1. Introduction

2. Investment theory and empirical model

3. Data

4. Results

5. Conclusions

Appendix A. Merit order curves

Appendix B. Example of how we calculate q for E.ON

Appendix C. Additional tables

References

Abstract

We investigate investment decisions in electricity generation technologies under uncertainty. The econometric analysis is based on a vast dataset of electricity generation capacities of virtually all European power plants, which we combine with disaggregated measures of investment opportunities and uncertainty. Our approach allows for a disaggregated analysis at the asset level (i.e. different electricity generation technologies) of the firm. Across technologies, we find investment to follow market incentives despite sunk and irreversible capital, confirming the implications of the Tobin’s q-model. Asset-specific uncertainty hinders investment in conventional technologies, especially in peak-load assets, while industry uncertainty even triggers investment. Given that renewable power replaces peak-load generation technologies and that investment incentives decrease over time, our results indicate that there may be under-investment in the long run.

Introduction

Investments in electricity generation capacity are irreversible, sunk, and generally take considerable time to build. Moreover, in the last decade European electricity markets have been characterized by a transition towards decarbonization with significant government intervention. Electricity prices have decreased significantly and the system has become more volatile as a result (Sinn, 2017). During times of high renewables production, residual demand for conventional generation technologies drops, decreasing their capacity utilization and profitability. This may withhold large-scale investments, and may eventually create a ‘missing money problem’ for investment in conventional technologies (Joskow, 2007). Conventional technologies, however, are still needed as a backup for intermittent renewables and other low-carbon technologies to ensure supply security. Understanding the main determinants of electricity generation-capacity investment bears thus importance beyond academia, since electricity is one of the keys to the success of the energy transition to a decarbonized system as a response to climate change.

Abstract

Corporate social responsibility (CSR) involvement and disclosure has been becoming increasingly popular among US public firms, including those that qualify as real estate investment trusts (REITs). This paper aims to discover the relationship between CSR involvement and potential determinants such as growth opportunities, profitability, visibility, and agency costs. Types of CSR involvement are assessed in terms of environmental, community, and governance disclosures and are quantified using word count from the company’s voluntary disclosure. Our results support the hypothesis that CSR has a strategic element and that REITs have greater CSR involvement when they have greater growth and investment opportunities. When the type of disclosure is broken into subcategories, the results show that not all dimensions of CSR are alike: environmental, community, and governance CSR disclosures appear to be motivated by different sets of incentives and reasons.

Introduction

Over the past few decades, corporate social responsibility (CSR) has become an essential part of business operations and garnered intense interest, debate, and controversy across almost the entire range of business disciplines. For instance, Gregory et al. (2014), Harjoto and Jo (2015), Mishra and Modi (2013) and many others find that CSR activities have implications on corporate valuation, financial performance, and risk profile. Chan et al. (2014), Jo and Harjoto (2011), and Mason and Simmons (2014) investigate the relationship between CSR and corporate governance through a variety of viewpoints, including interest alignment and managerial activism. Cormier et al. (2004), Di Giuli and Kostovetsky (2014), and Perrow (1970) study CSR as a legitimacy response to environmental concerns and political pressure. As a concept, CSR is integral to ethics and moral values; it entails a firm’s initiatives that contribute to social welfare (Barnett 2007). Carroll’s (1979) seminal conceptualization of CSR explicitly contains an ethical dimension in which CSR activities have moral values that are expected of firms by their stakeholders.

Managerial ability has been proven to play an important determinant in tax avoidance, earnings quality, goodwill impairment, and other corporate policies. However, the relationship between investment opportunity and managerial ability has remained unclear for a long time, likely due to difficulty in measurement and other data limitations. This study focuses on how superior managerial ability affects investment opportunity for the following two reasons. First, as a crucial role in corporate finance, investment opportunity impacts a firm’s capital structure, dividend policy, and future growth (Smith and Watts (1992), Kallapur and Trombley (1999)). Second, because investment opportunity is unobservable by outsiders, it would be helpful if we could link investment opportunity to other firm characteristics and managerial ability. We argue that superior managers can understand industrial trends better, predict product demand more accurately, and invest in more value-creating projects, therefore associating themselves with better investment opportunity. Although the hypothesis we propose is somehow intuitive, a recent study in behavior corporate finance also shows that managers with a good reputation and compensation package may engage in more risk-averse and time preference projects that can harm investment opportunities (Graham, Campbell, and Manju (2013)). Moreover, we aim to find out whether the relation between managerial ability and investment opportunity varies under different financial conditions and economic environments. Rather than extrapolate the ability from managers’ characteristics, education background, personality traits, and working experience, we examine the relation by adopting the newly developed measure of managerial ability introduced by Demerjian, Lev, and McVay (2012) – namely, the MAscore (henceforth, we use MA-score to represent managerial ability). This measure follows a two-step procedure composed of data envelopment analysis and multivariate regression to quantify managers’ ef- ficiency in generating revenue. Prior research shows that the MA-score can reflect management-specific factors more precisely through several valid tests and is thus a better measure of managerial ability. The empirical evidence strongly supports our hypothesis, because our results document a significantly positive relation between managerial ability and investment opportunity, even after we control for firm fixed effects, year fixed effects, and other control variables. The empirical results indicate that managers with superior ability are related to more outstanding investment opportunities, as expected. In addition, we conduct a subsample test to look at how managerial ability’s impact on investment opportunity operates in different fi- nancial conditions and find that the result is more pronounced for firms with a low Kaplan-Zingales Index and a high Altman Z-score. Lastly, we interact the MA-score with the HHI dummy and Recession dummy to examine theirs correlations under different industrial and economic conditions and show that superior ability can mitigate the adverse effect of industry competition and financial crisis. For robustness, we conduct many different tests. First, we adopt Tobin’s q and the capital expenditure rate as alternative proxies for investment opportunity. Second, we use another methodology, first difference, to confirm the baseline regression. Third, we select the subsample of positive MAscores to re-run analysis. Fourth, we use 2SLS with instrumental variables, system simultaneous equations model (SEM), and Granger Causality to solve the endogenous problem.1 All results are still consistent with our expectation.

چکیده

این مطالعه این امر را بررسی می کند که آیا شرکت هایی که تحت نظر مدیران برتر فعالیت می کنند، می توانند با استفاده از داده های شرکت های صنعتی آمریکا در طی سال های 1988 تا 2015 به فرصت های سرمایه گذاری مطلوبتر دست پیدا کنند یا خیر. نتایج تجربی نشان می دهد که رابطه مثبتی بین توانایی مدیریتی و فرصت سرمایه گذاری وجود دارد و همچنین این رابطه تنها در شرکت هایی که از لحاظ مالی غیر محدود هستند یا شرکت هایی که در موقعیت مالی قوی قرار دارند معنادار می باشد. در کل یافته های ما از این حمایت می کند که شرکت هایی که مدیرانی با توانایی برتر دارند می توانند به منافع اقتصادی بیشتر از طریق فرصت های سرمایه گذاری بهتر دست پیدا کنند. از طریق تحقیق ما، سیاست گذاران و سرمایه گذاران می توانند توجه بیشتری به توانایی مدیریتی بنمایند.

1- مقدمه

توانایی مدیریتی اثبات کرده است که یک عامل تعیین کننده مهم در اجتناب از مالیات، کیفیت درآمد، و سایر سیاست های شرکت می باشد. با این حال رابطه بین فرصت سرمایه گذاری و توانایی مدیریتی برای مدت زمان زیادی نامعین مانده است که این به دلیل دشواری اندازه گیری و سایر محدودیت های داده ای می باشد. این مطالعه بر روی چگونگی تأثیرگذاری توانایی مدیران برتر بر فرصت های سرمایه گذاری به دو دلیل زیر تمرکز می کند. اولاً فرصت سرمایه گذاری بعنوان یک نقش حیاتی در امور مالی شرکت بر ساختار سرمایه ای شرکت، سیاست های سود سهام و رشد آینده تأثیر می گذارد. دوماً از آنجا که فرصت سرمایه گذاری توسط افراد خارجی قابل رویت نیست، اگر ما بتوانیم فرصت سرمایه گذاری را به سایر ویژگی های شرکت و توانایی مدیریتی مرتبط کنیم نتیجه مطلوبی خواهیم گرفت.

This paper examines the added-value of combining traditional valuation ratios with each other as well as with some financial statement variables in the German stock markets during the 2000–2015 period. The results show that combination pays off and, moreover, that the benefits of combination are greater in Germany than in most other developed stock markets. Particularly, we find strong evidence of the added-value of using Piotroski’s F-score as a supplementary selection criterion for value stocks as well as for low-accrual stocks. Our results show further that the F-score also boosts the efficacy of other valuation ratios besides the book-to-price ratio. In addition, the inclusion of F-score besides a relative value measure tends to increase the average market equity of portfolio firms. The decomposition of the full-sample-period performance into separate bull- and bear-period performance shows clearly that the better performance of F-score-boosted portfolios is mostly attributable to their outperformance during bearish periods, even though on average, they also generate higher bull-period returns than the comparable value portfolios formed without F-score. The use of F-score as a supplementary criterion also increases the proportion of stocks that earn above-market-average returns during the subsequent holding period. For the first time in the financial literature, we also document a strong relationship between high F-score stocks and momentum stocks.

Introduction

Considerable international evidence of value anomalies, which refer to the tendency of value stocks to outperform the stock market average most of the time, has been documented (e.g., Chan and Lakonishok 2004; Brown et al. 2008a; Fama and French 2006, 2012; Cakici et al. 2013; Pa¨ta¨ri et al. 2017b). This evidence has shown not only that the value anomalies in stock markets are a worldwide phenomenon but also that the relative efficacy of different valuation criteria varies across stock markets and the sample periods examined.1 In addition, some scholars have started to examine whether the performance of value stock portfolios can be further enhanced by adding other criteria besides relative value to the portfolio selection. These studies can be classified into two categories, the first of which either combines value indicators with momentum indicators (e.g., Pa¨ta¨ri et al. 2012, 2017a; Fisher et al. 2016) or double-sorts the stocks based on their value and momentum indicators (e.g., see Bird and Casavecchia 2007; Leivo 2012). In the second category, test designs attempt to pick the best-performing value stocks of the future from a larger set of value stocks based on some other firm characteristics, such as profitability, accruals or financial strength. The results of the studies of the latter type have been promising as, on average, value stocks with good profitability, a high earnings quality and/ or a sound financial condition have performed better than stocks that are just the cheapest in terms of valuation ratios.2 This study contributes to the latter category by combining these three quality dimensions with a value dimension by using German stock market data. Motivated by the evidence for the added-value of combining individual valuation ratios into composite value criteria,3 we also test whether the benefits of creating combinations within the value dimension are comparable to those achievable by combining the value and quality dimensions. For this purpose, we form some simple 2-combination value portfolios. We also examine the added-value of the inclusion of Piotroski’s (2000) F-score as the supplementary criterion in cases of forming such composite value portfolios. In general, the benefits of combining selection criteria are related to the inter-relationship between the criteria being compared. The weaker the relationship, the better the potential for the added-value of combining. For this reason, the added-value of combining individual valuation ratios is generally deemed to be limited, as they all are reasoned to represent the same (i.e., value) dimension (e.g., see Fama and French 2011).