Knowledge that Transforms

Research summary : Previous studies have emphasized firm and industry effects on variation in firm performance, but the relationship between forms of ownership and firm performance has been the focus of limited research. This article examines the extent to which ownership form ( i.e., public or private ownership) and ownership structure (including diffused ownership and blockholding) affect firm performance. The results of an analysis of 30,525 European Union ( EU ) firms indicate that form of ownership is an important explanatory factor in the difference in performance among firms. These results underscore the need to study firms characterized by different ownership arrangements and to provide empirical evidence for the study of firm ownership in strategic management . Managerial summary : Motivated by growing evidence on the involvement of different types of owners in the strategies of firms, we studied the extent to which a firm's ownership form (type of legal incorporation, such as public and private ownership forms) and ownership structure (diffused ownership and blockholding) affect its performance. Our study of more than 30,000 firms from the European Union shows that ownership form differences explain some of the performance differences between firms. Our results also indicate that firms with different ownership forms are differently affected by their competitive environment. Overall, the study suggests that choosing the right ownership form can have important strategic consequences .

Research summary: This article explores the relationship between corporate social irresponsibility ( CSI ) and financial risk. We posit that media coverage of CSI generates risk by providing conditions that increase the potential for stakeholder sanctions. Through analyzing an international panel of 539 firms during 2008–2013, we find that firms receiving higher CSI coverage face higher financial risk. We show that the reach of the reporting media outlet is a critical condition for this relationship. Once the outlet has a high reach, the severity of CSI coverage is a boundary condition that further reinforces the effect. Our findings complement existing theory about the risk‐mitigating effect of corporate social responsibility by illuminating the risk‐generating effect of CSI coverage. For executives, these insights suggest complementary strategies for corporate risk management . Managerial summary: This article examines the effect of negative news on financial risk. It shows that negative media articles regarding environmental, social, and governance ( ESG ) issues increase a firm's credit risk. It also provides a detailed analysis of the impact of an article's reach and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the firm. The results allow to quantitatively assess the risk that emanates from negative ESG news. For executives, three strategies are derived for limiting a firm's exposure to this risk: balancing corporate social responsibility programs with operational safety programs, reporting suboptimal environmental and social performance transparently and proactively, and avoiding acquisition targets and markets with a legacy of negative news .

Research summary: T he dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter‐temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most‐related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification . Managerial summary: I t is believed that diversified firms are more likely to combine more‐related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one‐stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most‐related businesses .

Research summary : While research has shown that good stakeholder relations increase the value of a firm, less is known about how specific types of stakeholder governance affect firm value. We examine the value of one such governance mechanism—community benefits agreements ( CBA s) signed by firms and local communities—intended to minimize social conflict that disrupts access to valuable resources. We argue that shareholders evaluate more positively CBA s with local communities with strong property rights and histories of institutional action and extra‐institutional mobilization because these communities are more likely to cause costly disruptions and delays for a firm. We evaluate these arguments by analyzing the cumulative abnormal returns associated with the unexpected announcement of 148 CBA s signed between mining companies and local indigenous communities in Canada. Managerial summary : With firms across many industries facing escalating costs associated with social conflict, new tools are emerging to help firms mitigate these risks by seeking the support of the local communities in which they operate. Community benefits agreements ( CBA s) are contracts in which a community provides consent for a new investment in return for tangible benefits, such as local hiring and revenue sharing. We argue that although CBA s are costly for the firm, they are particularly valuable when communities can cause costly disruptions and delays for a firm. Our study of investor reactions to the announcement of 148 CBA s signed between mining companies and local indigenous communities in Canada shows that investors value more CBA s signed with communities with strong property rights and histories of protest .

Research summary: Investing a firm's resources in corporate social responsibility ( CSR ) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm's financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEO s of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEO s of firms with good financial performance from dismissal. These findings provide novel insight into how CEO s' career outcomes may be affected by earlier CSR decisions . Managerial summary: In this study, we examined a potential personal consequence for CEO s related to corporate social responsibility ( CSR ). We explored the role prior investments in CSR play when a board evaluates the firm's financial performance and considers whether or not to fire the CEO . Our results suggest that while financial performance sets the overall tone of a CEO 's evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences .

Research summary: E merging reputation research suggests that high‐reputation firms will act to maintain their reputations in the face of high expectations. Yet, this research remains unclear on how high‐reputation firms do so. We advance this research by exploring three questions related to high‐reputation firms' differential acquisition behaviors: Do high‐reputation firms make more acquisitions than similar firms without this distinction? What kind of acquisitions do they make? How do investors react to high‐reputation firms' differential acquisition behaviors? We find that high‐reputation firms make more acquisitions and more unrelated acquisitions than other firms. Yet, we also find that investors bid down high‐reputation firms' stock more than other firms' in response to acquisition announcements, suggesting that investors are skeptical of how high‐reputation firms maintain their reputations . Managerial summary: W e know that high‐reputation firms wish to maintain their elite standing in the face of high‐market expectations, but we know little about how they do so. We explore this puzzle by investigating how reputation maintenance influences high‐reputation firms' acquisition behaviors. We classify high‐reputation firms are those firms that make Fortune's M ost A dmired annual list, and we find that high‐reputation firms make more acquisitions and more unrelated ones than other firms. Surprisingly, we also find that the market tends to react negatively to these acquisitions. Thus, managers may want to reconsider their strategy of making acquisitions as a means to maintain their firms' high reputations .

Research summary : This article examines the capability antecedents of firm entry into nascent industries. Because a firm's technological investments in nascent industries typically occur before market entry, this study makes a distinction between firm capabilities at the time of market entry and at the time of initial investment. At the time of market entry, core technical capabilities and complementary assets influence the likelihood of entry. However, at the time of investment, a firm's integrative capabilities as well as the initial stocks of related technical capabilities and complementary assets become critical, as they enable endogenous development of core technical capabilities and complementary assets by the time of entry. The empirical sample consists of firms involved in field experiments in agricultural biotechnology during the period 1980–2010 . Managerial summary : New product commercialization in a nascent industry typically requires access to not only core technologies of the focal industry, but also supporting commercialization assets. However, firms may not possess these critical capabilities when they first invest in the industry. Instead, empirical evidence from the context of agricultural biotechnology shows that at the time of first investment, a firm's integrative capabilities partly explain their likelihood of entry. Integrative capabilities encompass a set of practices that enable effective coordination and communication, and in turn put firms in an advantageous position to develop the needed capabilities by the time of entry .

Research summary: W e examine the role of firm strategy in the global effort to combat pollution. We find that U . S . plants release less toxic emissions when their parent firm imports more from low‐wage countries ( LWC s). Consistent with the P ollution H aven H ypothesis, goods imported by U . S . firms from LWC s are in more pollution‐intensive industries. U . S . plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWC s. The negative impact of LWC imports on emissions is stronger for U . S . plants located in counties with greater institutional pressure for environmental performance, but weaker for more‐capable U . S . plants and firms. These results highlight the role of local institutions and firm capability in explaining firms' offshoring and environmental strategies . Managerial summary: U sing confidential trade, production, and pollution data of more than 8,000 firms and 18,000 plants from the U . S . C ensus B ureau for years 1992–2009, we find that U . S . plants release less toxic emissions when their parent firm imports more from low‐wage countries ( LWC s). In addition, goods imported by U . S . firms from LWC s are in more pollution‐intensive industries. U . S . plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWC s. However, not all U . S . firms choose to “offshore pollution.” U . S . plants located in counties with greater institutional pressure for environmental performance offshore more, but more‐capable U . S . plants and firms offshore less .

[Research summary: Investing a firm’s resources in corporate social responsibility (CSR) initiatives remains a contentious issue. While research suggests firm financial performance is the primary driver of CEO dismissal, we propose that CSR will provide important additional context when interpreting a firm’s financial performance. Consistent with this prediction, our results suggest that past CSR decisions amplify the negative relationship between financial performance and CEO dismissal. Specifically, we find that greater prior investments in CSR appear to expose CEOs of firms with poor financial performance to a greater risk of dismissal. In contrast, greater past investments in CSR appear to help shield CEOs of firms with good financial performance from dismissal. These findings provide novel insight into how CEOs’ career outcomes may be affected by earlier CSR decisions. Managerial summary:In this study, we examined a potential personal consequence for CEOs related to corporate social responsibility (CSR). We explored the role prior investments in CSR play when a board evaluates the firm’s financial performance and considers whether or not to fire the CEO. Our results suggest that while financial performance sets the overall tone of a CEO’s evaluation, CSR amplifies that baseline evaluation. Specifically, our results suggest that greater past investments in CSR appear to (a) greatly increase the likelihood of CEO dismissal when financial performance is poor, and (b) somewhat reduce the likelihood of CEO dismissal when financial performance is good. Thus, striving to deliver profits in a socially responsible manner may have both positive and negative personal consequences.]

Research summary: Does the degree to which founders keep control of their startups affect company value? I argue that founders face a “control dilemma” in which a startup's resource dependence drives a wedge between the startup's value and the founder's ability to retain control of decision making. I develop hypotheses about this tradeoff and test the hypotheses on a unique dataset of 6,130 American startups. I find that startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up control. On average, each additional level of founder control (i.e., controlling the board and/or the CEO position) reduces the pre‐money valuation of the startup by 17.1–22.0 percent . Managerial summary: A founder's vision and capabilities are key ingredients in the early success of a startup. During those early days, it is natural for the founder to have a powerful, central role. However, as the startup grows, founders who keep too much control of the startup and its most important decisions can harm the value of the startup. Both qualitative case studies and quantitative analyses of more than 6,000 private companies highlight that startups in which the founder has maintained control (by retaining a majority of the board of directors and/or by remaining as CEO ) have significantly lower valuations than those where the founder has relinquished control. This is especially true when the startup is three years old or more .