaluated as high quality, those with a strong drive to self-verify were between 51% and 73% more likely to receive a placement offer. The second study replicated this effect in a radically different sample: lawyers applying for positions in a branch of the US military. High-quality candidates in this sample increased their chances of receiving a job offer by five times, from 3% to 17%, if they had a strong drive to self-verify. An important caveat is that the effect depends on meeting the bar of quality: self-verification actually weakened the position of candidates who were rated as low quality.
A third study was designed to test the mechanism behind this effect. A survey of 300 people measured their striving for self-verification, and selected those who scored extremely high and extremely low. These individuals participated in mock job interviews that were recorded and then transcribed and submitted to text analysis. The findings revealed that candidates’ language differed as a function of their self-verification drive. People with a strong self-verification drive communicated in a more fluid way about themselves, and were ultimately perceived as more authentic and less misrepresentative. These perceptions ultimately explain why high-self-verifying candidates flourish in the job market.
“In a job interview”, Celia Moore says, “we often try to present ourselves as perfect. Our study proves this instinct is wrong. Interviewers perceive an overly polished self-representation as inauthentic and potentially misrepresentative. But ultimately, if you are a high-quality candidate you can be yourself on the job market. Being honest and authentic will be more likely to get you the job”.
Ji-Chai Lin, The Hong Kong Polytechnic University
Yanzhi (Andrew) Wang, National Taiwan University
U.S. firms that invest more in R&D (on the basis of per dollar of firm size) tend to offer investors higher stock returns.The Accounting Review, 91 (3), 955-971 (2016)
U.S. firms that invest more in R&D (on the basis of per dollar of firm size) tend to offer investors higher stock returns. Is this R&D premium due to the mispricing of R&D-intensive firms or the compensation for higher uncertainty and risk associated with their R&D activity? According to a new study forthcoming in the Accounting Review, it is not due to the mispricing or the risk associated with R&D; instead, it is largely due to (i) high R&D capacity relative to firm valuation makes R&D-intensive firms attractive takeover targets and (ii) the higher takeover probability leads their investors to face higher takeover risk and require higher returns.
For firms more likely to become takeover targets, their values will increase more when economic fundamentals are good and acquirers are flush with cash to pursue takeovers. Conversely, as a takeover wave recedes, the values of the firms with higher takeover probability will decline more. Thus, for firms facing higher takeover probability, their values will fluctuate with the crests and troughs of takeover waves.
“We find robust evidence that a firm’s R&D intensity is a significant determinant of its likelihood of becoming a takeover target: the higher the R&D intensity, the higher the takeover probability. Furthermore, the R&D premium positively relates to the takeover probability even after controlling for many R&D-related factors,” write authors Ji-Chai Lin (Hong Kong Polytechnic University) and Yanzhi (Andrew) Wang (National Taiwan University).
The authors suggest that the R&D premium and the takeover factor strongly co-move and illustrate a major risk of holding high R&D-intensive firms’ stocks when the takeover factor falters, which usually occurs as takeover waves recede.
Donal Crilly, London Business School
Na Ni, The Hong Kong Polytechnic University
Yuwei Jiang, The Hong Kong Polytechnic University
Do-no-harm versus Do-good Social Responsibility: Attributional Thinking and the Liability of ForeignnessStrategic Management Journal, 37 (7), 1316-1329 (2016)
Do the efforts of multinational corporations (MNCs) to be socially responsible always engender positive evaluations from overseas stakeholders? Probably not. As more and more MNCs hope to gain more legitimacy and increased financial performance by engaging in corporate social responsibility (CSR) activities, there is no guarantee that these efforts always pay off, according to a forthcoming study in the Strategic Management Journal.
“Though some CSR involves proactive strategies to create social value, many forms of CSR seek to limit the social costs of business, ironically highlighting the negative consequences of corporate activity that are rarely entirely eliminated.” Write authors Donal Crilly (London Business School), Na Ni (Hong Kong Polytechnic University), and Yuwei Jiang (Hong Kong Polytechnic University).
In this study, the authors argue that two heuristics guide stakeholders in evaluating firms' social performance: foreignness and the valence of firms' social responsibility. They provide evidence from a field study of secondary stakeholders and an experimental study involving 129 non-governmental organizations. Consistent with attribution theory, the liability of foreignness is minimized when firms engage in “do-good” social responsibility (focused on proactive engagement creating positive externalities) but is substantial when firms engage in “do-no-harm” social responsibility (focused on attenuating negative externalities). They also demonstrate that these evaluations have consequences for whether stakeholders subsequently cooperate, or sow conflict, with firms.
MNCs often invest in social responsibility; however, these investments are generally undervalued by local constituencies. This is problematic because perceptions of social performance matter for how easily firms gain resources from stakeholders. “The effectiveness of strategy depends on the receptivity of actors outside the firm, e.g., analysts, customers, and governments. Communication with intermediaries is of prime importance,” the authors conclude.
Yuwei Jiang, The Hong Kong Polytechnic University
Gerald J. Gorn, The Hong Kong Polytechnic University
Maria Galli, Universitat Pompeu Fabra, Barcelona, Spain
Amitava Chattopadhyay, INSEAD Singapore
Does Your Company Have the Right Logo? How and Why Circular- and Angular-Logo Shapes Influence Brand Attribute JudgmentsJournal of Consumer Research, 42 (5) 709-726 (2016)
What are the key elements of a brand logo? One is for sure its shape. All logos are basically either circular (with curved lines), or angular (with straight lines and sharp corners), or a combination of both. A recent research published on the Journal of Consumer Research suggests that the circularity and angularity of a brand logo influences how consumers judge its brand attributes.
“Physical products like a sports shoe and sofa are found to be seen as more comfortable when the logo is circular and more durable when the logo is angular. And a company in the services industry that has a circular logo is seen as being more consumer-sensitive when it has a circular as opposed to an angular logo,“ write authors Yuwei Jiang (Hong Kong Polytechnic University), Gerald J. Gorn (Hong Kong Polytechnic University), Maria Galli (Universitat Pompeu Fabra), and Amitava Chattopadhyay (INSEAD).
Across five experiments, this research documents that the mere circularity and angularity of a brand logo is powerful enough to affect perceptions of the attributes that people think that a product or a company has. It is theorized and shown that circular vs. angular logo shapes activate respectively the association of softness and hardness. And these associations are very important. Why? Because what happens then is that product imagery gets generated based on these associations, and this results in the product or company being seen as having particular characteristics.
How does a company decide on the shape it will use for its brand logo? While brand logos are usually complex stimuli composed of multiple visual elements (e.g., shape, typeface, color), this research provides practical guidance to managers about how one specific but very important feature influences what people think about a product or company, namely how the shape of the logo influences the features that a product or a company is seen as having. As a real world example, Google’s recent logo change included making the two ‘g’s and the two ‘o’s, almost perfect circles, and removing the serifs (flicks at the ends of letters). Brand executives of Google at their new logo launch announcement in 2015 were quoted as saying “We think we’ve taken the best of Google (simple, uncluttered, colorful, friendly) and recast it not just for the Google of today, but for the Google of the future.” (Bloomberg Week; Sep. 18, 2015).