Banking Deregulation and Investment-Cash Flow Sensitivity
Dawei Jin, Haizhi Wang, Tianyu Zhao & Xinting Zhen
Motivation: Prior empirical studies show that there exists a declining pattern of investment-cash flow sensitivity during the banking deregulation period in the United States, but it is still unclear whether such deregulatory reforms that increase competition affect the sensitivity of investment to internally generated cash flows. This research provides empirical evidence to explain banking de- regulation as an important determinant of the documented declining trend of investment-cash flow sensitivity. Premise: This study investigates the important role of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) in explaining the doc- umented declining trend of firms’ investment-cash flow sensitivity. We predict that banking deregulation progress relaxes geographical restrictions on bank expansion and facilitates bank loan issuance as a main source of external financ- ing, and ultimately, reduces the sensitivity of investment to internally generated cash flows. Approach: We implement a difference-in-difference approach to investigate the effects of both the interstate and intrastate banking deregulation on sensitivity of investment to internal cash flow at the firm-year level over the period 1970 to 2006. We also follow the conventional investment literature and apply the Erickson-Whited estimators to control for the measurement error of Tobin’s q. Results: We document that there exists a material drop in the firm’s sensitivity of investment to cash flow following the deregulation of restrictions on interstate and intrastate banking. Particularly, such reduction effects are strong among firms in industries that rely heavily on external finance, and among firms that geographically located in the urban areas. Furthermore, we show that the reduction effects of banking deregulation on investment-cash flow sensitivity is more pronounced for financially constrained firms with low hedging needs than for constrained firms with high hedging needs. Conclusion: Banking deregulation changes improve competition among banks and promote the use of bank loans as external financing, and thus reduce sen- sitivity of investment to internally generated cash flows. Such reduction effects are mainly driven by financially constrained firms with low hedging needs and are more pronounced among urban firms than among small-city and rural-based firms. Consistency: This research provides important implications on the role of fi- nancial market development for corporate investment. By making bank loans a more available external source of financing to firms after deregulation, com- petition-enhancing deregulatory changes reduce the sensitivity of investment to cash flows.
The Leader-Member Exchange (LMX) Influence at Organizations: The Moderating Role of Person- Organization (P-O) Fit
Omer Faruk Derindag, Ozgur Demirtas & Ali Bayram
Motivation: In recent years, leader-member exchange (LMX) has become a widely utilized concept in business management and leadership literature. Ad- ditionally, business professionals and practitioners have been adopting this idea in their day-to-day management practices to ensure the effective performance of their teams. Premise: This study investigates the influence of LMX on burnout, turnover in- tention, and organizational citizenship behaviors (OCB). In addition, we exam- ined the moderating role of person-organization fit on these LMX influences. Approach: To address the moderating role of person-organization (P-O) fit on the relationships between the leader-member exchange (LMX) and burnout, LMX and turnover intention, and LMX and organizational citizenship behavior (OCB), a survey was conducted in Kayseri, Turkey’s manufacturing region. The sample consists of 903 employees who have direct relationships with their lead- ers. Frequency analysis, reliability analysis, confirmatory factor analysis, and hierarchical regression analysis were employed in the interpretation of the data obtained. Results: The results of the study reveal that leader-member interaction has a negative effect on burnout and intention to quit and has a positive effect on organizational citizenship behavior. In addition, person-organizational fit was found to have a moderating role in these relations. Conclusion: The studies on LMX theory revealed that leaders have the pro- pensity to trust their followers who displayed enthusiasm, and leaders pay less attention to other team members. The LMX theory kept evolving into a new structure concentrating more on the leader–team member relationship. There- fore, leader-member interaction influences burnout, turnover intention, empow- erment, employee performance, and organizational behavior. Consistency: Regardless of the type of industry, the quality of the relationship and interaction between managers and employees is directly reflected in work out- comes. In this context, especially in risk management and in times of uncertainty, it is vital that the entire team can act in a coordinated and consistent manner. In professional life, stakeholders can adopt LMX as an effective tool for alleviating burnout and turnover intention and increasing OCB in their organizations.
The Real Effect of Financial Reform: Evidence from Bond Market in China
Xian Gu, Lu Yun & Shangwei Hao
Motivation: There has been rich literature on the relationship between equity market liberalization or overall financial development and economic growth, however, very few studies focus on the private bond market. It is difficult to identify the causal effect of liberalization on the real economy because of the potential endogeneity problem. This paper provides new insights by explaining the real effect of financial reform on the private bond market, i.e., the corporate bond market, and tackling the endogeneity problems. Premise: This study aims to examine the real effect of China’s bond issuance re- form in 2015 on the cost of debt and debt choices. We use this reform to address endogeneity concerns because this policy shock only targets on the corporate bond market, not on the enterprise bond market. Approach: We employ a difference-in-difference method to investigate the effects of liberalization of the private bond market on the cost of debt and debt structure from both the bond-level and listed-firm level. The bond-level dataset covers 689 enterprise bonds and 1,295 corporate bonds issued from 2007 to 2016. The listed firm–level dataset covers almost all the public firms on China A-share market from 2013 to 2016, including 2,500 firms across 17 industries. Results: The bond-level results show that the reform reduces the cost of bond financing in terms of bond yield spread by approximately 29.4 percent and enhances the bond issuance volume by approximately 1.7 percent. At the list- ed-firm level, the reform reduces the cost of total debt by around 7.4 percent, enhances the public debt issuance instead of the private debt, and shortens the debt maturity. Additional robustness tests show that the above results are more pronounced for state-owned companies. Conclusion: The liberalization of the private bond market reduces the cost of debt and alleviates financial constraints. Furthermore, with less frictions in the public debt market, firms issue more public debt, i.e., bond, instead of private debt, i.e., bank loan. The effect is more significant for politically connected firms with more concentrated ownership, indicating that they may use it as a way to insulate from bank monitoring. Consistency: This research provides important implications on the role of financial reform for the private bond market. Liberalization of the private bond market reduces the cost of debt and further raises the public debt over bank loans, which may help reduce the exposure to liquidity shock during economic downturns. The paper sheds light for policy makers who aim to alleviate financial constraints and improve real growth through liberalizing capital markets.
Work Environment and Employee Performance: Evidence from Sell-Side Analysts
Shuya Liu & Kevin Sun
Motivation: While there is ample evidence that work environment quality is positively related to firm performance, there is limited evidence on whether the positive relation between work environment and firm performance is due to the claim that employees’ satisfaction with their work environment increases their job performance. We attempt to fill in this void by investigating how stock analysts’ rating of work environment is related to their job performance. Premise: We examine whether analysts in a better-rated work environment ex- pend more efforts, are more capable, and have high-quality stock recommendations. Approach: We use Glassdoor ratings as a proxy for employee satisfaction of work environment. Glassdoor.com is a website where current and past employees can rate their overall work environment and provide feedback about their firms. We regress analysts forecast accuracy, forecast frequency, and stock market reaction to analysts’ buy/sell recommendation on Glassdoor ratings, and the squared term of Glassdoor ratings. Results: We find that in better-rated brokerage firms, analysts issue more frequent and more accurate earnings forecasts, and their stock recommendations produce a larger stock market reaction. The coefficient on the squared term of Glassdoor rating is negative, indicating a concave relationship between work environment quality and job performance. We also find that this nonlinear relationship only exists after an analyst works for a brokerage firm for at least two years. In addition, highly rated brokerages have better analyst retention and a lower percentage of employee turnover. Conclusion: We find that out of five subcategories of work environment ratings, Career Opportunities and Culture & Values have consistently demonstrated their positive impact on analyst job performance. Our research demonstrates long-term benefits of investing in employees. Consistency: Our research contributes to the literature on environment, sustain- ability, and governance (ESG) and labor economics. The findings indicate the need to spend on improving work environments that may improve employee performance.