Can we trust financial analysts? Reliability of stock recommendations and firm-specific characteristics

We examine the reliability of analysts’ stock recommendations issued for Italian listed firms by exploring absolute stock returns. Research findings reveal that absolute stock returns following recommendations differ depending on whether they are positive, neutral or negative recommendations, but slightly more than fifty percent of recommendations are confirmed by absolute stock returns. On the basis of the logistic regression model, we also document that the reliability of stock recommendations is inversely connected to the uncertainty faced by investors who hold stocks in a specific firm, as suggested by the estimate of explanatory variables, such as the firm’s beta, the interest coverage ratio and cash flow volatilit

What R&D assets say about firm profitability

Research and development (R&D) activities are usually considered a key factor for achieving superior performances. Using a sample of 11,897 manufacturing Italian firms, we examine the relationship between R&D expenditure that is capitalized as an intangible asset and some proxies of firm profitability over a period of four years in order to explore whether R&D assets can help investors in the identification of profitable firms. Contrary to expectations, this paper found a negative and/or an insignificant association between R&D assets and proxies of firm profitability. Although there are several possible explanations for this result, what we learn from this study is that R&D assets are not on average a reliable indicator for detecting profitable firms. Research findings revealed that firms with R&D assets appear to be not so profitable, large and levered

How codes of ethics deal with fear in the workplace

The relationship between decision-making and emotions has been increasingly explored in the past thirty years by physicians, psychologists and economists. Because of the impact that emotions have on human behaviour, ethical implications need to be examined if we consider that managers could use emotions to motivate employees. This paper analyses the content of the code of ethics of 278 companies listed on the Italian stock exchange in order to verify how the codes take into account the emotion of fear experienced by employees in the workplace. Research findings revealed that companies have failed to consider the word “fear” and most of the other terms expressing similar emotions. On the other hand, their codes of ethics focused on ethical standards that should be respected, such as the dignity of each single individual and on unethical actions that must be avoided, such as acts of physical or psychological violence

Rethinking the corporate tax base. Evidence of the relationships between cash flow and net income

This study examines how the operating cash flow net of cash from investing activities (CFINV) is correlated with the net income for a sample of 189 Italian listed firms from 2011 to 2015. Research findings revealed three main results. First, firms that have a positive amount of CFINV greater than the amount of net income are unprofitable and levered. Second, CFINV is positively affected by firm profitability, efficiency and leverage. Third, the corporate tax burden is positively affected by firm profitability and efficiency, but negatively influenced by leverage. A similar association between corporate tax burden and CFINV was also found. The relations we present aim to provide additional evidence for the debate about the use of a cash-flow tax base as an alternative solution to the traditional income tax base

How cash flow volatility affects debt financing and accounts payable

This paper investigates how volatility of cash flow from operations affects debt financing and accounts payable using a sample of Italian listed firms. Firms with different levels of cash flow were also examined. We find that firms that have more cash flow volatility have lower long-term debt to total debt, whatever the average level of their cash flow. We also show that accounts payable is positively associated with cash flow volatility, in particular for firms with a higher level of cash flow. Lastly, research findings reveal that firm leverage as measured by the total debt to assets ratio is negatively associated with cash flow volatility when firms have a lower level of cash flow, while the same relationship was not found for firms with a higher cash flow level

A ten-step model for solving ethical dilemmas

This paper suggests a ten-step model for solving ethical dilemmas taking into account a wide spectrum of ethical values. The model has a prescriptive content that should help decision-makers to find a solution to ethical dilemmas according to the dictates suggested by moral obligation. For each step of the model, different types of simplification procedures are used in order to guide the decision-maker progressively toward a satisfactory solution. We begin with a discussion of the main characteristics that the model should possess. The paper then gives a detailed description of the single steps of the model. Lastly, a case study was analysed

Cost of Debt and Corporate Profitability

This paper examines the relationship between the cost of debt and corporate profitability using a sample of 3,556 Italian unlisted firms between 2007 and 2011. On the basis of the logistic regression model, we find that the cost of debt, measured by the interest expense to financial debt ratio, is negatively correlated to various proxies of firm profitability. These findings are consistent with previous research on the relevance of indirect costs of corporate distress. However, although the analysis found evidence that unprofitable firms are highly leveraged in accordance with the Pecking order theory, we also observed that the cost of debt for the firms included in the sample is inversely dependent on the amount of financial debt

Characteristics of firms eligible to go into “Extraordinary Administration” in Italy

Large financially distressed firms are admitted to Extraordinary Administration (EA) in order to preserve corporate assets, through the continuation or reconversion of entrepreneurial activities pursuant to the Legislative Decree 270/99. One or three judicial commissioners appointed by the Minister of Industry are engaged to manage the company admitted to EA. However, not all financially distressed firms are eligible to go into EA. First, firms are admitted to the procedure if there is a prospect of preserving the business as a going concern. Second, admission to the EA is restricted to large and highly leveraged firms. In more detail, two quantitative limits are required: 1) no less than two hundred employees in the last financial year; 2) debts not less than two-thirds both of revenues and of total assets in the last financial year. The present study examines the scope of the admission requirements 1) and 2) by analysing firm characteristics that differentiate companies eligible to go into EA from those that are not admitted