Abstract

It has been recognized that previous experiences can provide different types of feedback. However, it has not been systematically explored why firms are more likely to learn effectively from certain types of experience than others. From a feedback-based learning perspective, we argue that it is useful not only to focus on feedback valence (success or failure experiences) but also to examine feedback saliency (the magnitude of the experience’s influence). Based on a sample of acquisitions by U.S. firms, our results indicate that a firm’s success experience drives up the premium that it pays for a subsequent acquisition, whereas a failure experience reduces this subsequent premium. Moreover, we find that the magnitude of the effects of the four types of experiences—small failure, big failure, small success, and big success—does not follow a symmetrical pattern of inverse effects.

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acquisition experience ;  acquisition premium ;  feedback-based learning ;  feedback saliency ;  feedback valence

Abstract

Despite the clearly visible effects of analysts’ pressures on C-level executives in the popular press, there is limited evidence on their effects on marketing spending decisions. This study asks two questions. First, how do analysts’ pressures affect firms’ short-term marketing spending decisions? Based on a sample of 2706 firms during 1987–2009 compiled from Institutional Brokers Earning System, COMPUSTAT, and CRSP databases we find that firms cut marketing spending. Second, more importantly, we ask if firms which remained more committed in the past to marketing spending under analysts’ pressures have higher longer-term stock market performance. We find that the stock market performance of firms more committed to marketing spending under past periods of analysts’ pressures is higher. The findings are replicated for R&D spending and are robust across measures, controls, and methodologies. Consideration of two industry-based moderators, R&D spending and revenue growth, and one firm-based moderator, whether the firm is among the industry’s top four market share or other lower share firms, reveals that the findings are stronger for high R&D and growth industries and lower market share firms. One key implication is that top executives respond to analysts’ pressures by cutting marketing spending in the short term; however, if they can resist these pressures, longer-term stock market performance is higher.

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Analysts’ earnings expectations ;  Marketing spending ;  Stock market return ;  Value of marketing

Abstract

Pressure to meet or beat earnings forecasts from securities analysts leads managers of publicly traded firms to improve short-term earnings by cutting strategic investments at the expense of long-term competitiveness. Drawing on the behavioral theory of the firm, we explore how different dimensions of performance feedback moderate managerial responses to this pressure. We find that the negative impact of earnings pressure on a firm's strategic investments is strengthened when it receives performance feedback from lower stock returns but is weakened when the firm receives performance feedback from lower sales growth. When both dimensions of performance feedback are present, we find that sales growth has a stronger moderating effect. Our paper contributes to the developing literature on multiple dimensions of performance feedback by demonstrating how stock price and sales growth differentially influence managerial responses to earnings pressure. From a management standpoint, we highlight the possibility that performance feedback influences managerial responses to earnings pressures in ways that managers may not fully consider.

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earnings pressure ;  multiple performance feedback ;  securities analysts ;  strategic investments

Abstract

Purpose This paper aims to focus on the unique goal of understanding how marketing spending, a proxy for firm visibility, moderates the effects of corporate social responsibility (CSR) strengths and concerns on stock returns in the short and long terms. In contrast to the resource-based view (RBV) of the firm, the visibility theory, based on stakeholder awareness and expectations, offers asymmetric predictions on the moderation effects of marketing spending. Design/methodology/approach The predictions are tested based on data from KLD, Compustat and Center for Research in Security Prices from 2001-2010 and panel data based regression models. Findings Two results support the predictions of the visibility theory over those of the RBV. First, strengths are associated with higher stock returns, for low marketing spending firms, and only in the long term. Second, concerns are associated with lower stock returns, for high marketing spending firms, also only in the long term. A profiling analysis indicates that high marketing spending firms have high R&D spending and are more likely to operate in business-to-customer than business-to-business industries. Practical implications The two findings highlight the importance of coordination among chief marketing, sustainability and finance officers investing in CSR and marketing for stock returns, contingent on the firm’s marketing and R&D spending and industry characteristics. Originality/value This paper identifies conditions under which CSR is and is not related to stock returns, by uniquely considering three variables omitted in most past studies: marketing spending, CSR strengths and concerns and short- and long-term stock returns, all in the same study.

Keyword

Corporate social responsibility ;  Marketing spending ;  Stock market returns

Abstract

Research summary: Many studies use research and development (R&D) intensity or R&D spending as a proxy for risk taking, but we have little evidence that either associates positively with firm risk. We analyze the relations between R&D intensity (R&D spending to sales) and R&D spending on the one hand and 11 different indicators of firm risk on the other, using data from 1,907 to 3,908 firms in various industries over 13 years. The analysis finds a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different constructs. We discuss potential reasons for these nonsignificant results. Our study demonstrates that researchers should avoid casual use of R&D as a proxy for risk taking without explicitly providing a clear definition and measurement model for risk. Managerial summary: Risk is a key construct in strategic management research. Many studies in this area measure risk taking by research and development (R&D) intensity (the ratio of R&D spending to sales) or R&D spending. However, since R&D intensity and spending have also been used to measure various other things such as information processing demands, this raises the question of whether R&D intensity and spending are valid indicators of firm risk. We examine this issue by considering the associations of R&D intensity and R&D spending with conventional measures of firm risk. We find a general lack of consistent positive association between R&D and firm risk, making the use of R&D as an indicator of risk taking questionable. Furthermore, R&D intensity and spending do not correlate positively, suggesting they measure different things.

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construct measurement ;  CONSTRUCT MEASUREMENT ;  CORPORATE-STRATEGY ;  DOWNSIDE RISK ;  INVESTMENT ;  LARGE MULTIPRODUCT FIRMS ;  PERFORMANCE ;  PROSPECT-THEORY ;  R&D intensity ;  R&D spending ;  RETURN PARADOX ;  risk ;  STRATEGIC MANAGEMENT RESEARCH ;  SYSTEMATIC-RISK ;  validity

Abstract

Recent research has shown that managers in publicly traded companies facing earnings pressure-the pressure to meet or beat securities analysts' earnings forecasts-may make business decisions to improve short-term earnings. Analysts' forward-looking performance forecasts can serve as powerful motivation for managers, but may also encourage them to undertake short-term actions detrimental to future competitiveness and performance. To identify whether managerial reactions to earnings pressure suggest evidence of intertemporal trade-offs, we explored how companies respond to earnings pressure under different conditions of corporate governance that shape the temporal orientations of managers. Using data on competitive decisions made by U.S. airlines under quarterly earnings pressure, we examined the effect of earnings pressure on competitive behavior under different ownership structures (ownership by long-term dedicated investors versus transient investors) and CEO incentives (unvested incentives that are restricted or unexercisable in the short term, versus vested incentives). The results suggest that companies with more long-term-oriented investors and long-term-aligned CEOs with unvested incentives are less likely to soften competitive behavior in response to earnings pressure, relative to companies with transient investors and CEOs with vested, immediately exercisable stock-based incentives. Using a difference-in-differences (DiD) specification for stronger identification, we also found that firms respond to their rivals' earnings pressure shocks by increasing capacity and prices, particularly when those rivals do not have long-term-oriented investors and CEO incentives. The evidence is more aligned with the view that the pursuit of short-term earnings as a result of earnings pressure may be detrimental to long-term competitiveness.

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airline industry ;  AIRLINE INDUSTRY ;  corporate governance ;  earnings pressure ;  EMPIRICAL-ANALYSIS ;  EXECUTIVE-COMPENSATION ;  FIRM PERFORMANCE ;  INSTITUTIONAL INVESTORS ;  MULTIMARKET CONTACT ;  RADICAL TECHNOLOGICAL-CHANGE ;  RISK-TAKING ;  SECURITIES ANALYSTS ;  STOCK-OPTIONS ;  strategic behavior

Abstract

Purpose - This paper aims to address two unique and important questions. First, how do recessions directly affect firms' marketing spending decisions? Second, and more importantly, do firms which are more committed to marketing spending through past recessions achieve better stock market returns? Design/methodology/approach - This study is based on a combination of National Bureau of Economic Research, COMPUSTAT and Center for Research in Security Prices data on 6,000 firms between 1982 and 2009 which are analyzed using panel data-based regression models. Findings - The authors find that firms cut marketing spending during recessions. However, firms committed to marketing spending during past recessions achieve better stock market returns. The findings are found to be robust across B2B and B2C industries, different periods and US firms which vary on the proportion of their global revenue from non-US sales. Research limitations/implications - Top executives cut marketing budgets during recessions; however, if they can resist the pressures, and strategically continue to make marketing investments during recessions, they will achieve higher stock market returns. Originality/value - This is the first paper to establish the longer-term (not short-term) positive stock market performance of continuous (not episodic) marketing spending through past recessions, i.e. the view that marketing spending is necessary (not discretionary) for stock returns.

Keyword

BUSINESS CYCLES ;  CASH FLOW ;  CONSUMER CONFIDENCE ;  CROSS-SECTION ;  Economic conditions ;  FINANCIAL PERFORMANCE ;  FIRM PERFORMANCE ;  FUTURE-DIRECTIONS ;  Marketing strategy ;  PANEL-DATA ;  RESEARCH-AND-DEVELOPMENT ;  Stock markets ;  UNITED-STATES

Abstract

“My research currently looks at the interaction between the capital market and firm strategy in terms of how capital markets influence the strategic decisions made by companies and their managers, and how it shapes the way they compete with other firms. My interest in this topic goes back to my college life. When I began college I chose finance as my major. It was a very hot major back then. I learned a lot about the newly-developed stock market in China. But later I realised that in order for the capital market to develop well, you really need to have good quality companies. And so when I went to graduate school for my PhD, I chose strategy as my major because I really want to help companies grow better. At INSEAD I often took advantage of the free subscriptions to the Wall Street Journal and the Financial Times so that I could become well-versed in the language of business. It struck me that almost every day there was a front-page story about some big name company missing its earnings forecast and the resulting drop in its stock prices. So this led to my dissertation in which I looked at the pressure managers face to meet or beat analyst forecasts on firm earnings, and how this pressure influences companies’ strategic decisions. I published a paper on that and that’s how I got into this area of academic research. Over the last decade my co-authors and I have found that in almost all industries – whether it’s in the US or in China, developed or developing countries – the pressure to meet or beat analysts’ forecasts or earnings pressure is causing managers to engage in more short-term-oriented behaviour. That creates problems for firms to really perform well in the long-term. If you want firms to excel in the long-term, they really need to make a commitment and pursue strategic investments that might sacrifice short-term performance. But if they face pressure to deliver short-term performance in the current quarter, or current year, that’s going to be a problem for them.” ~ Yu Zhang, CEIBS Prof. of Management

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CEIBS Prof. of Management Yu Zhang takes a look how small or start-up companies can challenge large players in the market.

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“There has been a big boom in e-commerce and what we call the online-offline arena. But in the past half-year there has also been talk about whether the winter’s coming; a lot of companies haven’t been able to sustain their cash flows or financing and they’ve had to close their business. But there are good companies, and one of the ones I like a lot is Jing Dong (JD.com). They have been doing very well in terms of their strategic investment and commitment and have found a very unique way to compete against incumbents like Alibaba or Taobao. I think in the future whether it’s e-commerce, online or offline, it has to be the efficiency and viability of the business models. Amazon can do very well because they are extremely efficient in their operations. If you go to Amazon’s warehouses, you will see that the number of people is much fewer than in the typical Chinese e-commerce company warehouse. A lot of the work is done by the Kiva warehouse robots. Amazon is building huge warehouses in the US. These are about 10 or 20 stadiums in size. Once they reach scale they can use their own truck fleet, they’re starting to buy or lease their own air cargo fleet as well, so it’s all about efficiency, scale, scope. And that’s something that every company, whether it’s Chinese or American, has to think about. At the end of the day it’s about how efficiently you can compete in the market. It’s an efficiency driven business. On the other hand, there can be multiple types of business models. Amazon is just one successful model but not necessarily the model everyone should use. If everyone does what Amazon does, then there’s no differentiation. Even Amazon is now starting to look at whether they should have physical stores. That’s because other than efficiency, low cost and low price, retail consumers want something else – they want the real shopping experience. Online shoppers cannot replicate the traditional shopping experience. So in that sense I think in the future there will be different kinds of business models co-existing for e-commerce”. ~ Yu Zhang, CEIBS Prof. of Management

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