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Review of Accounting Studies, 25(1), 54-83 (2020) Sales and profit margins are two popular earnings components discussed in the financial media and foci of real-world attention. Profit margin is influenced by expenses scaled by sales, and findings on expenses may not be strictly carried over to profit margin. Although studies exist evaluating how sales and expenses differ in their usefulness in the capital market context (e.g., Ertimur et al. 2003), evidence on profit margin is lacking. This paper uses novel methods to the analyst forecast literature to investigate whether previously documented performance properties of analyst forecasts of earnings apply to both sales and profit margin, and whether these properties differ with respect to the two multiplicative earnings components. The sample consists of 25,230 observations from I/B/E/S (Institutional Broker Estimate System) over 15 years from 2002 to 2016. The authors examine four popular forecast properties to find out if these properties apply to both sales and profit margin, and whether sales forecasts will perform better or worse than profit margin forecasts. First, analyst forecasts tend to be too optimistic; that is, realized earnings tend to be lower than analyst forecasts (optimism). Second, benchmark forecasting models tend to forecast less accurately than analyst forecasts (relative forecast accuracy). Third, research suggests that analyst forecasts of earnings can be improved by considering predictions from statistical models (suboptimality). Fourth, positive or negative earnings forecast errors tend to be followed by similarly signed errors — a small but identifiable positive serial correlation (positive errors serial correlation). The authors find that all four performance properties apply to sales and profit margin forecasts. They also find that sales forecasts are generally superior to profit margin forecasts, and that firm size improves both forecasts and the improvement is largely stronger for sales than for profit margin. The authors conduct two additional analyses to contrast forecasts of sales and profit margin: (1) their contributions to the forecast errors of earnings, and (2) financial analysts’ forecast adjustments as a result of new information contained in sales and profit margin. The results show that sales forecasts perform better than profit margin forecasts in terms of how their forecast errors explain earnings forecast errors and how realized surprises affect adjustments of the respective forecasts. In evaluating how information can improve analyst forecasts, the authors use firm size as a substitute for information richness. They find that a better information environment improves sales forecasts more than profit margin forecasts. Their findings that many of the analyst forecast inefficiencies disappear for large firms suggest that analyst forecast research should be conducted separately for large versus small firms. This study extends past research on earnings forecasts to earnings components: sales and profit margin. Compared to prior works, the authors consider profit margin, a less studied component, instead of expenses. It provides empirical evidence that the performance properties found for forecasting earnings apply to both sales and profit margin. It also find that earnings forecast errors are due to profit margin forecast errors more than to sales forecast errors. In addition, the authors design robust methods for analyst forecasts research that can be readily applied to analyst forecasts of other accounting numbers, for example, forecasts of operating cash flows or return on assets. |
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C.S. Agnes Cheng, The Hong Kong Polytechnic University K.C. Kenneth Chu, The Hong Kong Polytechnic University James Ohlson, The Hong Kong Polytechnic University |
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Production and Operations Management, forthcoming Major social platform firms have two main sources of revenue. The first source is from the users that pay the platform a fixed subscription fee to view the content that the platform carries. The platform retains a pre-determined fraction of the subscription revenue and shares the balance with the content developer that supplies the content. The second source is from the users that upload illegal content to the platform seeking to monetize their content by displaying advertisements. In this case, the platform firm may receive a share of the advertisement revenue (ad-revenue) earned by the uploaders. In recent years, illegal content uploads on social platforms, such as YouTube, have grown rapidly. Social platforms tend to invest in the development of anti-piracy tools and content developers have been concerned about the availability of pirated or illegal content threatening their profitability. They also face the issue of responsibility for monitoring the content with the objective of detecting and removing illegal content on the platform's website. |
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Tarun Jain, Indian Institute of Management Bangalore Jishnu Hazra, Indian Institute of Management Bangalore T.C.E. Cheng, The Hong Kong Polytechnic University |
While previous research focuses on mechanisms to eradicate illegal content, which include pursuing enforcement effort, price discrimination, fines, taxation, and versioning, this study considers enforcement effort in the setting where the content is sold through a platform firm. It considers the scenario where both subscription-fee-based legal content and advertisement-based free illegal content are simultaneously available on a platform firm's streaming website. Specifically, it analyses three scenarios of illegal content monitoring: a) only the content developer monitors, b) only the platform firm monitors, and c) both the content developer and platform firm monitor the illegal content.
This study seeks to answer three questions. First, what are the content developer's pricing and content monitoring strategies under different scenarios? Second, which illegal content monitoring scenario is better for both the platform firm and the content developer? Third, how do various content monitoring strategies impact the welfare of society?
Numerical studies reveal that joint monitoring of illegal content motivates both parties to exert higher effort and make higher profits. The content developer sets a higher subscription price under this scenario to increase its revenue, as it invests heavily in content monitoring, and the platform firm earns a higher fraction of the subscription revenue. It also motivates the platform firm to exert a high monitoring effort and increases the content developer's profit because a larger number of customers will buy the legal content.
With respect to the impact of the expected ad-revenue (from the illegal content) on the monitoring effort, analysis reveals that under the scenario where only the platform exerts the monitoring effort, the expected ad-revenue increases and the platform's effort decreases. When only the content developer exerts the monitoring effort, the effort is not affected by the expected ad-revenue. When both players exert monitoring effort, the expected ad-revenue increases, and the effort exerted by both players decreases.
The results of this study have interesting implications for both content developers and platform firms. It is important for content developers to invest in illegal content eradication measures as this further motivates platforms to exert high monitoring effort. The content developer also needs to be careful while pricing the content under collaboration initiatives.
The results also have important implications for policymakers who set requirements, suggesting that when the quality of the illegal content is very low, content monitoring only by the developer is best for society. When the illegal content's quality is very high, collaboration between the platform and content developer is in the best interest of society.
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Journal of Management Studies, 57(3), 664-697 (2020) Cross‐border mergers and acquisitions (CBMAs) has been an increasingly important firm strategy. In CBMAs the key for acquirers to gain value is to effectively integrate with their foreign targets, which is often very challenging. Whether the foreign targets will collaborate with the acquirers or not could be substantially affected by the targets’ surrounding national culture. The individualism‐collectivism culture represents an important and well‐researched distinction across cultures. Yet research is less clear about how the different levels of individualistic cultures in host countries affect the success of CBMAs. This paper redirects attention from cultural distance to specific cultural values in host countries in CBMAs. It examines the effects of individualism on CBMA wealth creation - whether and how individualistic cultures in host countries affect the post‐acquisition value creation of firms’ CBMAs. |
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Hong Zhu, Peking University Qi Zhu, The Hong Kong Polytechnic University Zhiwen Ding, Lianhe Credit Investment Consulting Co., Ltd. |
As Chinese firms are increasingly acquiring targets outside of China in the New Normal global business landscape, this study addresses this key research question in the context of Chinese firms’ CBMAs.
With a sample of 404 Chinese listed firms’ CBMAs between 1 January 2001 and 31 December 2015, the theory and findings of this study show that a more individualistic culture in host countries is negatively related to post‐acquisition performance of Chinese acquirers.
This study further theorizes and tests how the Chinese acquirer CEOs’ characteristics moderate the wealth creation relationship. It finds that certain characteristics could affect the way that CEOs address the individualistic oriented behaviours of target managers and employees to create wealth from CBMAs. First, Chinese CEOs with exposure to foreign culture perform better in creating value from CBMAs involving targets with individualistic cultures than those without exposure to foreign culture. Second, female CEOs are more capable of handling targets’ individualistic cultures and gaining more value from CBMAs. Third, Chinese CEOs who are not board chairs could better address individualistic cultures in host countries.
The results suggest that acquirer CEOs have a major role to play in minimizing the potentially negative impact of targets with individualism culture if they have the exposure to foreign culture and are females, and yet acquirer CEO duality (CEO position and board chair consolidated) may amplify the negative effects.
This study represents the first crucial step towards a multilevel understanding of culture in the important and challenging international strategy of CBMAs. It advances the understandings of CBMA value creation from the culture perspective, in particular Chinese firms’ CBMA value creation and Chinese CEOs’ roles in addressing individualism culture in host countries to gain new value from CBMAs. It also contributes to the theory of MNE (multinational enterprise) management as MNEs often operate in many countries and face great challenges of integrating with their foreign subsidiaries.
This research also offers important practical implications. First, executives involved in international expansions need to have good understandings of the nature of the culture in host countries. Second, it may be value‐adding for Chinese firms to separate the CEO and board chair positions. Third, male CEOs should be prepared to reduce their directive leadership in their CBMAs where the input and cooperation of acquired targets are critical and needed. Finally, the findings can add value not only to Chinese acquirers but also to firms in other countries to advance the understandings of Chinese acquirers’ CBMA behaviours and wealth creation.
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Journal of Financial Economics, 134(3), 647-668 (2019) The authors show for the first time in the literature that counterparty credit risk has a strong impact on derivatives pricing using the data from the Hong Kong derivatives market during 2005-2014. They find that the log-price difference between a derivative warrant with counterparty credit risk and an otherwise identical option without counterparty credit risk is significantly and negatively associated with the credit default swap spread on the warrant issuer. They also find that the prices of out-of-the-money put warrants are more sensitive to credit risk than those of other warrants, consistent with the theory. Overall, the results highlight the importance of counterparty credit risk for the pricing of derivative securities. |
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Gang Li, The Hong Kong Polytechnic University Chu Zhang, The Hong Kong University of Science and Technology |
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The Accounting Review, forthcoming Successful innovations could induce more disclosure if the information asymmetry between the firm and its investors about post-innovation outcomes leads investors to demand more information. However, such innovations also likely entail greater proprietary cost concerns, which deter disclosure. This paper uses patent grants to examine the effect of innovation success on management guidance behaviour. The authors find that more management guidance follows patent grants, suggesting that despite disclosure cost concerns, firms with successful innovations do respond to information demand. This association is stronger after enactment of Regulation Fair Disclosure and for firms with greater institutional investor ownership, further highlighting the role of information demand. The association is weaker for firms with more competition, consistent with proprietary cost concerns having a moderating impact. Overall, the findings suggest that innovation creates demand for more voluntary disclosure and firms' disclosure decisions following innovation outcomes vary in ways that disclosure theory and economic intuition predict. |
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Sterling Huang, Singapore Management University Jeffrey Ng, The Hong Kong Polytechnic University Tharindra Ranasinghe, University of Maryland Mingyue Zhang, University of Toronto |
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Management Science, forthcoming The authors use a social learning perspective to extend their understanding of information technology (IT) investment and return. Specifically, they investigate social learning in the context of interlocks between corporate boards, which allow firms to share knowledge and experiences with respect to their IT investments. Using a large dataset of firm-years from 2001 to 2008, they find (a) a positive relationship exists between a focal firm’s IT investment and that of its interlocked firms; (b) this positive relationship is amplified by the interlocked firms’ IT capability, but only if the focal firm has an active board, which devotes time to allow sufficient communication among directors; and (c) the component of the focal firm’s IT investment that is attributable to board interlock influence is positively related to the firm’s performance, but only if the firm has an active board. Collectively, these findings support the authors’ central thesis: social learning through board interlocks can play a significant role in influencing a firm’s IT investments and enhancing their payoff. That said, attaining such benefits requires boards to incorporate those firms with high IT management capability and to strengthen board activity so interlocked members can substantively share their knowledge and experiences with IT investments. |
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Zhuo (June) Cheng,The Hong Kong Polytechnic University Arun Rai, Georgia State University Feng Tian, The Hong Kong Polytechnic University Sean Xu, Tsinghua University |
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The Accounting Review, forthcoming The authors investigate the relationship between societal trust and managers' decisions to voluntarily issue earnings forecasts. They reason that managers are more likely to issue earnings forecasts in high-trust countries than in low-trust countries because investors view these voluntary disclosures as more credible information about the firm's future profitability. They find evidence consistent with these predictions, suggesting that societal trust fosters corporate voluntary disclosure. They also document that societal trust works as a substitute for country-level formal institutions in terms of its implications for management earnings forecast (MEF) issuance. Additionally, the authors find a stronger relationship between firm-level commitment to credible disclosure and MEFs in low-trust countries, suggesting that country-level societal trust relates to the effectiveness of firm-level credibility enhancing mechanisms. Finally, they show that firms from countries with higher societal trust issue more precise and accurate MEFs that contain more information about multiple items. |
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Yuyan Guan, City University of Hong Kong Gerald J. Lobo, University of Houston Albert Tsang, The Hong Kong Polytechnic University Xiangang Xin, City University of Hong Kong |
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Journal of Marketing, 84(3), 106-121 (2020) Firms often attribute their service employees’ competent performance to either dedicated effort or natural talent. However, it is unclear how such practices affect customer evaluations of service employees and customer outcomes. Moreover, prior work has primarily examined attributions of one’s own performance, providing little insight on the impact of attributions of others’ performance. Drawing on research regarding the warmth-competence framework and performance attributions, the current research proposes and finds that consumers expect a more communal-oriented and less exchange-oriented relationship when a service employee’s competent performance is attributed to dedicated effort rather than natural talent, as effort (vs. talent) attribution leads consumers to perceive the employee as warmer. The authors further propose customer helping behaviours as downstream consequences of relationship expectations, finding that effort (vs. talent) attribution is more likely to induce customers’ word-of-mouth and idea provision behaviours. The findings enrich existing literature by identifying performance attributions as a managerially meaningful antecedent of relationship expectations and offer practical guidance on how marketers can influence consumers’ relationship expectations and helping behaviours. |
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Fine F. Leung, The Hong Kong Polytechnic University Sara Kim, The University of Hong Kong Caleb H. Tse, Nanyang Technological University |
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Academy of Management Journal, forthcoming As corporate social responsibility (CSR) matters not only for firms’ competitiveness, but also societies’ sustainability, governments often encourage firms to engage in CSR. Yet, the relationship between government CSR initiatives and firms’ CSR performance is quite mixed. To address this research gap, the authors developed a dual-agency model incorporating both public agents (government officials) and private agents (corporate CEOs) to investigate when firms respond to government initiatives by increasing their CSR. They tested their model in a sample of 746 Chinese listed firms during the period of 2009-2014 when a national CSR initiative, the 12th Five-year Plan, took place. Their results showed that firms responded positively to the Plan by increasing their CSR performance but their response varied by incentives of both public and private CSR agents. Firms were more likely to increase CSR when public agents were more motivated to seek promotion to the central government or when private agents had greater concerns for legitimacy. This examination of the role of two different types of CSR agents within institutions contributes to the institutional view of CSR by highlighting the interplay of institutions and human agents in promoting firm CSR. It also advances public policy and managerial practices regarding the development and selection of CSR agents inside and outside firms in a given institutional environment. |
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Li Shuping, The Hong Kong Polytechnic University Lu Jane, City University of Hong Kong |
