Asian Businesses in a Turbulent Environment

Uncertainty and Coping Strategies

T.S. Chan, Geng Cui, T.S. Chan, Geng Cui, T. S. Chan

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN:
  9781137488855
• eBook ISBN:
  9781137488879
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Asian Businesses in a Turbulent Environment explores how Asian firms cope with challenges such as globalization, regional conflict, pressure for greater democracy and environmental protection, and the impact that rising above these challenges will have in their growth prospects.

Part I

© Palgrave Macmillan, a division of Macmillan Publishers Limited 2016

T. S. Chan and Geng Cui (eds.)Asian Businesses in a Turbulent EnvironmentAIB Southeast Asia10.1057/978-1-137-48887-9_1

Begin Abstract

1. The Multiple Facets of Crisis and Its Impact on IPO Underpricing

Frank W. Ng¹

(1)

Department of Management, The Chinese University of Hong Kong, Hong Kong, Hong Kong

Frank W. Ng

Email: [email protected]

Keywords

Environmental shocksCrisisInitial public offerings (IPOs)

End Abstract

Introduction

Asian business and economies are not unfamiliar with global and regional crises. In the last two decades, for instance, Asian firms have been facing many challenges such as the Asian financial crisis (Belderbos & Zou, 2005; Wan & Yiu, 2009), political instability within and among Asian nations (Siegel, 2007; Weiner, 2005), and market liberalization in emerging Asian economies (Dau, 2013; Kumaraswamy, Mudambi, Saranga, & Tripathy, 2012). Turbulent environmental conditions pose challenges to national or regulatory policies (Allen, Chakraborty, & Watanabe, 2011; Huang, Wu, Yu, & Zhang, 2015) as well as international and domestic strategies (Boubakri, Guedhami, & Mishra, 2010; Chung, Lee, Beamish, & Isobe, 2010), which greatly affect firm operations, growth, and survival (Belderbos & Zou, 2005; Chung et al., 2010; Dai, Eden, & Beamish, 2013). As Asian economies are growing and integrating with the global market, firms are expected to deal with more frequent and complex crises in the future. It is important to understand the challenges and uncertainties triggered by these global and regional crises.

There has been increasing inquiry into the contribution to management theories by Asian economies and business research (Bruton & Lau, 2008). The objective of this chapter is to contribute to the literature on global and regional crises by providing a more in-depth theorization regarding the multidimensional characteristics of crisis. This is critical because extant conceptualization only provides a simplified, and sometimes homogeneous, view of crisis (Lengnick-Hall & Beck, 2005), which may not be adequate to capture its complex nature and impact on firms. As such, the discussion attempts to move the current literature forward to enrich the conceptualization and thus the classifications of crisis for future research. In particular, a new construct of crisis uncertainty, which is defined as the difficulty in accurately predicting the nature of upcoming crisis, is developed. The premise is that a particular crisis can be described in terms of three dimensions of crisis uncertainty: (1) crisis-state uncertainty, referring to the likelihood that individuals predict the occurrence of the upcoming crisis; (2) crisis-effect uncertainty, referring to the likelihood that individuals predict the impact of the crisis; and (3) crisis-response uncertainty, referring to the extent to which individuals are likely to evaluate and respond to the crisis.

To illustrate how a multidimensional conceptualization of crisis can be used to account for the differing impact on firm strategies and activities, this chapter will use the example of initial public offering (IPO) underpricing. The equity market is one of the important drivers of economic development and the integration of many emerging Asian countries (Naughton, 1999). Also, it is attractive to many international and domestic investors because of the considerable short- and long-term returns, demonstrated by the high oversubscription rates and underpricing values (Agarwal, Liu, & Rhee, 2008; Reber & Fong, 2006). Yet, due to global and regional crises, the Asian equity markets have also been subject to substantial risks and volatility (Ahmad-Zaluki, Campbell, & Goodacre, 2011; Vithessonthi, 2014). Characterized as a turbulent environment, environmental crisis may hamper the intentions of international and domestic firms to go public in these regions as well as the confidence of potential investors to involve in these IPO markets. Grounded in information uncertainty perspective (Milliken, 1987) and effectuation perspective (Sarasvathy, 2001), different levels of crisis-uncertainty dimensions will influence the quantity and quality of information distribution in the IPO market. When the dimensions of crisis uncertainty are high, the information is of less value. As such, IPO insiders, including the pre-listed firm owners and IPO issuers, as well as IPO outsiders such as potential investors, would find it difficult to accurately predict the likely impact of the crisis. As a result, IPO insiders will strategically alter the selling price of their shares to control for loss affordability and to devise environmental contingencies (Sarasvathy, 2001).

The multidimensional conceptualization of crisis offers theoretical contribution and responds to the call for research into richer conceptualization of crisis (Lengnick-Hall & Beck, 2005) and the impact of external environment on IPOs (Certo, Holcomb, & Holmes, 2009). First, the new concept of crisis uncertainty provides insight through more direct and closer examination of the nature of crisis. Through identifying different facets of crisis, further studies are able to more accurately predict and understand the impact of crisis on Asian businesses and economies. This is especially important for understanding how coping strategies and organizational responses effectively deal with crises (Smart & Vertinsky, 1984). In addition to explaining the varying impact on IPO underpricing, such conceptualization of crisis uncertainty can also be applied to other issues of international business such as international expansions (Chung et al., 2010) and cross-border alliances (Belderbos & Zou, 2005). Second, the multidimensional conceptualization of crisis attempts to generalize to most, if not all, types of crisis and therefore allows researchers to develop new theories or taxonomy in classifying and differentiating among crises. Third, this chapter also contributes to the IPO literature by offering an alternative explanation of uncertainty arising from the external environment rather than from conventional information asymmetry during the IPO process (Beatty & Ritter, 1986; Carter & Manaster, 1990). Finally, in addition to considering firm capabilities and strategy formulations, the multidimensional conceptualization of crisis provides guidance for managers operating internationally to more accurately predict a forthcoming crisis and therefore develop more effective coping strategies.

This chapter starts with a brief review of the past and current research of crisis, and follows by proposing a crisis classification system that may account for the differing impact on firms. Next, this chapter introduces the concept of crisis uncertainty and presents examples of how different levels of uncertainty result in different impacts on IPO underpricing. The chapter concludes with a discussion of potential future research.

Crisis: Discontinuous Environmental Change

In studying the impact of organizational environment on firm strategy and performance, researchers have long examined the role of crisis, or discontinuous environmental change (discontinuous change) (Kraatz & Zajac, 2001; Tushman & Romanelli, 1985). For example, they have studied the impact or context of crises such as environmental jolts (Meyer, Brooks, & Goes, 1990), exogenous shocks (Wan & Yiu, 2009), fundamental environmental shifts (Ginsberg & Buchholtz, 1990), upheaval (Danis, Chiaburu, & Lyles, 2010), and conflicts (Dai et al., 2013). Researchers have also explored their impact on firm activities and performance (Boubakri et al., 2010; Chung et al., 2010; Wan & Yiu, 2009), as well as firm responses in facing and managing changes (Dai et al., 2013; Kraatz & Zajac, 2001; Lengnick-Hall & Beck, 2005). In general, discontinuous change leads to environmental turbulence, which lowers environmental munificence and increases environmental complexity (Dess & Beard, 1984; Kraatz & Zajac, 2001). It ‘transforms fundamental properties or states of the system’ (Meyer et al., 1990, p. 94). Also it renders existing operations and strategies ineffective, which gives rise to a number of coping or turnaround strategies, including organizational retrenchment and restructuring, executive turnover, and strategic change (Bruton, Ahlstrom, & Wan, 2003).

Although these studies provide significant contributions, (Meyer, Gaba, & Colwell, 2005; Suarez & Oliva, 2005), they tend to assume, with notable exceptions, that crisis is a unidimensional concept, and have examined relatively simple impact on firms. That is, the literature has yet to examine the nature of discontinuous change. However, especially in Asia, there are many different types of crises due to different causes that result in different influences on firm activities and performance. This chapter aims to contribute to the literature by proposing a multidimensional conceptualization of crisis. First, I will discuss two of the possible crisis dimensions implicitly embedded in the past literature.

Regional Scope

In general, environmental scope refers to the number of environmental elements affected by a particular event or crisis (Suarez & Oliva, 2005, p. 1022). A crisis that affects less elements or components of organizational environment leads to a less complex and thus less uncertain environment (Duncan, 1972). Drawing from this insight, future research can examine the regional scope of crisis, referring to the number of countries and regions affected by a particular crisis. Some crises have international or even economy-wide influences. An example is the Asian Financial Crisis, which resulted in widespread economic adversity among almost all Southeast Asian firms across varied industries. Another example lies ...

Table of contents

• Cover
• Frontmatter
• 1. Part I
• 2. Part II
• Backmatter