Transilvania University of Braşov

HABILITATION THESIS

Title: Sustainability Reporting and Financial Performance

of the Economic Entities

Domain: FINANCE

Author: Assoc. Prof. PhD. Camelia Mirela BABA

Transilvania University of Brașov

BRAŞOV, 2021
Habilitation thesis Camelia Mirela BABA

CONTENT

Acknowledgement......................................................................................................................... 2
(A) Summary.......................................................................................................................................... 4
Rezumat............................................................................................................................................ 12
(B) Scientific and professional achievements and the evolution and development plans
for career development.................................................................................................... 20
(B-i) Scientific and professional achievements.............................................................................. 20
Chapter 1. Sustainability Reporting of Economic Entities and their Environmental
Responsibility.................................................................................................................................. 25
1.1. Introduction............................................................................................................................... 25
1.2. Literature review..................................................................................................................... 30
1.3. Data, hypothesis, and methodology.................................................................................. 33
1.4. Research results and conclusions...................................................................................... 49
Chapter 2. Reorganization of Economic Entities by Demerger and Sustainable Development
Strategies......................................................................................................................................... 60
2.1. Introduction............................................................................................................................... 60
2.2. Literature review..................................................................................................................... 62
2.3. Data and methodology.......................................................................................................... 64
2.4. Results, discussions, and conclusions.............................................................................. 70
Chapter 3. Financial Sustainability and Performance Reporting of Economic Entities.................. 82
3.1. Introduction............................................................................................................................... 82
3.2. Literature review..................................................................................................................... 82
3.3. Methodology and results...................................................................................................... 83
Chapter 4. Measuring the Risk of Insolvency. Prevention Methods.................................................... 94
4.1. Introduction............................................................................................................................... 94
4.2. Literature review..................................................................................................................... 96
4.3. The Model to Estimate Insolvency Risk and Data Analysis........................................ 99
4.4. Data and Methodology......................................................................................................... 106
4.5. Conclusions............................................................................................................................... 113
Chapter 5. Other Research Direction............................................................................................................. 115
5.1. Cyclicality of Fiscal Policy in the European Union.......................................................... 115
5.2. Explaining The EU Regional Economic Growth Through Regional - And
Country-Level Achievements in Education..................................................................... 116
(B-ii) The evolution and development plans for career development...................................... 118
(B-iii) Bibliography..................................................................................................................................... 126

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Habilitation thesis Camelia Mirela BABA

ACKNOWLEDGEMENT

The habilitation thesis entitled “Sustainability Reporting and Financial Performance of

the Economic Entities” includes the most important achievements in my scientific

research activity, after I was conferred the scientific title of doctor, as well as a

professional career development plan.

In the pre- and post-doctoral period, my didactic and research activity took place in

the Department of Finance, Accounting, and Economic Theory, Faculty of Economic

Sciences and Business Administration, Transilvania University of Brasov.

After defending my doctoral thesis entitled "Accounting instruments and statements

utilized in accounting analysis and decision-making process", under the supervision of

Professor Dr. Mihaela Dumitrana at ASE Bucharest, my scientific research activity

focused mainly on financial and non-financial reporting of economic entities, as well as on

the financial analysis of the main indicators provided by the financial statements.

My scientific preoccupations concentrate on topics in the field of finance in general

and corporate finance in particular, with a focus on sustainability reporting and the

financial performance measuring of the economic entities.

The research, published in ISI journals, has been carried out in research teams with

fellow members from the Faculty of Economics and Business Administration, Transilvania

University of Brașov, as well as members of faculties from university centres abroad

(Portugal and Macedonia).

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In this context, I consider the existence of the Doctoral School in the Finance domain

at the Transilvania University of Brasov a great opportunity, and I reckon that obtaining

the right to be a doctoral supervisor would be an opportunity to work with complex

research teams consisting of specialists in the field and young PhD researchers. I would

like to thank professors Gheorghița Dincă and Marius Dincă for the effort they made to

set up the young doctoral school in the field of Finance, but also for the excellent

collaboration in the research teams.

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Habilitation thesis Camelia Mirela BABA

(A) Summary

Sustainability reporting has received increasing attention in recent years, being

considered an important topic of debate that reflects the responsibility and commitment

of entities to the economic, social, and environmental issues/problems. The approach

includes the sustainability reports that outline an economic entity's sustainable

development policies and strategies, as well as the impact they have on the economy,

society, and environment.

The sustainability report is an important communication tool for companies.

Transparency, openness, and communication carried out by means of sustainability

reports can lead to increased trust, reputation among business partners and implicitly to

an increase in the performance of economic entities.

The topic addressed in my research focuses mainly on sustainability reporting, as

well as on the connection between the information disclosed by means of reports and the

financial performance of economic entities. Trust in an economic entity and, implicitly, in

its management depends on the degree of understanding and perception of the financial

and non-financial information by those interested.

The research I have carried out lately has allowed me an insight into the field of

financial and non-financial reporting, which is presented and analyzed both in terms of its

role in substantiating user decisions and in terms of its role as a tool meant to increase

the performance of economic entities. The habilitation thesis is elaborated on two main

sections: scientific and professional achievements and career evolution and development

plans. The scientific and professional achievements fall into five research directions,

respectively five chapters:

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Habilitation thesis Camelia Mirela BABA

1. The sustainability reporting of economic entities and their environmental

responsibility

2. Reorganization of economic entities by demerger and sustainable development

strategies

3. Financial sustainability and performance reporting of economic entities

4. Measuring the risk of insolvency. Prevention methods

5. Other research directions

The published articles, transposed in research directions, contain an introductory

part, an analysis of the literature in the approached field, the research methodology, as

well as the main results and contributions.

The first research direction, entitled "Sustainability reporting of economic entities and

their environmental responsibility," aims at the transparency and responsibility of

companies to environmental issues, as well as the dependence relationship that may

exist between the degree of disclosure of environmental information and various

economic and financial measures (the performance of companies, their size, the seniority

of the entity and degree of indebtedness).

In this sense, in order to evaluate the transparency related to the environmental

aspects, data were extracted from the annual reports and the sustainability reports for

100 companies listed at the Bucharest Stock Exchange, companies that carry out their

activity in areas with major environmental impact, with activities and products prone to

damage the environment. For each of the 100 selected companies, an index was used to

measure the degree of disclosure of environmental information. The environmental

disclosure index is, in fact, a centralized list that allows a score to be assigned to each

analyzed company, depending on the environmental information it presents in the annual

reports or in their sustainability reports. The environmental disclosure index includes a

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set of environmental performance indicators which are aligned to relevant international

standards, in particular ISO 14031, as well as to the GRI (Global Reporting Initiative). The

obtained scores reflect the degree of environmental information disclosure, transparency,

and company responsibility in terms of environmental issues.

The analysis of the dependency relationship between the degree of disclosure of

environmental information (DEI, Disclosing Environmental Information) and the financial

and non-financial measures has been tested by several different econometric

approaches.

The results of the study have shown that the interest in publishing environmental

data is relatively low. The highest score obtained by the sampled companies has been 15,

compared to the maximum possible value of 29. Unfortunately, there is still a significant

part of listed companies that are reluctant to provide information on the impact of their

activities on the environment. In Romania, only the companies with over 500 employees

are obliged to publish sustainability reports. Equally, the results of econometric

processing show that the disclosure of environmental information greatly depends on the

size of the company and its performance.

This study adds value to the existing literature by completing and expanding the

research area in the field of environmental reporting. The results of the study may

contribute to: (a) the improvement of environmental reporting and disclosure practices;

(b) the increase in managers' transparency about and awareness of environmental issues.

Managers should be aware of the need to provide relevant, clear, real, and complete

information on environmental protection. Managers could use our index as a guide for

designing a framework for reporting environmental information in the companies they

run; (c) the change of the behaviour/mentality of the listed companies; (d) the increase in

awareness of regulators and the need to support them when taking steps to cause

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companies to disclose the effect of their operations on the environment. Environmental

information disclosure is based less on voluntary initiatives and more on official ones, on

regulations.

The second research direction entitled "Reorganization of economic entities by

demerger and sustainable development strategies" argues for the need to reorganize and

rethink business strategy, especially in the context of the pandemic generated by Covid-

19. One solution for the recovery and reorganization of the economic entities' activity is

the partial division.

In this sense, in order to assess the impact of demerger on the sustainable

development of Romanian economic entities, both a statistical analysis of the financial

performance before and after the demerger was performed and a content analysis of 268

demerger projects have been carried out for the period April 2012 - April 2021.

The results of the study indicate that there are no significant differences between the

financial performance (expressed by the return on assets - ROA and the return on equity

- ROE) before and after the demerger, but the demerger still has a positive effect on

companies helping them survive and rethink their business strategy and continue their

long-term business. The demerger does not lead to an immediate improvement in

performance, but rather to the maintenance of efficiency levels for about four years, after

which it is possible to see a slight increase. The demerger leads to increased

independence and a focus on core business, thus ensuring companies' efficiency and

sustainable development. A smaller company can benefit from a greater efficiency in

managing, using its resources more efficiently, and maintaining long-term financial

profitability.

The statistical processing in this study provides a comprehensive analysis of the

impact of the demerger of Romanian economic entities on the financial performance and

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efficiency of their activity. The analysis of the financial profitability rates before and after

the demerger is particularly important for the managers of an economic entity because

they will be able to assess the impact and benefits of the demerger to decide on the form

of restructuring they want to implement in the entity they lead. The study reveals the

economic and financial implications that the demerger process may have on the

sustainable development of economic entities.

The third research direction refers to "Financial sustainability and performance

reporting of economic entities." The periods of economic and financial crisis impose on

companies the need to develop a model of sustainable development. A sustainable

company is an efficient company, and efficiency can be defined in the form of financial

performance, profitability, or productivity.

Sustainability is an economic component that economic entities need to integrate

into their business strategies in order to meet the challenges, but also in order to ensure

the continuity and development of their long-term activity. Sustainability has a financial

side as well, highlighted by financial indicators. Obtaining favourable financial results

(profit) as well as the efficiency in the use of resources can be considered an expression of

financial sustainability.

Zabolotnyy and Wasilewski (2019) define the financial sustainability of a company as

the ability to generate value for owners and to provide continuity to long-term

operations, using an optimal combination of investments and sources of financing.

„Financial performance shows the success of a company and the attractiveness of

shares in the financial markets. It helps investors make investment decisions in stock

markets and managers make financial decisions” (Madaleno and Bărbuță-Mişu, 2019).

The financial performance of the economic entities has been the subject of discussion

in most of the articles we have published in recent years; either it was analyzed in

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correlation with the degree of disclosure of environmental information; or it was analyzed

before and after the reorganization process of an entity; or it has been analyzed as

dynamic in different sectors of activity (pharmaceutical sector, construction, and textile

industry).

In diagnosing the financial health of the analyzed companies, we have used the

following indicators: return on assets, return on equity, turnover, net result, liquidity

rates, solvency rates, degree of indebtedness, etc.

This section covers both published and forthcoming articles, an example being the

research on the "Financial Sustainability of Companies in the Agricultural Sector." The

mentioned article, currently forthcoming, offers a financial perspective on the

sustainability of companies in the agricultural sector, using the econometric processing of

the financial data for a sample of 524 companies in Romania, the analysis period being 16

years.

The fourth direction of research entitled “Measuring insolvency risk. Prevention

methods” heads towards insolvency risk forecasting models. In this regard, a model for

insolvency risk forecasting was designed and was econometrically tested by logit and

logistic models. The model, unlike the models based on score functions, is based

exclusively on the analysis of the fluctuation of financial rates over time, more precisely

on the information provided by means of financial statements; this model provides

generally valid and reliable results and allows of the generalization of data and

implementation of results in any economic circumstances.

The model, designed for an early warning of financial difficulty of economic entities, is

based on a set of five measures, respectively general solvency, patrimonial solvency,

accounts receivable conversion period, assets’ liquidity, and assets’ efficiency ratio.

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The selection of financial indicators was conditioned by the availability of financial

data provided by Romania’s Administration of Public Finance.

Based on the designed model, those interested can identify the companies at risk of

insolvency and decide whether to start or continue business relationships with those

companies. The insolvency situation in Romania has been analyzed, after the financial

crisis of 2008, for a period of five years, for 70 companies from different domains.

Regression results show assets liquidity and patrimonial solvability are insignificant

factors for insolvency risk.

All five indicators which make up the model have had a descending trend (in the last

three years preceding the insolvency entry), and values outside the ranges considered

normal for healthy companies (having lower levels than the minimum accepted values).

The inability to honor creditors’ obligations (general solvency with low and declining

values), accelerated de-capitalization (unsatisfactory and declining level of economic

solvency), growing delays in collecting the value of goods and services sold (increasing

A/R conversion period), the lack of real liquidity (declining assets’ liquidity) and inefficient

use of assets (downward trend of assets’ efficiency) are the five measures that, together,

led to a situation of imminent insolvency, within a three years’ period.

The end, the fifth chapter is reserved for "other directions of research". This section

includes two articles published on the following topics: “Cyclicality of Fiscal Policy in the

European Union” and “Explaining The EU Regional Economic Growth Through Regional-

And Country-Level Achievements in Education”.

The article "Cyclicality of Fiscal Policy in the European Union" analyzes the way in

which fiscal policy works throughout the phases of the economic cycle, more precisely it

verifies the pro-cyclical characteristics of this policy. The sample includes EU countries,

except Cyprus and Malta, for the period 1995-2014. Multiple regressions have been used

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to measure the pro-cyclicality and the way fiscal policy responds to social and political

stimuli. It has been found that, throughout the period under review, most countries

pursued a pro-cyclical fiscal policy, regardless of whether they were developed or

developing countries.

The research entitled "Explaining The EU Regional Economic Growth Through

Regional-And Country-Level Achievements in Education" examines the impact that

factors such as investment in education and ICT (Information and Communication

Technologies) have on EU country and regional growth Communication Technologies).

The research methodology uses multi-level mixed-effects models, and the data cover the

period 2001-2017, and they are available on Eurostat. The study shows that

achievements in the field of education, when significant generate positive effects for the

regional growth in both the new Member States (NMS) and in the old Member States

(OMS), and it seeks to design measures for the regional-national policies in education and

ICT.

The second section of the habilitation thesis summarizes the plans for the evolution

and development of the future professional career, both in the direction of the teaching

activities and in terms of the research activity.

The last section is intended for the bibliographic references used in the research

approach.

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Rezumat

Raportarea sustenabilă a beneficiat de o atenție sporită în ultimii ani fiind considerată

un subiect important de dezbatere ce reflectă responsabilitatea și angajamentul

entităților economice față de aspectele/problemele economice, sociale și de mediu.

Demersul include rapoartele de sustenabilitate care creionează politicile și strategiile de

dezvoltare durabilă a unei entități economice, precum și impactul pe care acestea îl au

asupra economiei, societății și mediului.

Raportul de sustenabilitate reprezintă un instrument important de comunicare

pentru companii. Transparența, deschiderea și comunicarea realizată prin intermediul

rapoartelor de sustenabilitate pot conduce la creșterea încrederii, a reputației în rândul

partenerilor de afaceri și implicit la o creștere a performanței entităților economice.

Tematica abordată în cadrul activității mele de cercetare vizează în principal

raportarea sustenabilă, precum și conexiunea dintre informațiile divulgate prin

intermediul rapoartelor și performanța financiară a entităților economice. Încrederea într-

o entitate şi, implicit, în conducerea acesteia depinde de gradul de înțelegere şi percepere

a informațiilor financiare și nonfinanciare de către părțile interesate.

Cercetarea realizată în ultimii ani mi-a permis o incursiune în sfera raportărilor

financiare și nonfinanciare, acestea fiind prezentate și analizate atât prin prisma rolului în

fundamentarea deciziilor utilizatorilor, cât și prin prisma rolului jucat ca instrument de

creștere a performanței entităților economice.

Teza de abilitare este elaborată pe două secțiuni principale: realizări științifice și

profesionale și planuri de evoluție și dezvoltare a carierei. Realizările științifice și

profesionale sunt conturate în cinci direcții de cercetare, respectiv, cinci capitole:

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1. Raportarea sustenabilă a entităților economice și responsabilitatea față de mediu

2. Reorganizarea entităților economice prin divizare și strategii de dezvoltare

sustenabilă

3. Sustenabilitatea financiară și raportarea performanțelor entităților economice

4. Măsurarea riscului de insolvență. Modalități de prevenție

5. Alte direcții de cercetare

Articolele publicate, transpuse în direcții de cercetare, conțin o parte de introducere, o

analiză a literaturii în domeniul abordat, metodologia cercetării, precum și principalele

rezultate și contribuții.

Prima direcție de cercetare cu titlul „Raportarea sustenabilă a entităților economice și

responsabilitatea față de mediu” vizează transparența și responsabilitatea companiilor

față de aspectele legate de mediu, precum și relația de dependență care poate exista între

gradul de divulgare a informațiilor de mediu și diverși factori economico-financiari

(performanța companiilor, mărimea acestora, vechimea entității economice și gradul de

îndatorare).

În acest sens, pentru evaluarea transparenței față de aspectele legate de mediu, s-au

extras date din rapoartele anuale și rapoartele de sustenabilitate pentru 100 de companii

listate la Bursa de Valori București, companii care își desfășoară activitatea în zone cu

impact major asupra mediului, cu activități și produse predispuse să provoace daune

mediului înconjurător. Pentru fiecare dintre cele 100 de companii selectate s-a utilizat un

indice pentru a măsura gradul de divulgare a informațiilor despre mediu. Indicele de

divulgare a informațiilor de mediu este de fapt o listă centralizatoare care permite

atribuirea unui scor fiecărei companii analizate, în funcție de informațiile de mediu pe care

le prezintă în rapoartele anuale sau rapoartele de sustenabilitate. Indicele de divulgare a

informațiilor de mediu include un set de indicatori ai performanței de mediu care sunt

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aliniați la standardele internaționale relevante, în special ISO 14031, precum și la GRI

(Global Reporting Initiative). Scorurile obținute reflectă gradul de divulgare a informațiilor

de mediu, transparența și responsabilitatea companiilor în ceea ce privește aspectele de

mediu.

Analiza relației de dependență dintre gradul de divulgare a informațiilor de mediu

(DEI, Disclosing Environmental Information) și factorii financiari și nonfinanciari a fost

testată prin mai multe abordări econometrice diferite.

Rezultatele studiului au arătat că interesul pentru publicarea datelor de mediu este

relativ scăzut. Cel mai mare scor obținut de companiile incluse în eșantion a fost de 15,

comparativ cu valoarea maximă posibilă de 29. Din păcate, există încă o parte

semnificativă a companiilor listate care sunt reticente în furnizarea de informații

referitoare la impactul activităților lor asupra mediului. În România, doar companiile cu

peste 500 de angajați sunt obligate să publice rapoarte de sustenabilitate. De asemenea,

rezultatele prelucrărilor econometrice arată că divulgarea informațiilor de mediu depinde

în mare măsură de dimensiunea companiei și de performanța acesteia.

Studiul realizat aduce valoare adăugată literaturii existente prin completarea și

extinderea ariei de cercetare în domeniul raportării de mediu. Rezultatele studiului pot

contribui la: (a) îmbunătățirea practicilor de raportare și de divulgare a informațiilor de

mediu; (b) creșterea transparenței și a conștientizării managerilor față de aspectele de

mediu. Managerii ar trebui să fie conștienți de necesitatea furnizării de informații

relevante, informații clare, reale și complete privind protecția mediului. Managerii ar putea

folosi indexul nostru ca ghid pentru conceperea unui cadru de raportare a informațiilor de

mediu în companii pe care le conduc; (c) schimbarea comportamentului / mentalității

companiilor listate; (d) creșterea gradului de conștientizare a autorităților de reglementare

și sprijinirea acestora în luarea unor măsuri care să determine companiile să dezvăluie

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efectul operațiunilor lor asupra mediului. Divulgarea informațiilor de mediu se bazează

mai puțin pe inițiative voluntare și mai mult pe cele oficiale, pe reglementări.

Cea de-a doua direcție de cercetare cu titlul „Reorganizarea entităților economice prin

divizare și strategii de dezvoltare sustenabilă” pledează pentru nevoia de reorganizare și

regândire a strategiei de afaceri, mai ales în contextul pandemiei generate de Covid-19. O

soluție de redresare și reorganizare a activității entităților economice este divizarea

parțială.

În acest sens, pentru a evalua impactul divizării asupra dezvoltării sustenabile a

entităților economice din România, s-a realizat atât o analiză statistică a performanței

financiare înainte și după divizare, precum și o analiză de conținut a 268 de proiecte de

divizare, pentru perioada aprilie 2012 – aprilie 2021.

Rezultatele studiului indică faptul că nu există diferențe semnificative între

performanța financiară (exprimată prin rata rentabilității activelor - ROA și rata

rentabilității capitalurilor proprii - ROE) înainte și după divizare, însă divizarea are totuși

un efect pozitiv asupra companiilor ajutându-le să supraviețuiască, să-și regândească

strategia de afaceri și să-și continue activitatea pe termen lung. Divizarea nu determină o

îmbunătățire imediată a performanței, ci mai degrabă o menținere a nivelurilor de

eficiență pentru aproximativ patru ani după care este posibil să se înregistreze o ușoară

creștere. Divizarea determină o independență sporită și o concentrare asupra activităților

de bază, asigurând astfel eficiența și dezvoltarea durabilă a companiilor. O companie mai

mică poate beneficia de o eficiență mai mare în gestionarea, utilizarea mai eficientă a

resurselor sale și menținerea profitabilității financiare pe termen lung.

Prelucrarea statistică realizată în cadrul acestui studiu oferă o analiză cuprinzătoare a

impactului divizării entităților economice din România asupra performanței financiare și

eficienței activității acestora. Analiza ratelor de rentabilitate financiară înainte și după

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divizare este deosebit de importantă pentru managerii unei entități economice deoarece

vor fi în măsură să evalueze impactul și beneficiile divizării, să decidă asupra formei de

restructurare pe care doresc să o implementeze în cadrul entității economice pe care o

conduc. Studiul relevă implicațiile economice și financiare pe care procesul de divizare îl

poate avea asupra dezvoltării durabile a entităților economice.

Cea de-a treia direcție de cercetare vizează „Sustenabilitatea financiară și raportarea

performanțelor entităților economice”. Perioadele de criză economică și financiară impun

companiilor necesitatea dezvoltării unui model de dezvoltare sustenabilă. O companie

sustenabilă este o companie eficientă, iar eficența se poate regăsi sub forma

performanței financiare, a profitabilității, sau a productivității.

Sustenabilitatea este o componentă economică pe care entitățile economice sunt

nevoite să o integreze în strategiile lor de afaceri pentru a face față provocărilor, dar și

pentru a-și asigura continuitatea și dezvoltarea activității pe termen lung.

Sustenabilitatea are și o latură financiară evidențiată prin intermediul indicatorilor

financiari. Obținerea de rezultate financiare favorabile (profit), dar și eficiența în utilizarea

resurselor poate fi considerată o expresie a sustenabilității financiare.

Zabolotnyy și Wasilewski (2019) definesc sustenabilitatea financiară a unei firme ca

fiind capacitatea de a genera valoare pentru proprietari și de a oferi continuitate

operațiunilor pe termen lung, utilizând o combinație optimă a investițiilor și a surselor de

finanțare.

„Performanța financiară arată succesul unei companii și atractivitatea acțiunilor pe

piețele financiare. Ajută investitorii în luarea deciziilor de investiții pe piețele de valori și

managerii în luarea deciziilor financiare” (Madaleno și Bărbuță-Mişu, 2019).

Performanța financiară a entităților economice a reprezentat subiect de discuție în

majoritatea articolelor pe care le-am publicat în ultimii ani; fie că a fost analizată în

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corelație cu gradul de divulgare a informațiilor de mediu; fie că a fost analizată înainte și

după procesul de reorganizare a unei entități economice; fie că a fost analizată ca

dinamică în diferite sectoare de activitate (sectorul farmaceutic, construcții și industria

textilă).

În diagnosticarea stării de sănătate financiară a companiilor analizate, am utilizat

următorii indicatori: rentabilitatea activelor, rentabilitatea capitalului, cifra de afaceri,

rezultatul net, ratele de lichiditate, ratele de solvabilitate, gradul de îndatorare etc.

Această secțiune are în vedere atât articole deja publicate, cât și articole în curs de

publicare, un exemplu fiind cercetarea cu tema „Sustenabilitatea financiară a companiilor

din sectorul agricol”. Articolul amintit, în curs de publicare, oferă o perspectivă financiară

asupra sustenabilității companiilor din sectorul agricol, utilizând prelucrări econometrice a

unor date financiare pentru un eșantion de 524 de companii din România, perioada de

analiză fiind de 16 ani.

Cea de-a patra direcție de cercetare cu titlul „Măsurarea riscului de insolvență.

Modalități de prevenție” se îndreaptă spre modele de previziune a riscului de insolvență. În

acest sens, s-a proiectat un model pentru previzionarea riscului de insolvență care a fost

testat econometric prin logit și modelele logistice. Modelul, spre deosebire de modelele

bazate pe funcții scor, se bazează exclusiv pe analiza fluctuației ratelor financiare în timp,

mai exact pe informațiile furnizate prin intermediul situațiilor financiare; acest model

oferă rezultate valabile și fiabile în general și permite generalizarea datelor și

implementarea rezultatelor în orice circumstanțe economice.

Modelul, conceput pentru avertizarea timpurie a dificultăților financiare ale entităților

economice, se bazează pe un set de cinci indicatori, respectiv: indicatorul solvabilității

generale, indicatorul solvabilității patrimoniale, indicatorul durata de conversie a

creanțelor, indicatorul lichidității activelor și rata de rotație a activelor totale. Alegerea

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Habilitation thesis Camelia Mirela BABA

indicatorilor financiari a fost condiționată de disponibilitatea datelor financiare furnizate

prin situațiile financiare.

Pe baza modelului conceput, părțile interesate pot identifica firmele cu risc de

insolvență și pot decide oportunitatea inițierii sau continuării relațiilor de afaceri cu

firmele respective. A fost analizată situația insolvenței din România, după criza financiară

din anul 2008, pe o perioadă de cinci ani pentru 70 de companii din diferite sectoare de

activitate. Rezultatele regresiei arată că lichiditatea activelor și solvabilitatea patrimonială

sunt factori nesemnificativi pentru riscul de insolvență.

Toți cei cinci indicatori care compun modelul au înregistrat o tendință descendentă (în

ultimii trei ani care preced intrarea într-o stare de insolvență) și valori în afara intervalelor

considerate normale pentru companiile sănătoase (înregistrând niveluri mai mici decât

valorile minime acceptate). Incapacitatea de a onora obligațiile creditorilor, decapitalizare

accelerată, întârzieri în creștere în colectarea valorii bunurilor și serviciilor vândute, lipsa

lichidității reale și utilizarea ineficientă a activelor sunt cele cinci măsuri care, împreună, au

dus la o situație iminentă de insolvență a companiilor incluse în eșantion.

Finalul, capitolul 5, este rezervat “altor direcții de cercetare”. În această secțiune sunt

incluse două articole publicate, cu următoarea tematică: „Cyclicality of Fiscal Policy in the

European Union” și „Explaining The EU Regional Economic Growth Through Regional -

And Country-Level Achievements in Education” .

Articolul „Cyclicality of Fiscal Policy in the European Union” analizează modul în care

funcționează politica fiscală de-a lungul fazelor ciclului economic, mai exact verifică

caracteristicile prociclice ale acestei politici. Eșantionul include țările UE, cu excepția

Ciprului și Maltei, pentru perioada 1995-2014. Pentru a măsura prociclicitatea și modul în

care politica fiscală răspunde la stimuli sociali și politici s-au folosit regresii multiple. S-a

constatat că pe parcursul întregii perioade analizate majoritatea țărilor au condus o

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politică fiscală prociclică, indiferent dacă au fost țări dezvoltate sau țări în curs de

dezvoltare.

Cercetarea cu tema „Explaining The EU Regional Economic Growth Through Regional

- And Country-Level Achievements in Education” analizează impactul pe care-l au asupra

creșterii economice la nivel de țară și la nivel regional UE factori precum investițiile în

educație și ICT (Information and Communication Technologies). Metodologia cercetării

utilizează modele cu efecte mixte cu mai multe niveluri, iar datele cuprind perioada 2001-

2017 și sunt disponibile pe Eurostat. Studiul arată că realizările în domeniul educației

atunci când sunt semnificative generează efecte pozitive pentru creșterea regională atât

în noile state membre (NMS), cât și în statele membre vechi (OMS) și încearcă proiectarea

unor măsuri pentru politicile regionale-naționale în educație și ICT.

Cea de a doua secțiune a tezei de abilitare sintetizează planurile de evoluție și de

dezvoltare a viitoarei cariere profesionale, atât în direcția activităților didactice cât și în

ceea ce privește activitatea de cercetare.

Secțiunea finală este destinată referințelor bibliografice utilizate în demersurile de

cercetare.

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Habilitation thesis Camelia Mirela BABA

(B) Scientific and professional achievements and the evolution and

development plans for career development

(B-i) Scientific and professional achievements

1. Introduction

The habilitation thesis entitled “Sustainability reporting and financial performance of

the economic entities” is structured, depending on the research results, on five research

directions, respectively: sustainability reporting of economic entities and environmental

responsibility, reorganization of economic entities by demerger and sustainable

development strategies, financial sustainability and entity performance reporting,

insolvency risk measurement and other research directions.

The starting point in the research is the doctoral thesis entitled " Accounting

instruments and statements utilized in accounting analysis and decision-making

process." Following the research based on financial reporting, I have expanded the

research area to sustainability reporting, which complements the financial information

with non-financial, environmental, and social data.

The periods of the financial crisis have made the economic entities supplement their

financial reporting with non-financial environmental, social, and economic information.

Stakeholders aim for transparency and the complete and integrated reporting of financial

and non-financial information.

Sustainability reports present an entity's policies and strategies for sustainable

development and their impact on the economy, society, and the environment. They show

the business model and the company values.

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Habilitation thesis Camelia Mirela BABA

The term sustainability reporting is closely related to sustainable development and

involves how the society handles its activity by using financial, social, and environmental

risk indicators (Caloian, 2013).

The information contained in the sustainability reports highlights the behaviour and

responsibility of economic entities concerning the impact of their activity on the

environment, society, and the economy, making them more transparent about the risks

and opportunities they face.

Sustainability reporting is a tool capable of helping companies and organizations

satisfy the growing demand for transparency from customers, investors, other

stakeholders, and society in general (Martínez et al., 2016; Girón et al., 2020).

Sustainability reporting standards, the Global Reporting Initiative (GRI), allow

economic entities to communicate information on sustainability and their work's

economic, environmental, and social impact. On the one hand, the GRI standards guide

the economic entities, providing them with sustainability reporting rules and principles,

and on the other hand, they provide to the interested ones criteria for assessing the

economic, social, and environmental policies pursued by economic entities.

The reporting of the non-financial aspects in Romania is regulated by Order no.

1802/2014, which includes the amendments brought by the MFP Order no. 1938/2016

and the MFP Order no. 3456/2018, and it stipulates the obligation for companies with

over 500 employees to report information on environmental, social and personnel issues,

human rights observation, the fight against corruption and bribery. The MFP order no.

1938/2016 transposes the Directive 2014/95/EU of the European Parliament on the

presentation of non-financial information and information on diversity by certain

companies and large groups. A sustainable, credible, and accurate reporting ensures the

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sustainable development of the economic entities' business and can implicitly influence

their financial performance.

The literature on sustainability reporting has recognized the positive effect that

companies obtain in disclosing information related to the sustainability of their daily

activities (Hahn and Kühnen, 2013; Girón et al., 2020). Disclosure of information related to

the sustainability performance of companies reduces information asymmetries and

improves transparency (Nobanee and Ellili, 2016).

The relationship between sustainability reporting and entity performance has been

addressed in various studies in the literature (Jones et al., 2007; Lo and Sheu, 2007;

Schadewitz and Niskala, 2010; Reddy and Gordon, 2010; Ameer and Othman, 2012;

Burhan and Rahmanti, 2012; Berthelot et al., 2012; Aggarwal, 2013; Caloian, 2013;

Bachoo et al., 2013; Speziale and Kloviene, 2014; Kusuma and Koesrindartoto, 2014;

Ngatia, 2014; Onyekwelu and Ekwe, 2014; Martínezet al., 2016; Joseph, 2016; Nobanee

and Ellili, 2016; Utami, 2015; Lassala et al., 2017; Ching et al., 2017; Kuzey and Uyar,

2017; Loh et al., 2017; Alshehhi et al., 2018; Gunarsih and Ismawati, 2018; Laskar, 2018;

Uwuigbe et al., 2018; Johari and Komathy, 2019; Fuadah et al., 2019; Carp et al., 2019;

Girón et al., 2020; Hongming et al., 2020.

Most studies have concluded that sustainability reporting has led to an improvement

in the financial performance of the economic entities; they confirm a significant positive

relationship between firm performance and corporate sustainability reporting.

The research we have carried out in the last years aims at the two main research

directions, highlighted/related by the title of the thesis, respectively the financial and

non-financial reporting and the economic entities' financial performance.

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The research results presented in the habilitation thesis were disseminated through

specialized articles published in ISI Web of Science indexed journals or indexed in

recognized international databases. These articles are presented below.

2. Representative papers

1. Dincă, M.S., Madaleno, M., Baba, C.M., Dincă, G. (2019). Environmental

Information Transparency—Evidence from Romanian Companies, Sustainability 2019,

11, 5040, ISSN: 2071-1050, WOS: 000489104700226, FI: 2,576, AIS: 0,332,

https://doi.org/10.3390/su11185040

2. Baba, C.M, Duguleană, C., Dincă, M.S., Duguleană, L., Dincă, Gh. (2021). The

Demerger Impact upon Sustainable Development of Economic Entities: Evidence from

Romania, Sustainability 2021, 13(15), 8316, 1-15, ISSN: 2071-1050, WOS:

000682240200001, FI: 3,251, AIS: 0,462,

https://doi.org/10.3390/su13158316

3. Dincă, G., Baba, M.C., Dincă, M.S., Dauti, B., Deari, F. (2017). Insolvency Risk

Prediction Using the Logit and Logistic Models: Some Evidences from Romania. Economic

Computation and Economic Cybernetics Studies and Research , 51(4), 139-157, ISSN:

18423264, WOS: 000423499200009, FI: 0,664, AIS: 0,093,

http://www.ecocyb.ase.ro/nr2017_4/09%20-

%20Dinca%20Gheorghita,%20Dinca%20Marius(T).pdf

4. Dincă, Gh., Dincă, M.S., Dauti, B., Baba, C.M., Popione, C. (2020). Cyclicality of

Fiscal Policy in the European Union. Journal for Economic Forecasting, 23(1), 75-96, ISSN:

15826163, WOS: 000525735900005 FI: 0,263, AIS: 0,07,

http://www.ipe.ro/rjef/rjef1_20/rjef1_2020p75-96.pdf

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Habilitation thesis Camelia Mirela BABA

5. Szeleș Răileanu, M., Anton, C., Baba, M., Busuioceanu, S., Litră, A., Suciu, T.

(2019). Explaining The EU Regional Economic Growth Through Regional - And Country-

Level Achievements in Education. Romanian Journal of Economic Forecasting, 22 (1), 143-

157, ISSN: 15826163, WOS: 000464199700010, FI: 0,561, AIS: 0,051,

http://www.ipe.ro/rjef/rjef1_19/rjef1_2019p143-157.pdf

6. Baba, C.M. (2016). Evaluating the financial performance of Companies from the

Pharmaceutical Industry. Bulletin of the Transilvania University of Braşov. Series V:

Economic Sciences, 9(58), 223-228,

http://webbut.unitbv.ro/BU2016/Series%20V/BULETIN%20I/23_Baba.pdf

7. Baba, C.M. (2015). The financial position and performance of the economic

entities from the Light Industry. Bulletin of the Transilvania University of Brașov. Series V:

Economic Sciences, 8 (57), 261-268,

http://webbut.unitbv.ro/BU2015/Series%20V/BILETIN%20I/31_Baba.pdf

8. Baba, C.M. (2014). Financial return in the field of constructions: What accounting

issues should an investor know? Bulletin of the Transilvania University of Brașov. Series

V: Economic Sciences, 7 (56), 175-180,

http://webbut.unitbv.ro/BU2014/Series%20V/BULETIN%20V/IV-01_BABA.pdf

9. Baba, C.M. (2017). Financial reporting in the Furniture Industry. Bulletin of the

Transilvania University of Braşov. Series V: Economic Sciences, 10 (59), 179-186,

http://webbut.unitbv.ro/BU2017/Series%20V/2017/BULETIN%20I/19_BABA.pdf

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Habilitation thesis Camelia Mirela BABA

Chapter 1. Sustainability Reporting of Economic Entities and their

Environmental Responsibility

1.1. Introduction

Climate change and air pollution lead to greater awareness of environmental issues

by economic entities, forcing them to correctly and transparently disclose information

that impacts the environment, information published through sustainability reports.

Disclosure of environmental information reflects the companies' transparency and

responsibility toward the environment and can increase the confidence in these

companies.

The relationship between environmental reporting and entity performance has been

addressed in various studies in the literature (Hart and Ahuja, 1996; Russo and Fouts,

1997; Ahmad et al., 2003; Nakao et al., 2007; Ngwakwe, 2009; Brammer and Pavelin,

2008; Buniamin, 2010; Andrikopoulos and Kriklani, 2012; Saha and Akter, 2013;

Beredugo and Mefor, 2016).

Hart and Ahuja (1996) perform a linear regression using as variables the financial

performance indicators calculated by accounting methods such as ROA (Return on

Assets), ROE (Return on Equity), ROS (Return on Sales), and reduction of gas emissions.

They find a positive correlation between the improvement of the analyzed index and

financial performance.

Abd Rahman et al. (2013) examined the association between environmental

reporting and firm performance in Malaysia. An environmental reporting was developed

using content analysis. They reported that 68% of firms in Malaysia perform

environmental practices by including separate sections in their annual reports. A positive

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relationship was concluded between environmental reporting disclosure and firm

performance in Malaysia.

Ngwakwe (2009) examines the relationship between environmental responsibility

and the performance of environmentally-conscious firms, which in this paper are termed

„environmentally responsible firms”. The author used three sustainable indicators for the

measure of environmental responsibility, namely: Employee health and safety (EHS),

Waste Management (WM), and community development (CD), which were identified

within the environmentally responsible firms. The results obtained by the authors show

that investment in social and environmental responsibilities such as employee health and

safety (EHS), waste management (WM), and community development (CD) are related to

improved return on total assets (ROTA) of the environmentally responsible firms.

Transparency is very important regarding the activities and investments made to

counteract the impact on the environment, especially by those economic entities that

operate in areas of activity recognized as polluting.

The paper published in 2019, "Environmental Information Transparency — Evidence

from Romanian Companies", analyse disclosure of environmental information (DEI) for a

set of 100 companies listed at the Bucharest Stock Exchange (BSE) and identify possible

correlations between this and the evolution of some relevant economic and financial

measures of companies' activities. For these purposes, it was calculated an

environmental information disclosure index. We employed a system dynamic panel data

estimation model and panel corrected standard errors for sampled companies for the

2013–2017 period. The results we have obtained show that sampled companies have a

low degree of environmental information disclosure, as the highest registered score was

15 out of a maximum of 29 points, with an average of merely 6.37 points. Regarding the

possible correlations, the tests performed have shown that entity size, expressed by the

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number of employees, is the factor that positively influences environmental information

disclosure. Results also evidence that performance determines the quantity of

information the firm provides to external users instead of maturity/age. Our study is the

first approaching companies from Bucharest Stock Exchange with data for 5 years using a

mixed approach (DEI–index, and regressions), and we think the results obtained are

useful for managers, the general public, and investors, considering that size and

performance greatly influence companies' environmental awareness.

The ever more diverse requests coming from stakeholders’ groups and the current

economic context impose increased transparency regarding accounting and financial

information and the risks economic entities currently face. The pressure originating from

users of accounting and financial information requires a more attentive and responsible

reflection upon the realization and presentation of annual and sustainability reports.

Reporting sustainability development, along with the information regarding economic

entities’ financial situation and performances, has become a necessity, appreciated by

both investors and business partners. Implicitly, the demand for information concerning

companies’ environmental impact has grown in the last years. According to Order no.

175/2005 and Order no. 680/2016, in Romania, economic agents are compelled to

consider integrating environmental protection aspects into their companies’ strategy.

They have to create a department dealing with environmental protection’s aspects, under

the general manager’s direct coordination and supervision.

In such circumstances, the topic of environmental protection seems to connect the

private and the public sector. On the one hand, companies offer environmental

information to public authorities; however, they can be made public only after a formal

request made by any person (Decision, No. 878/2005 Regarding Public Access to

Environmental Information). Starting from 2017, Romanian companies with more than

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500 employees should now elaborate sustainability reports each year to show the

positive impact of their environmental actions upon the sustainable development of the

community in which they are located. Reporting their environmental actions and concerns

can improve a company’s image, increase its outer visibility and reputation. On the other

hand, the state itself is concerned with the way it manages to protect the environment.

Environmental protection is perceived as a public service for which, in most countries,

local administrations are the ones directly responsible for providing it in a high quality,

cost-efficient and sustainable manner. Moreover, environmental protection, as well as

other public services, such as public order, social protection, modern sewage, water

distribution and treatment, public transportation, and so forth, should be provided

efficiently and sustainably in terms of timely delivery, costs, and quality. That is especially

true in countries like Romania, where bureaucracy, social disparities, corruption, and

economic development are still a matter of great concern (Dincă et al., 2016). The

necessity of protecting the environment involves allocating significant amounts of money

both for the state and its subnational levels and for the companies that comply with

specific legislation. Nevertheless, unlike in the private sector, where efficiency aspects

prevail, in the public sector, the level of expenditures, with environmental protection

expenses included, increases steadily (Andronic, 2016). We have used in this paper DEI

(Disclosure of Environmental Information) to reveal the extent of the environmental

information a company offers to interested third parties. DEI supplies information about

companies’ environmental activities and reflects their transparency and responsibility

toward the environment. Based on the DEI index we have conceived, we calculated a

score for each sampled company and for each year of the analysed period (this

information is also presented in Section 3—Data, Hypothesis, and Methodology). The

paper follows two objectives: (1) identifying transparency in disseminating environmental

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information by BSE-listed companies; (2) identifying the correlation between

environmental information and some relevant economic and financial measures. This

study contributes to existent literature in several different ways. Firstly, DEI helps

companies recognize their business decisions’ environmental impact, and we follow that

for 100 of BSE listed companies. Secondly, we devise a DEI index collecting all the

necessary data from published financial information, from sustainability’s and

administrators’ reports. Thirdly, we made use of information from 100 BSE-listed

companies whose activities bear a significant influence upon the environment. To

evaluate transparency and disclosure regarding environmental aspects, we have

extracted information from annual reports, sustainability reports, administrators’ reports

and the websites of the sampled companies, whereas for analysing the dependency

between environmental information and economic and financial measures we have used

a system dynamic panel data estimation model, considering a GMM two-step procedure

and robust standard errors. Fourthly, we consider the size, age, performance, and

indebtedness degree of these firms as factors likely to explain companies’ environmental

information disclosure. Results seem to indicate that both size and performance are

important to explain DEI, as opposed to previous authors’ results and by opposition age

seems to be irrelevant. Moreover, indebtedness effects over DEI are not clear yet. Finally,

we made use of different econometric specifications to provide robustness to overall

conclusions using simultaneously common panel fixed effects and random effects

models, panel corrected standard errors models, and system dynamic panel data models

(GMM and robust standard errors specifications used). As such, this research analyses

DEI on behalf of good practices promoted by the BSE listed companies and it is further

associated with other variables from the firms’ annual reports disclosures.

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1.2. Literature review

Research regarding environment information disclosed by the companies is found

quite often lately. Similar studies, from various countries, have investigated the relation

between environmental performances and environmental information disclosed by the

companies (Clarkson et al., 2008; Wu and Shen, 2010; Abba et al., 2018), the relation

between environmental information and financial performances (Al-Tuwaijri et al., 2004;

Sarumpaet et al., 2017; Deswanto and Siregar, 2018), the relation between company size

and environmental information disclosed (Nurhayati et al., 2006; Brammer and Pavelin,

2008; Galani et al., 2012), the relation between environmental information disclosed and

different financial and non-financial factors (Galani et al., 2012; Buhr and Freedman,

2001; Deegan et al., 2002; O’Donovan, 2002; Holland and Foo, 2003; Cormier et al.,

2005; Frost, 2007; Taylor and Shan, 2007; Sumiani et al., 2007; Stanton and Suttipun,

2012; Murcia and Santos, 2012; Van de Burgwal and Oliveira Vieira, 2014; Akbas and

Canikli, 2014; Wei and Peng, 2014; Dibia and Onwuchekwa, 2015). At a national level,

Ienciu et al. (2011) investigated the quality of environmental information displayed by the

Bucharest Stock Exchange-listed companies, performing a comparative analysis between

Romania’s and Hungary’s environmental reporting and concluded that most of the

environmental information supplied by Romanian companies is incomplete and irrelevant.

Another study by Ienciu (2012) analysed the relationship between environmental

reporting and corporate governance for the Bucharest Stock Exchange-listed companies.

The relationship between environmental reporting and corporate governance was also

analysed by other researchers (Ho and Wong, 2001; Haniffa and Cooke, 2002; Gul and

Leung, 2004; Barako et al., 2006; Buniamin et al., 2008; Kelton and Yang, 2008; Al-

Shammari and Al-Sultan, 2010). The impact of shareholders’ structure and of

administration board’s structure upon environmental information was studied by

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References (Huafang and Jianguo, 2007; Akhtaruddin et al., 2009; Klai and Omri, 2011).

Currently, all economic entities grant more attention to the environment due to the

pressure exerted by different parties such as clients, investors, and financial institutions,

competition, global policies, and ecological associations (Martin Houldin, EMAG Limited).

This theory regarding external pressure exerted upon companies is found in reference

literature as stakeholders’ theory (Freeman, 2001). The stakeholders’ theory stands out

as one of the most used theories to explain companies’ intention to disclose

environmental information. The pressure sources influence in a higher or lower measure

the activity of entity’s management through the information they have to present to

financial and accounting reports’ users. The number of “ethical” investors is growing and

they want to invest in companies which respect the environment, leading to an increased

demand for information regarding the management of the company environment

[Feleagă and Feleagă, 2007). The new accounting branch—environmental accounting—

was approached by Caraiani et al. (2015) in their book Green Accounting—Initiatives and

Strategies for Sustainable Development. As well, the International Federation of

Accountants has published a brochure presenting the main information of interest for

investors regarding social, environmental, and corporate governance aspects. Junquera

and Barba (2018) studied the connection between environmental pro-activity and

company performances for 142 Spanish wineries. The authors found that environmental

proactivity was instrumental in obtaining both cost-based and differentiation-based

competitive advantages, however, it did not significantly influence financial performance

of sampled companies. Also, in a study published in 2018, Radhouane et al., analysed the

potential benefits for shareholders and customers in cases in which companies report

more about their environmental activities for the 120 largest publicly traded companies in

France for the 2007–2011 period. One of their most important findings was that an

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increase in the level of environmental reporting is valuable in terms of customer-related

performance (i.e., sales growth and profit margin) as well as in terms of market value.

This was more visible for companies operating in customer proximity industries. Chelli et

al. (2018) analysed normativity in environmental reporting for Canada and France in the

environmental reporting practices of a sample via institutional legitimacy. The three

researchers found that the French parliamentary regime was apparently more successful

than the Canadian stock exchange regulation in triggering environmental reporting and

that the GRI reporting standards combined with local regimes generated more

environmental disclosures.

Moseñe et al. (2013) performed a content analysis of sustainability reports for the

2005–2009 period for seven main Spanish wind energy companies. The analysis allowed

them to realize a longitudinal comparison of compliance levels with Global Reporting

Initiative indicators of sustainability. The authors learned that the disclosures were

minimal, lacking effectiveness, and were quite unreliable. Hossain et al. (2017) have

approached corporate social and environmental reporting (CSER) practices and

motivations in Bangladesh. They found that community investment and development and

governance codes and policies categories received the highest amount of disclosure,

while the least disclosed was the workplace/human rights category. Radhouane et al.

(2018) investigated whether customer-related performance affects the value relevance

of voluntary environmental reporting, using a sample of French listed firms for the 2001–

2011 period. Their results have showed that a higher level of environmental disclosure is

valued negatively by shareholders for firms operating in environmentally sensitive

industries.

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1.3. Data, hypothesis, and methodology

Transparency in Communicating and Disseminating Environmental Information

A first objective of the research was to evaluate the transparency and responsibility

of BSE-listed companies towards environmental aspects. In this direction, we have

achieved a content analysis of annual reports, sustainability reports, administrators’

reports, or websites of sampled companies. The sample includes 100 companies listed at

BSE, considering the ease of access to annual financial situations, declarations and other

types of reports made public on the websites of the respective companies or on

Bucharest Stock Exchange’s site. The data covers the 2013–2017 period, with selected

companies operating in areas which have a major impact upon the environment, with

activities and products prone to cause damage to the environment. The 100 companies,

making up the sample were selected from different sectors of activity, as well as

according to the availability of the financial and non-financial data for the 2013–2017

period. The sample was created considering three criteria: a) the sector of activity (mainly

the industries/sectors with the highest pollution risks); b) Companies listed at Bucharest

Stock Exchange; c) Companies active during the 2013–2017 period and which have

published financial and non-financial data and information.

We have selected 20 of the most polluting sectors from Romania, with 15 companies

from metallic construction industry, 11 companies from mineral non-metallic industry, 11

companies from the machinery and equipment production industry, 10 companies from

the metallurgic industry, 9 companies producing electric equipment, 9 companies

producing other transportation means, 6 companies producing rubber and plastic

products, 5 companies from the pharmaceutical industry, 4 companies from land and

piping transport, 3 companies producing electronic products, 2 companies from oil

extraction and processing and one company from each of the following industries: coal

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products; production and supply of gas and electricity; paper products; roads and highway

construction; beverage; food processing and manufacturing; and one from clothing

manufacturing. The 20 sectors include 123 companies listed with Bucharest Stock

Exchange, which published financial and non-financial information throughout the entire

2013–2017 period, therefore our sample of 100 companies represents 81% of the total

number of companies. For each of the 100 selected companies, we have used an index to

measure the degree of disclosing environment information. The index of disclosing

environment information is actually a centralizing list which allows the assigning of a

score to each and every analysed company, according to the environment information it

presents in its annual reports. These results are expressed and centralized as follows:

- 0: the entity does not present any environment information;

- 0.5: the entity provides only general information (only in a descriptive manner)

regarding environmental aspects included in the index;

- 1: the entity offers detailed information regarding environment information, both

descriptive and quantitative information.

Part of the information included in the index are also found in the Ministry Order no.

175/2005 regarding the procedure of data reporting for environment protection activities

of Romanian industrial companies. The index of disclosing environmental information

includes a set of indicators of environmental performance, which are aligned to relevant

international standards, especially ISO 14031, as well as to GRI (Global Reporting

Initiative). Where relevant, the environmental performance measures were adjusted to

reflect specific requirements of Romanian legislation or to underline certain

environmental aspects which have a specific importance in the Romanian context. Also,

the list realized by the authors was adapted to Romania’s economic and legislative

situation, according to the list used in the Clarkson et al. study’s (2008). The fore-

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mentioned list was elaborated by Clarkson in cooperation with an expert from the

environmental reporting field, and it is based on the guidelines offered by GRI (Global

Reporting Initiative) to facilitate the understanding and communicating company’s

environmental impact. The GRI index was also used in some studies [He and Loftus,

2014; Iatridis, 2013; Moroney et al., 2012; Sutantoputra et al., 2012).

The list processed by the authors includes 29 questions, with a maximum possible

score of 29 a company can obtain. For each of the 100 companies, we calculated a score

based on the data extracted from annual reports, websites or sustainability reports. The

scores obtained reflect the degree of disclosing environmental information, transparency,

and responsibility of the companies regarding environmental aspects. The maximum

score was obtained by the company which was the most involved in environmental

activities and made most efforts to reduce its impact upon the environment (the most

responsible company toward environmental aspects).

The sampled companies obtained a maximum of 15 points of the 29 possible. The

average of 6.37 points confirms the opinion that analysed companies have a low degree

of environmental disclosure. Figure 1 shows the scores regarding the disclosure of

environmental information obtained by the sampled 100 companies for the 2013–2017

period.

In Figure 1 we can observe a higher score in 2017 compared with previous years, in

disclosing the environmental information. Of the 100 companies, 24 have over 500

employees, therefore should present sustainability reports. The annual reports do not

offer too many details regarding environmental aspects, the companies merely

presenting general aspects regarding environmental authorizations and certificates;

environmental policies and objectives; conformity with current legislation; existence or

lack of litigations; data about CO2, water, energy consumptions, and waste management.

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Figure 1. The scores of disclosing environmental information

The sustainability reports and websites offer more details, alas many companies do

not present such reports. In what follows we have realized an individual analysis of each

point/category from the index of disclosing environmental information for our sample.

Company Management Structure

In Romania, according to Order 175/2005, the companies have the obligation to set a

department with attributions for environmental protection, under the direct coordination

of the manager/general manager. However, only 65% of the evaluated companies have

published information regarding the existence of this department. The companies

focused mainly on getting the 14001 ISO certificate, with 86% of the evaluated companies

(86 out of 100 companies) claiming they have this environmental certificate. ISO 14001

confirms the fact that the company complies with all the requirements regarding the

environment management system. The results obtained suggest that BSE-listed

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companies are interested and involved in tackling the environmental problems. Voluntary

implementation and certification of the environmental management system according to

the international standard ISO 14001 reflects a company’s preoccupation for more than

merely legislation compliance, that is, for a continuous improvement of environment

performance. The companies seemed less interested in offering information about the

existence of environmental protection departments, as well as about environmental

demands imposed to their suppliers and clients. This result can be explained as those

elements are actually absent from companies’ structure. Also, the companies do not offer

information about their accounting department or about green accounting. Green

accounting can be a complement to traditional accounting and it is meant to account and

present data about raw materials, water, and energy consumption; costs of protecting

and restoring natural environment; gains from the policy led by the company to protect

the natural environment and so forth. The economic entities which implement

environmental accounting can benefit from a series of advantages such as a stricter

control of environmental expenditures, knowledge of their environmental performance,

obtaining more sustainable long-term revenues, improving their company image and so

forth. The information from environmental accounting and the analysis of costs-benefits

relation help managers to set their decisions regarding the environment and its

protection, to take measures to prevent environmental damages and to evaluate

environmental costs.

Credibility

We have noticed that 92% of evaluated companies, respectively 92 out 100

companies have presented information about their environmental certificates. This result

was expected, as Romanian legislation imposes to companies with a major

environmental impact to own such certificates. 44% of the companies declared that they

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adopted a set of rules by which they evaluate, report and improve the effect their

activities or products have upon the environment. The companies have declared in their

publish reports that they implemented and applied procedures for a periodic identification

and evaluation of environmental aspects. The companies showed a lower interest for

disclosing information regarding internal environmental audit, probably as they were

looking to keep dormant the non-conformities found by this audit.

Environmental Performance Measures

The companies which offered details about this aspect were the ones which made

and presented sustainability reports. Their sustainability reports presented information

regarding the investments made to reduce water consumption; the consumption of

electric energy, gas and water; quantity of waste generated/recycled; quantity of CO2

emissions. Overall, 47% of the evaluated companies offered information about CO2

emissions in their annual reports and/or on the company site, yet most of the times this

information was presented only in a descriptive manner, mentioning that CO2 emissions

are within the limits stipulated by the law. From the total 100 companies, 29 declared

they ensure in part or fully their energy consumption from renewable sources (either

directly, from their own facilities or by acquiring energy from the producers which use

renewable sources). These companies can be considered as environmentally responsible.

Reducing energy consumption represented a major objective of their environmental

policy for 83% of analysed economic entities. In 2017, the analysed companies reported

an improvement of the quality of their used water released into the public sewage

network and showed an interest in reducing water losses in their supply pipes or in

sanitary installations. We have found little information concerning soil contamination, yet

67% of analysed companies declared they have adopted waste management policies. The

companies also named responsible persons with waste management and reporting. The

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companies supplied data regarding the actions they have undertaken to reduce energy,

water and gas consumptions.

Environmental Assets, Debt and Expenditures

Another aspect which was almost neglected by the companies refers to investments

in tangible and intangible assets connected with environmental protection activity. These

investments are not presented in a distinct manner in their financial situations, with

economic entities supplying only their overall value of such investments (19% of the

companies published information regarding the total value of their environmental

investments). The environmental expenditures are also not presented in a detailed

manner (the companies published only total value of their environmental expenditures).

The companies mentioned that environmental expenditures are connected with

implementing their environmental management programs and aligned to existing

environmental legal requirements. Of the 100 analysed companies, 61% offered

information regarding litigations and fines received for non-compliance with

environmental norms, mentioning that they did not receive warnings, sanctions or fines

connected with environmental legislation. This statistic provides confidence that selected

companies’ approach in environment protection area was efficient, that they

implemented successful organizing and technological measures and their personnel was

aware and responsible. Environmental provisions are not presented distinctly, probably

included in other provisions category. Still, we do not find inside annual reports data

regarding their value and the situation/context they were created for. Environmental

commitments provisions should be created when obtaining environmental authorization

is contingent upon presenting a reducing pollution investment plan by the entity. These

investments are programmed over several fiscal years and they involve setting

installations and equipment to prevent the generation of environment damaging factors.

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The expenditures which accommodate the provisions are not deductible for fiscal

purposes. From one company’s annual report we have extracted the following statement:

“As of December 31-st of 2017, the Group does not register debt connected with

anticipated expenditures regarding environmental aspects. The Group does not have

significant environmental expenditures.” This statement may suggest the fact that

economic entities do not grant too much importance to financial aspects connected with

protecting the environment and that financial information regarding the environment is

not considered relevant.

Vision and Strategy

The communication with the external environment is made via annual reports,

whereas the internal one is done using the regular environmental training. The economic

entities had a positive reaction towards disclosing their environmental mission and

objectives, with 81% of analysed companies presenting this kind of information. A

company’s environmental policy or strategy is the formal way in which it shows

commitment towards environmental protection and sustainability.

In total, 96% of sampled companies declared they have an environmental policy or

vision complying with international environmental protection standards. In general, the

companies have declared and defined their environmental objectives inside their annual

or sustainability reports and part of them have also declared the degree of attaining these

objectives. Only 32% of the companies declared they have fully attained their established

environmental objectives.

Among the measures stated in the environmental action plans we have found proper

waste management and minimizing the quantity of waste generated; the reduction of

energy consumption; pollution prevention; the periodical monitoring of environmental

factors; the modernization and updating of installations; an increased use of renewable

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energy sources; implementing measures for improving the energy efficiency of company

buildings; making sure the entire personnel knows and respects environmental

legislation; preventing major accidents connected with hazardous substances.

Entity’s Environmental Profile

Most information was presented as statements regarding economic entities’

compliance with different environmental standards and laws. Compliance with the

requirements of environmental protection laws represents the minimum objective for any

company aspiring to green company status, according to the 2016 Catalogue of Green

Business Index. In total, 89% of the companies have declared in their annual reports they

have fulfilled their legal commitments towards the environment. We have also analysed

companies which do not want to supply public information about the impact of their

activities upon the environment, by claiming they have reported those data to local public

authorities.

Environment Initiatives

The sampled companies have granted little attention to their environment initiatives.

Less than 30% of the companies have offered information about professional training of

their employees regarding environmental aspects. The companies which offered this

information claimed they support continuous professional development of their

employees via periodical preparing, qualification and certification programs. In one

sustainability report we have found the statement: “The periodical trainings regarding

environmental protection, respectively the permanent actions of raising employees and

other stakeholders’ awareness have had the designed effect and as such we will continue

the efforts to uphold the growing trend of environmental performance and the clean

statistics regarding environment incidents.” The same low incidence is found in what

regards involvement in community environmental projects. Very few economic entities

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have supplied information regarding this aspect. The involvement in community

environmental projects can be a company’s sign/measure of assuming responsibility

concerning its environmental impact. As a conclusion, we can state that companies’

transparency regarding the environmental aspects/information is quite low. The highest

score obtained by a company from the selected ones is 15, out of a maximum of 29

points. The companies declare they grant significant importance to environmental

protection, assuming their commitment to integrate the best practices, yet they are

reluctant to supply public information/details regarding environmental aspects. As a rule,

companies offer details regarding environmental information to local authorities (where

they have a legal obligation to do so) whereas in their public reports they disclose only

information which provides them a positive image. The results suggest companies are

interested first of all to comply with legal requirements and also to reach some

performances in environmental management. The least disclosed information in

company reports refer to financial aspects (environmental assets, debt and expenditures),

with less than 20% of the companies offering such data. We can state that sampled

companies do not consider relevant to provide such information for external users. In 12

of the 100 reports we found the following statement: “All issues regarding environmental

aspects (monitoring environmental factors, management of hazardous substances,

management of waste and wrapping and other environmental requirements) are done

according to existing legislation.”

Identifying the Correlation between Environmental Information and Economic and

Financial Factors

The lack of environmental information and implicitly of environmental problems

could generate significant risks for the business environment, such as reputation risk,

discontinuing the activity, lack of resources and high costs, supply chain risks, financing

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risk (identified in a study by ACCA in partnership with KPMG in 2011). These risks can be

reflected via economic and financial factors which can influence the degree of disclosing

environmental information. Another objective of our paper is identifying the financial and

non-financial factors which influence environmental information disclosure in case of BSE

listed economic entities. To achieve this purpose, we have identified the following

research lines: determining the elements which possibly influence the disclosure of

environmental information; the calculus of scores based on the environmental

information disclosing index; determining the connection between environmental

information and economic and financial factors, using a multiple linear regression.

Determining the Elements Which Possibly Influence Environmental Information

Disclosure

Most studies before now have shown that the most used economic and financial and

non-financial factors which favour the disclosure of environmental information are entity

size, financial performance, indebtedness degree, type of industry, type of property (state

or private), age of the entity, existence of external relations and so on. In our analysis we

decide to work with the factors size of the entity, financial performance, indebtedness

degree and age of the entity.

Entity Size

Previous studies from different countries, such as Greece (Galani et al., 2012),

Thailand (Suttipun and Stanton, 2012), Holland (Van de Burgwal and Oliveira Vieira, 2014),

Turkey (Akbas and Canikli, 2014) and China (Wei and Peng, 2014) claim that entity size

has a significant impact upon the degree of environmental information’s disclosing. It is

expected that bigger economic entities will offer more environmental connected

information, considering the pressure originating from information users (Caraiani et al.,

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2015), as well as in an attempt to improve their public image. Also, it is expected that this

information would be published on company website (Akrout and Othman, 2013).

Also, Riahi–Belkaoui (2001) and Cormier et al. (2005) have shown that there is a

correlation between company size (expressed via sales turnover) and the level of

environmental reporting. The studies which analysed this dependency have used various

measures to express entity size, such as total assets, number of employees or sales

turnover. In the present article we use TA (log of total assets), ST (log of sales turnover)

and also ANE (the average number of employees) as different proxies for the size of the

entity, expecting a positive relationship between size and disclosure of environmental

protection.

Company Performance

Previous studies have shown mixed results concerning the influence of profitability

upon environmental information reporting. Some researchers have determined a positive

relation between the two variables (Al-Tuwaijri et al., 2004; Murcia and Santos, 2012).

However, the studies which did not find a significant relation between profitability and

environmental information reporting are more numerous [Galani et al., 2012; Akbas and

Canikli, 2014; Dibia and Onwuchekwa, 2015; Echave and Bhati, 2010; Alikhani and

Maranjory, 2013). Although these results are contradictory, we can assume that a

profitable entity has enough resources to invest in its environmental policy, respectively

in improving company’s environmental results and its image, mainly for investors. As

such, entity’s performance is an important factor in determining the environmental

information to be disclosed. Many studies have used return on equity (ROE) and/or return

on assets (ROA) to express company performance (Albertini, 2013; Angelia and

Suryaningsih, 2015; Dobre et al., 2015; Hategan and Curea-Pitorac, 2017; Manurung et

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al., 2017; Ong et al., 2014; Vogt et al., 2017; Omnamasivaya and Prasad, 2016; Makni et

al., 2009). We have used ROE (net profit/equity) to accomplish our goal.

Indebtedness Degree

As total assets are also financed from other sources rather than equity holders, it is

expected that the entity will report, alongside compulsory financial information, other

voluntary information, both financial and non-financial. These are meant to increase

transparency and confidence in the company. Also, in this case the studies realized

showed contradictory results.

Clarkson et al. (2008) concluded that indebtedness degree (DD) has a significant

influence upon the degree of environmental information disclosure, as creditors put

pressure on the company to report environment information and analyse possible risks.

Thus, it is expected a positive relationship between the two variables.

Nevertheless, the studies of Echave and Bhati (2010) and Murcia and Santos (2012)

found no association between the two variables.

The Age of the Entity

Age is another characteristic of the entity that is less used in the research, yet it can

influence the degree of environmental information reporting. A company which has been

for a long time on the market is perceived as stable and aspects such as environmental

policy and objectives are part of company’s daily activity, as essential components of its

environmental image and strategy. Hence, we expect a positive relation between the two

variables. Akbas (2014) showed that age in the case of Turkey’s Stock Exchange positively

influences the degree of environmental information disclosure, yet the influence is not

significant. The age of the entity is computed as the log of the difference between the

year of the company constitution and the current year of analysis.

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The Calculus of Scores Based on the Environmental Information Disclosing Index

The environmental information list (the environmental information disclosing index)

is a summarizing situation, based upon which, the analysed company obtains a score

according to the environmental information published in its annual reports, sustainability

reports or websites. The DEI (disclosure of environmental information) index built will be

the dependent variable used within estimations.

Determining the Connection between Environmental Information and Economic and

Financial Factors, Using Regressions

Our study analyses the relationship between the degree of disclosing environmental

information and factors such as the entity’s age, financial performance, indebtedness

degree and size. In our study, total assets, sales turnover and average number of

employees (the size criteria specified/established by Romanian accounting regulation)

express entity size.

Considering previous research and studies and our sample’s characteristics, we have

established and tested the following four hypotheses using different econometric

specifications.

Hypothesis 1 (H1). Entity’s size does not significantly influence disclosing of

environmental information.

Hypothesis 2 (H2). Entity’s financial performance does not significantly influence

disclosing of environmental information.

Hypothesis 3 (H3). Indebtedness degree does not significantly influence disclosing of

environmental information.

Hypothesis 4 (H4). Entity’s age does not significantly influence disclosing of

environmental information.

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To test these hypotheses, the dependency relation is expressed using a multiple

linear regression, expressed by Equation (1):

(1)

where DEI represents the dependent variable, respectively disclosed environmental

information, whereas the individual independent variables used to test our hypotheses

are represented by TA (total assets), ST (sales turnover), ANE (average number of

employees), ROE (return on equity), DD (indebtedness degree), AG (age of entity). In

equation (1) stands for the standard error, a represents a constant and bi are the

regression coefficients (i = 1 . . . 6). For all variables we have used their natural logarithms,

except for ROE and DD, provided these are ratios.

We have chosen total assets (taken from the balance sheet) as they represent past

investments made by the company and the productive capacity of the company, sales

turnover (taken from the profit & loss account) representing the effective capacity of

company assets of generating useful effects, average number of employees (as the most

important productive factor), return on equity (calculated as net profit/equity owner), as

one of most important measures of company performances, indebtedness degree (the

ratio between total debt and total assets, all collected from the balance sheet) since it

shows an important feature of company financial strategy and age (since it depicts

continuity, sustainability in some way, investors’ trust and other relevant features of a

company’s activity).

Panel data analysis is the most suitable to be applied provided the nature of our

sample data of Romanian firms. Besides allowing to control for variables which cannot be

observed or measured, it accounts for individual heterogeneity. The first models to be

used into our analysis are those of random (RE), between (BE) and fixed effects (FE).

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By applying FE, we are assuming that something within the firm can influence or bias

the predictor (independent) variables, which we need to control. Or else, that there is

correlation between firm’s error term and predictor variables. Therefore, FE removes the

effect of those time-invariant characteristics, allowing to assess the net effect of the

predictors upon disclosed environmental information (DEI). Another important

assumption in FE is that error terms are not correlated among firms. If not, the FE model

would not be suitable, inferences could be wrong and we need to model this relationship

probably using RE. In estimations we have added the option robust to control for possible

heteroscedasticity. Unlike the FE model, in the RE model the variation across economic

entities is assumed random and uncorrelated with the independent variables. If we

believe that differences across firms have some influence over DEI, as we do, then we

should use RE. The Hausman model is used to select which model is more suitable.

The BE model captures the cross-sectional nature of the data and as such allows us

to estimate effects between RE and FE. Stata’s RE estimator is a weighted average of FE

and of BE coefficients, provided FE uses only the time series information and BE uses the

cross-sectional information.

For robustness check we have also used the linear regression with panel-corrected

standard errors (PCSE) which assumes that the disturbances are by default

heteroskedastic and contemporaneously correlated across panels. We also use the

system dynamic panel data estimation model in order to include lagged effects of

dependent variables using both a GMM two-step standard errors procedure and a robust

standard errors assumption. Moreover, we consider the high correlation values identified

in Table 1 among independent variables and present estimation results which account for

their inclusion individually to reduce multicollinearity issues and provide additional

robustness check.

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1.4. Research results and conclusions

To analyse the relationship between the variables we have used the correlation

matrix. The highest mean values are displayed by total assets and sales turnover,

justifying also why these present the highest standard deviation. Both return on equity

and disclosed environmental information present negative minimum values, yet DEI has

the lowest maximum value. As a rule, correlation coefficients with values between 0 and

0.3 express a weak link, with values between 0.3 and 0.7 a moderate link, whereas values

between 0.7 and 1 express a strong bond. The correlation coefficients as well as

descriptive statistics are presented in Table 1 below.

Table 1. Descriptive statistics and correlation matrix

Std.
Mean Dev. Min Max DEI TA ST ANE ROE DD AG
DEI 1.310 0.776 -0.693 2.708 1
TA 18.030 1.912 13.455 24.489 0.781*** 1
ST 17.320 2.218 11.639 23.618 0.850*** 0.893*** 1
ANE 5.101 1.742 0.000 9.853 0.749*** 0.694*** 0.804*** 1
ROE 0.080 0.805 -4.259 10.131 0.019 0.002 0.026 0.025 1
DD 0.413 0.478 0.000 5.009 0.157*** 0.065 0.188*** 0.115*** 0.119*** 1
-
AG 3.248 0.231 1.386 3.912 -0.025 0.010 -0.043 -0.068 0.176*** 0.012 1
Notes: All variables except ROE and DD are in natural logarithms. DEI stands for disclosed environmental information;
TA—total assets; ST—Sales Turnover; ANE—average number of employees; ROE—return on equity; DD—
indebtedness degree; AG—age of entity. *, **, *** represent statistically significant at 10%, 5% and 1%, respectively

According to Table 1 we can notice a strong correlation between total assets and

sales turnover, between average number of employees and total assets, as well as

between average number of employees and sales turnover, all statistically significant.

These correlations are actually expected, since these measures are used in Romania for

expressing entity size. There is a strong and expected correlation between disclosed

environmental information and number of employees, as in Romania companies with a

large number of employees are the ones which publish sustainability reports and

implicitly supply more environmental information. Also, previous studies support the fact

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that there is a positive relationship between entity size and disclosure of environmental

information (Nurhayati et al., 2006; Brammer and Pavelin, 2008; Galani, et. al, 2012;

Cormier et al., 2005; Suttipun and Stanton, 2012; Van de Burgwal and Oliveira Vieira,

2014; Akbas and Canikli, 2014; Wei and Peng, 2014; Caraiani et al., 2015; Akrout and

Othman, 2013; Riahi-Belkaoui, 2001; Carreira et al., 2014; Jariya, 2015; Sahore and

Verma, 2017). The association between disclosed environmental information and

indebtedness degree, respectively age of entity, is very weak. The variance inflation factor

(VIF) quantifies the severity of multicollinearity. If the VIF value is VIF < 0.2 or VIF > 10,

then multicollinearity is problematic [70]. To infer about VIF we have run a simple OLS

regression and then applied the VIF test. Results Indicate VIF values for ST = 8.04; TA =

5.37; ANE = 2.88; DD = 1.12; AG = 1.05; ROE = 1.05; and a mean VIF of 3.25. Therefore,

we should not worry with multicollinearity issues within our sample, turning

multicollinearity among independent variables.

Table 2 below presents the fixed, random and the between effects estimation

results, as well as Hausman test’ results, suggesting that fixed effects’ model is the most

suitable one. All models present global statistical significance provided that appropriate

tests indicate all model’s coefficients are different from zero. Both the fixed and random

effects models indicate total assets have a clear positive and significant influence over

disclosure of environmental information, suggesting that the bigger the firm the higher

environmental information’s disclosing. This means that size positively influences this

disclosure, probably due to company’s need to keep a good image for existing and

potential investors. The same occurs with indebtedness degree, whose coefficient is

positive and significant. It means that the higher the indebtedness degree, the higher the

probability of a company disclosing environmental information, as it needs to display a

favourable image for financial creditors. This in turn contradicts the assumed hypothesis

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that indebtedness does not influence disclosed environmental information (DEI). The

average number of employees, which also accounts for company size, with statistical

significance in both the FE and the BE effects model, displays negative and positive

coefficients respectively. Therefore, our first hypothesis is not confirmed, since results

seem to indicate that size influences DEI. Provided that TA is also a measure of firm size,

results are contradictory in the FE model, indicating that results might be biased

depending upon considered measure of size. However, we can state that size determines

the quantity of information it provides to external users.

Table 2. Panel data simple model estimations

Fixed Effects (FE) Random Effects (RE) Between Effects (BE)
Dependent: DEI Coefficient t-test Coefficient t-test Coefficient t-test
TA 0.0834 2.70*** 0.1634 6.75*** 0.0568 1.20
ST 0.0123 0.56 0.1005 5.01*** 0.1226 2.09**
ANE -0.0146 -2.20** -0.0074 -1.05 0.2113 3.80***
ROE -0.0005 -0.07 -0.0033 -0.43 -0.0063 -0.05
DD 0.0777 3.61*** 0.1142 5.54*** 0.0169 0.15
AG -0.1079 -2.55** -0.0988 -2.23** 0.1103 0.53
Constant -0.0130 -0.02 -3.0644 -8.74*** -3.2808 -4.11***
Hausman chi(2) 68.88***
F-test 4.39*** 54.94***
Wald chi(2) 241.17***
R within
2
0.0627 0.0400 0.0089
R between
2
0.6123 0.7034 0.7800
R overall
2
0.5953 0.6890 0.7145
Number of obs. 500
Notes: All variables except ROE and DD are in natural logarithms. DEI stands for disclosed environmental information;
TA—total assets; ST—Sales Turnover; ANE—average number of employees; ROE—return on equity; DD—
indebtedness degree; AG—age of entity. *, **, *** represent statistically significant at 10%, 5% and 1%, respectively

Age connected results indicate a negative and significant impact over DEI and

therefore company maturity influences DEI and our no. 4 hypothesis is also not verified.

The remaining explanatory variables of the models, namely ST and ROE, are not

statistically significant under the FE model. For all models, ROE is not statistically

significant, leading us to accept the null hypothesis thereby concluding that financial

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performance does not influence DEI. The results of our study resonate with other

previous studies which do not find a significant relation between financial profitability and

environmental information reporting (Brammer and Pavelin, 2008; Van de Burgwal and

Oliveira Vieira, 2014; Wei and Peng, 2014; Radhouane et al., 2018; He and Loftus, 2014).

However, considering the RE and BE results, they contradict our no. 2 hypothesis,

provided that ST coefficient is positive and significant. Moving one step further we

present the results obtained for the panel corrected standard errors (PCSE) model in

Table 3 and the results achieved using the system dynamic panel data estimation model

considering GMM two-step procedure and robust standard errors in Table 4.

Table 3. Panel corrected standard errors (PCSE) model results

Model 1 Model 2 Model 3 Model 4
Dependent: DEI Coeff. z-test Coeff. z-test Coeff. z-test Coeff. z-test
TA 0.0547 4.38*** 0.2055 7.53*** 0.0433 3.30*** 0.3143 85.95***
ST 0.1992 7.57*** 0.2639 18.76***
ANE 0.0876 2.36** 0.1731 3.97***
- -
ROE -0.0012 -0.07 0.0022 -0.11 0.0008 -0.04 -0.0017 -0.09
DD 0.0302 0.94 0.1292 4.94*** 0.0135 0.43 0.1740 7.87***
-
AG 0.0355 0.81 0.0182 -0.35 0.0191 0.52 -0.1159 -4.62***
- - -
Constant -3.7003 -16.19*** 3.2715 -12.66*** 4.1093 -27.75*** -4.0518 29.21***
Wald chi(2) 9522.69*** 6217.47 12152.62 8937.73
R2 0.7388 0.6985 0.7254 0.6219
Number of obs. 500
Notes: All variables except ROE and DD are in natural logarithms. DEI stands for disclosed environmental information;
TA—total assets; ST—Sales Turnover; ANE—average number of employees; ROE—return on equity; DD—
indebtedness degree; AG—age of entity. *, **, *** represent statistically significant at 10%, 5% and 1%, respectively.
Model 1: Including all independent variables; Model 2: Excluding ST provided we have 3 size measures; Model 3:
Excluding ANE provided we have 3 size measures; Model 4: Excluding ST and ANE provided we have 3 size measures.

Results from Table 3 reinforce the idea that DEI is positively and statistically

influenced by size, as expressed by total assets, average number of employees, as well as

by sales turnover. As sales turnover is also a measure of financial performance, results

seem to indicate that financial performance does influence disclosure of environmental

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information. We cannot state the same for ROE, since there is no evidence of statistical

significance for its coefficient value. Therefore, this also contradicts our no. 2 hypothesis.

Both size and performance positively increase the probability of company’s DEI, as does

indebtedness. However, DD is sensitive to inclusion of other explanatory variables in the

model. As such, the inclusion of accounting variables in the model used to explain DEI is

sensitive to the selection of variables used. The overall significance of models presented

in Table 3 is high, meaning that all these variables are important to explain DEI. However,

there might exist other relevant variables besides the accounting ones to explain DEI.

Environmental protection is a complex issue and the decision of disclosing environmental

information is not always rational and as such it might not only depend on quantitative

data, as the ones obtained from the accounting. We should also evidence that company

age or maturity seems to have a negative impact over DEI. The result was only significant

when we removed the variables of sales turnover and average number of employees

from the analysis. As such there is evidence that age in fact influences DEI. Moreover,

results are sensitive to the model chosen as comparing among different estimations

showed.

Table 4. System dynamic panel data estimation models: GMM

(generalized method of moments) and robust
Robust- Robust- Robust- Robust-
GMM-M1 M1 GMM–M2 M2 GMM-M3 M3 GMM-M4 M4
Dependent:
DEI Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff. Coeff.
DEI (-1) 0.8776*** 0.8776*** 0.8622*** 0.8622*** 0.8498*** 0.8498*** 0.8168*** 0.8168***
TA 0.0569* 0.0569 0.0819*** 0.0819** 0.0634** 0.0634 0.0898*** 0.0898***
ST 0.0564* 0.0564* 0.0614** 0.0614
ANE 0.0090*** 0.0090** 0.0097*** 0.0097**
ROE -0.0069 -0.0069 -0.0033 -0.0033 -0.0085 -0.0085 -0.0050 -0.0050
DD 0.0352 0.0352 0.0439* 0.0439 0.0398* 0.0398 0.0500** 0.0500*
AG 0.0404 0.0404 0.0418 0.0418 0.0345 0.0345 0.0361 0.0361
Constant -2.0028*** -2.0028*** -1.4676*** -1.4676*** -2.1087*** -2.1087*** -1.4835*** -1.4835***
Wald chi(2) 235.76*** 118.07*** 259.74*** 109.77*** 236.22*** 102.51*** 247.15*** 92.86***
Number of
obs. 400 - Two Step Results

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Notes: All variables except ROE and DD are in natural logarithms. DEI stands for disclosed environmental information;
DEI (−1)—disclosed environmental information lagged one period; TA—total assets; ST—Sales Turnover; ANE—
average number of employees; ROE—return on equity; DD—indebtedness degree; AG—age of entity. *, **, ***
represent statistically significant at 10%, 5% and 1%, respectively. Instruments for differenced equation: GMM type L
(2/2). DEI; Standard: D.TA, D.ROE, D.DD, D.AG. Instruments for level equation: GMM type LD.DEI, Standard _cons.
Results have been obtained through STATA version 14. M1—Model 1: Including all independent variables; M2—Model
2: Excluding ST provided we have 3 size measures; M3—Model 3: Excluding ANE provided we have 3 size measures;
M4—Model 4: Excluding ST and ANE provided we have 3 size measures.

To provide more robustness check in terms of analysis Table 4 presents the results

obtained using the system dynamic panel data estimation model, considering GMM two-

step procedure and robust standard errors. Once more, there are some results which

might be validated through robustness check as Table 4 evidenced. It is possible to

conclude that there are differences upon model’s assumed form and that GMM type is

more robust. Despite, all the coefficients are different from zero and the model is valid

using these regressors. Still there might be other factors able to explain DEI. Moreover,

we need the lagged values of DEI to explain present DEI, which means that once the firm

starts disclosing environmental information, its investors demand more from it, forcing it

to continue doing that. In terms of general conclusions, it is possible to observe that size

is an important (positive and significant) factor to explain DEI. This somehow contradicts

the results obtained by Junquera and Barba (2018), as the two authors analysed mainly

SME companies (wineries). Radhouane et al. (2018) showed that it is important to

account for an industry’s environmental sensitivity when investigating the value

relevance of a company’s environmental commitment and disclosure.

The same happens in terms of performance, when measured through sales turnover

(ST), provided that ST coefficient reveals to be positive and statistically significant. Both

results invalidate our hypothesis 1 and 2. These results are also seemingly different from

the ones obtained by Junquera and Barba (2018) and of Radhouane et al. (2018).

Indebtedness positively influences DEI only when some variables are removed and

under the GMM assumption. As such, we have mixed evidence if in fact indebtedness

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does or does not influence DEI, since robustness check provides mixed evidence. So, we

cannot completely confirm or invalidate hypothesis no. 3. With respect to the age variable

and provided it is not statistically significant, we can confirm hypothesis no. 4 that

maturity does not influence DEI but as seen previously results are also sensitive to the

model specification and as such we must be careful while providing conclusions. To sum

up all our conclusions, we present in Table 5 a summary of our main findings.

Table 5. Summary of the main findings

PCSE Dynamic GMM Dynamic Robust
M1 M2 M3 M4 M1 M2 M3 M4 M1 M2 M3 M4
DEI(-1) +*** +*** +*** +*** +*** +*** +*** +***
TA +*** +*** +*** +*** +* +* +** +*** +** +***
ST +*** +*** +* +** +*
ANE +** +*** +*** +*** +*** +**
ROE
DD +*** +*** +* +* +* +*
AG -***
H1: Not verified; Size + influences Not verified; Size + influences
H 2: Verified; No significance Verified; No significance of performance
H 3: Not verified; Debt + influences Not verified; Indebtedness degree + influences
H 4: Mixed; AG - influences in M4 Verified; No significance of Age
Notes: All variables except ROE and DD are in natural logarithms. DEI stands for disclosed environmental information;
DEI (−1)—disclosed environmental information lagged one period; TA—total assets; ST—Sales Turnover; ANE—
average number of employees; ROE—return on equity; DD—indebtedness degree; AG—age of entity. *, **, ***
represent statistically significant at 10%, 5% and 1%, respectively. H1: Entity’s size does not significantly influence
disclosing of environmental information; H2: Entity’s financial performance does not significantly influence disclosing of
environmental information; H3: Indebtedness degree does not significantly influence disclosing of environmental
information; H4: Entity’s age does not significantly influence disclosing of environmental information. M1—Model 1:
Including all independent variables; M2—Model 2: Excluding ST provided we have 3 size measures; M3—Model 3:
Excluding ANE provided we have 3 size measures; M4—Model 4: Excluding ST and ANE provided we have 3 size
measures. GMM—generalized method of moments; PCSE—Panel corrected standard errors. When significant, +
means positive coefficient attained through results—means a negative coefficient sign.

Our paper evaluated transparency and responsibility of some BSE listed companies

toward environmental aspects, as well as the dependency relation between degree of

disclosing of environmental information and economic and financial factors such as

entity’s size, profitability, indebtedness degree and age. The data were collected from

annual reports, sustainability reports and websites of sampled companies.

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Habilitation thesis Camelia Mirela BABA

Our research can be of interest for potential investors concerned by companies’

environmental responsibility, for existing shareholders, as well as for other stakeholders

(local community, local and central authorities), besides providing several different

contributions for the existent literature. This research brings value added to existing

literature by completing and expanding the research in the environmental reporting area.

The results of our study can contribute to: (a) improving environmental reporting and

environmental information disclosure practices; b) increasing transparency and

managers’ awareness toward environmental aspects; (c) changing the

behaviour/mentality of listed companies; d) increasing awareness of regulating

authorities and supporting them in taking measures to determine companies disclosing

the effect their operations carry upon the environment. Supplying the environmental

information is less based on voluntary initiatives and more on official regulations. The

authorities should know (and we reveal this) that only big companies, with a high sales

turnover are willing to report environmental data/information; (e) revealing the

relation/connection between DEI and various economic, financial and non-financial

factors (relation we have tested through various econometric approaches).

The results show environmental reporting largely depends upon company size and its

financial performance/profitability.

As opposed to previous studies, which analysed environmental information

disclosure for a maximum of three years, our research employs a longitudinal analysis

following disclosure trends for a five years period for 100 companies pertaining to 20

different activity sectors. We feel this period is sufficient to formulate clear and relevant

conclusions regarding sampled companies’ environmental information disclosure.

Studies using an index of disclosing environmental information (DEI index) are

numerous. Usually, precedent research has built the DEI index with a focus upon the non-

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financial information, the financial information being less approached. Our paperwork

completes previous studies by conceiving a DEI index which includes and details financial

information such as investments for environmental protection; costs with litigations or

fines paid for disregarding environmental regulations; ecological taxes; environmental

provisions and other costs. In building our DEI index we have used as a reference the

Global Reporting Initiative (GRI) and the list used by Clarkson et al. study (2008), while we

have adjusted the measures to reflect Romanian specific legislation.

The evaluation results show that the interest for publishing environmental data is

relatively low. The highest score obtained by sampled companies (calculated based on the

environmental information disclosing index) was of 15, compared to the maximum

possible value of 29. Unfortunately, there is still a significant part of listed companies

which are reluctant to supply information concerning the impact their activities have upon

the environment. The motives behind that can be diverse, that is, they do not want to

acknowledge the impact their activities have upon the environment, no matter if they

comply or not with legal requirements, they fear a reaction from environmental agency or

from general public or from ignorance or indifference.

In Romania, only companies with over 500 employees listed on the stock exchange

market or with state ownership have the obligation to publish a sustainability report. The

other companies (even if their activity has a significant impact upon the environment) are

not obligated and they do not present voluntarily sustainability reports. We can state that

transparency is only the result of obligation and does emerge voluntarily.

The environmental information provided by sampled companies are mostly general,

with details offered only about the environmental policies, objectives and in some

measure environmental performances. The financial aspects concerning the implications

upon environment are scarcely approached. Communication and transparency concerning

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environmental problems is still quite low, yet we can notice some positive aspects such

as: (a) declaring the reduction in water and energy consumption by a large number of

companies; (b) waste management policies (reducing the quantity and impact of waste);

(c) formulating the environmental objectives and reaching them in a significant

proportion; (d) stating the plans and actions programs concerning environmental

protection and (e) legal conformity (aligning to environmental protection standards and

complying with existing legislation). Companies offer detailed information about

environmental aspects only to public authorities, whereas the public authority can supply

data on request from any natural or legal person (according to the Government Decision

no. 878/2005 concerning public access to environmental information). Transparency

could increase only if high-risk pollution companies would be legally obligated to fulfil

public environmental reports. Our paper also looked to determine the influence of

financial and non-financial factors and measures (such as entity’s size, financial

performance, indebtedness degree and age) upon the environmental information

disclosure degree of BSE-listed Romanian economic entities. The connection between

environmental information and financial and non-financial factors was tested through

several different econometric approaches. In light of the tests performed we have noticed

that entity’s size, expressed via average number of employees, significantly influences

the quantity of information supplied by the companies. As a company gets bigger,

increases the pressure from the general public and other stakeholders for the company to

publish more information about its environmental activity. Also, the company becomes

more interested to disclose more information to attract more investors and create a

better image on the market. Results also seem to point that financial profitability, when

measured through sales turnover (not true for ROE), influences the disclosure of

environmental information and in a positive way. Thus, as company performance

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increases there might be more resources to affect to environmental awareness and firms

might also do it for image concerns. However, indebtedness degree, with mixed results

and entity’s age do not have a significant influence upon disclosing environmental

information. Therefore, even if a company has a long history of existence it does not

guarantee that it will disclose more environmental information. The results we have

obtained can also indicate that profit generating economic entities are starting to be

interested to invest in company environmental activities or in their reporting. The number

of employees can influence disclosing environmental information, as economic entities

with over 500 employees have obtained a higher score, being legally committed to

present sustainability reports. Economic entities are not obligated to disclose

environmental information for interested information users. Romania has regulations,

however, such as Government Order no. 178/2005, which obligates certain companies

(from polluting industries) to report some information, at determined time intervals,

toward a certain state authority. However, this information is not public.

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Chapter 2. Reorganization of Economic Entities by Demerger and Sustainable

Development Strategies

The Covid-19 induced economic crisis has significantly affected almost all businesses

from nearly every sector, causing severe financial problems, lack of cash assets, and

decreased revenues. In this context, the economic entities were forced to look for

adjustment and rescue solutions of their activities. One possible solution for the recovery

and reorganization of economic entities’ activities is demerger.

The paper published in 2021, The Demerger Impact upon Sustainable Development of

Economic Entities: Evidence from Romania, evaluates the impact of demerger upon

economic efficiency and financial performances of economic entities. To achieve this goal,

a statistical analysis of profitability ratios before and after the demerger, as well as a

structural analysis of 268 demerger projects for the April 2012–April 2021 period, were

performed. The results attest there are no significant differences between the ex-ante

and ex-post financial performances. However, demerger seems to have a positive effect

upon analyzed companies helping them to overcome economic hardships, rethink their

business strategies, and continue their activity in the medium and long-term time

horizon.

2.1. Introduction

To cope with economic hardships exacerbated by the sanitary crisis and avoid

bankruptcy, economic entities need to look for solutions to continue their activities and

develop sustainably. One of the main measures economic entities can adopt to protect

their businesses in the context of the pandemic is restructuring.

Demerger represents a type (a mechanism) of restructuring, a strategy for rescuing

economic entities in financial difficulties, and implicitly an instrument supporting the

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sustainable development of businesses. The demerger process allows the identification

and focusing on a given market segment for each company resulted from the process, as

well as for the cedent company.

The partial division (demerger) represents a reorganizing operation and “implies the

secession of part of a company’s wealth/patrimony, which still continues to exist, and in

transferring this part to one or more legal entities which already exist or they are created

in this way”. The demerger is defined in Romania by Fiscal Code’s Law no. 227/2015,

subsequently added and modified and by the Law of Economic Societies no. 31/1990,

republished with subsequent additions and modifications in Ministry of Public Finances

Order no. 897/2015. The dividing company is called assignor, whereas the companies

already existing or which are created in the demerger process are called beneficiaries. The

main objective of this paper is to evaluate the impact of demerger upon the sustainable

development of economic entities in terms of economic efficiency and financial

performance. A structural analysis for 268 demerger projects from the April 2012–April

2021 period and a statistical analysis of profitability ratios before and after the demerger

were performed to reach this objective. The profitability analysis before and after the

demerger was necessary to properly highlight the effects generated by the demerger.

The purpose of this paper is to realize a statistical analysis of the ex-ante and ex-

post demerger performances and find whether the demerger had a positive impact upon

sampled companies’ efficiency and financial sustainability. The studies from reference

literature pay more attention to the typology of these transactions and/or their tax and

accounting treatment, with a lesser focus on the effect demerger may have on the

efficiency and financial performance of economic entities. The analysis of financial

profitability ratios from before and after the demerger is essential for the managers of

involved companies, allowing them to assert the impact and benefits of the demerger and

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decide the restructuring format best suited for the success of the operation. The detailed

analysis of demerger projects and the study of demerger impact upon sampled economic

entities’ financial performances may represent an approach of the demerger analysis.

This study contributes to an in-depth knowledge of economic entities’ restructuring and

identifying the financial characteristics of these transactions. It shows the economic and

financial implications which the demerger process can have upon these economic

entities’ sustainable development.

2.2. Literature Review

In the Romanian legislation, reorganization is approached in various ways, such as

mergers, demerger, sector/sectors’ activity transfer, acquisition-sale of sector/sectors’

activity. The demerger was analyzed in reference literature either from the perspective of

typology characteristics or from the standpoint of shareholders’ wealth and value

creation for the entity, respectively, for the impact demerger has upon company

performances.

Demerger Characteristics, Typology of Restructuration through the Demerger

Rachisan et al. (2008) analyzed demerger operations from the January 2006–30 June

2007 period. Their study looked to identify restructuration typology through demerger

practiced by Romanian economic entities. The authors concluded demerger is a

restructuration process that usually develops in the maturity stage of an entity’s life

cycle.

Impact of Demerger upon Shareholders’ Wealth and the Price of Shares of Stock

The impact demerger can have upon shareholders’ wealth and the price of shares of

stock was studied by recent research papers (Singh et al., 2009; Vyas et al., 2015;

Padmanabhan, 2018; Aggarwal, 2019). Singh et al. (2009) have investigated the way in

which shareholders’ wealth was influenced before and after the demerger. The authors

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have found that equity value increased following the demerger, due to the reduction of

negative synergies and unlocking the value through a break-up. Vyas et al. (2015)

analyzed the impact of spin-off announcements on stock prices. They took data of 51

spin off announcements from 2012 to 2014. Their results show that the spin-off

announcements lead to a positive impact on the stock prices of the parent company.

Padmanabhan (2018) and Aggarwal & Garg (2019) also analyzed the effect of spin-off

announcements on share prices of Indian firms.

Creating Value through Spin-Offs

Some of the most recent studies from reference literature focused upon the

relationship between spin-offs and value creation for shareholders and companies (Veld

and Veld-Merkoulova, 2004; Veld and Veld-Merkoulova, 2009; Khurana and Gupta, 2013;

Chai, 2018). Studies show that spin-offs generate both benefits and problems. Khurana

and Gupta (2013) studied a few demergers in India to establish that demergers resulted

in a significant increase in the total market capitalization of involved companies. The

reason for that was attributed to improved focus. The authors suggest that demerger

may allow companies to strengthen their core competencies and realize the true value of

their business. Chai et al. (2018) studied the impact on spin-off announcements in

Australia. The authors found Australian spin-offs are associated with a positive excess

stock performance for up to 24 months after the spin-off. Basak (2017) produced another

paper investigating whether demerger restructuring can create value for shareholders.

The author realized a comparative analysis of ex-ante and ex-post performances,

concluding that this restructuring format creates value for interested parties.

Impact of Demerger upon Company Performances

The consequences of demerger upon company performances and financial situation

have been researched in various recent studies (Johnson et al., 1996; Mallick and Rakshit,

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2006; Rakshit and Ghosh, 2010; Panda and Rao, 2012). In most cases, demergers tend to

have a positive influence over the company. Johnson et al. (1996) consider spin-offs

create value by improving investment incentives and economic performances. Mallick and

Rak shit (2006) compared financial performances from before and after the demerger.

The authors concluded that financial performances improved after the demerger, the

latter allowing the companies to impose widened control and create value. Rakshit and

Ghosh (2010) measured the financial and operational efficiency of JK Industries by

comparing the ex-ante and ex-post demerger periods. The financial and operational

efficiency improved after the demerger, which was the conclusion reached by the

authors. Panda and Rao (2012) concluded there is a very significant improvement in the

return and revenue performances of companies in the ex-post compared to the ex-ante

demerger period. Bao (2017) realized another study measuring the impact of demerger

upon financial performances. The author evaluated banks’ financial performances from

the ex-ante, respectively, ex-post demerger periods.

2.3. Data and Methodology

The purpose of this paper is to evaluate the demerger’s impact upon the sustainable

development of economic entities, using a structural analysis of 268 demerger projects

from the April 2012–April 2021 period and a statistical analysis of profitability ratios from

before and after the demerger.

Structural Analysis of Demerger Projects

The first objective of this study is a detailed analysis of demerger projects to identify

characteristics such as demerger year, companies’ legal form, sector of activity, and

number of beneficiary companies. The yearly evolution of demerger projects is shown in

Figure 1.

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Figure 1. The evolution of the demerger projects during the 2012–2021 period

The structural analysis also envisioned identifying the causes, motivation, and

advantages of the demerger projects. The database includes all the 268 demerger

projects published by Romanian Trade Office Register for the April 2012–April 2021

period. The analysis counted 10 projects in 2021, 28 projects in 2020, 43 projects in

2019, 31 projects in 2018, 29 projects in 2017, 20 projects in 2016, 41 projects in 2015,

21 projects in 2014, 33 projects in 2013, and 12 projects in 2012. Most of the concerned

societies are organized as limited liability societies, such as following the demerging, as it

usually results from only one beneficiary company. Of the total 268 companies, 67

(respectively 25% of the demerger projects) are incorporated shares companies, whereas

201 are limited liability companies, respectively 75% of the total. The main type of

demerger was the patrimonial transfer toward the newly established companies at the

demerger moment. Figure 2 presents the distribution of the demerger projects by sectors

of activity.

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Figure 2. Main sectors of activity of demerged companies

The divided companies originate from virtually all activity sectors. Yet, predominant

are the ones from letting and subletting real estate assets sector (14), taxi transportation

(11), electricity production (9), commercial and non-commercial real estate construction

companies (9), retail sales in non-specialized stores (8), hotels and assimilated

accommo dation structures (7), retail of pharmaceutical products (6), growing crops (5)

and other activities with a smaller number of projects. The content analysis revealed the

reasons and foundations of demerging the 268 involved economic entities. The main

economic and commercial reasons substantiating the demerger projects are summarized

and presented in Table 1, ordered by their decreasing frequency. The analysis reveals a

variety of reasons which determine companies to subject them selves to a demerger

process. The demerger is justified by the necessity of separating specific projects and

activities realized by divided economic entities in view of better-focused and more

efficient management of available resources. The content analysis revealed that

increasing economic efficiency was the main reason for dividing the concerned Romanian

economic entities.

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Table 1. Advantages and motivation of demerger

Advantages and Motivation of Demerger

1. Increasing economic and financial efficiency and profitability
2. Specializing improves labor productivity, raises personnel’s interest for contributing to economic
efficiency
3. Distinct appraisal of financial performances and financial measures for each activity from the
portfolio
4. More adequate management of available resources
5. Increasing efficiency and simplifying the decision-making process
6. Increasing decision making and operational flexibility
7. Optimizing the level of expenditures
8. Separating the competitive activities from the less competitive ones
9. Separating the risks associated with each line of activity
10. Separating investment objectives
11. Better choice of strategies for organizing and operating the activities, as well as of strategies of
managing company assets
12. Higher flexibility in designing strategies and policies customized for each activity
13. Easier access to financing
14. Increasing the attracting, implementing, and managing of non-reimbursable funds
15. Smaller companies are easier to manage and control and more responsive to market reactions
16. Promoting a stronger brand image
17. Avoiding potential conflicts/misunderstandings between shareholders
Source: Data collected and processed from demerger projects

Creating distinct economic entities specialized in a specific sector of activity, with

separated budgets of revenues and expenditures, can contribute to a better efficiency

and profitability of each entity. Smaller companies are easier to manage and control and

more responsive to market reactions. A smaller company can benefit from a more

efficient management, more efficient use of resources, productivity increase, all resulting

in increased profitability and quality of products and services offered to the clients.

The demerger process allows a proper identification and focus on a given market

segment for each company resulted from demerger. In addition, splitting the activities

can improve negotiation power with business partners, offering the companies an

improved market response capacity and generating a consolidation of market positioning.

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The content analysis revealed situations which justified demerging due to

misunderstandings between shareholders/associates regarding the investment and

management policies of concerned economic entities. A large number of

shareholders/associates can generate problems in the decision-making process.

Separating and empowering the management structures can optimize expenditures,

reduce operating costs and increase long-term profitability.

Another reason for company demerger is the negative effects of the sanitary crisis

upon sales turnover. The companies which divided in 2020 and 2021 maintained

demerging was necessary due to current economic context (Covid-19 generated), due to

financial and social crisis, and implicitly because of the need for a long-term increase of

efficiency and profitability.

Statistical Analysis of the Differences between the Ex-Ante and Ex-Post Demerger

Sub-Periods

Another objective of this paper is to evaluate the impact of demerger strategy upon

companies’ efficiency and profitability. The profitability analysis for the ex-ante and ex-

post periods is necessary to ensure a better highlight of the effects generated by the

demerger. One purpose of this paper is to realize a statistical analysis of the performance

differences from the before and after demerger sub-periods and to find whether the

demerger had a positive impact upon sampled companies’ efficiency and financial

sustainability. This paper investigates whether demerger can be a solution for saving and

recovering the companies found in financial distress. To see whether companies’ financial

performances have improved after the demerger, it was selected a sample with 72

economic entities demerged, only from those entities which reported financial situations

in the 2005–2019 period. The economic entities included in the sample were analyzed in

four stages, using 4 panels, respectively, one with 8 companies demerged in 2012, one

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with 22 companies demerged in 2013, a panel with 17 companies demerged in 2014, and

another one with 25 companies demerged in 2015. The analysis also included 20

economic entities demerged in 2020 and 6 economic entities demerged in 2021 to find

whether the demerger restructuring was needed and useful from an economic and

financial point of view. The analysis started by selecting those economic entities which

reported financial data in the 2005–2019 period. The main source of data was the

financial statements of demerged companies, using the site www.romanian-

companies.eu (accessed on 29 April 2021). We have selected as measures of financial

performances the profitability ratios of ROA (Return on Assets) and ROE (Return on

Equity). ROA shows management performances in using company assets to generate net

income. We calculated ROA as Net profit after tax divided by Total Assets. ROE expresses

financial performance, and it informs shareholders about the company’s capacity to use

its invested capital (Equity) to generate profits. We calculated ROE as Net profit after tax

divided by Equity. The analysis of these profitability ratios for the sample considered can

offer information about companies’ financial performances from the before and after

demerger periods.

The purpose of this research is to analyze the impact of demerger upon sampled

companies’ financial performances, these were established and statistically tested two

sets of hypotheses:

Testing the ROA level differences in the ex-ante and ex-post demerger periods

Hypothesis 0 (H0): There are no significant differences between the ex-ante and ex-

post demerger levels of ROA.

Hypothesis 1 (H1): There are significant differences between the ex-ante and ex-post

demerger levels of ROA.

Testing the ROE level differences in the ex-ante and ex-post demerger periods

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Hypothesis 2 (H2): There are no significant differences between the ex-ante and ex-

post demerger levels of ROE.

Hypothesis 3 (H3): There are significant differences between the ex-ante and ex-post

demerger levels of ROE.

2.4. Results, discussions, and conclusions

Statistical Analysis of 2012, 2013, 2014, and 2015 Panels

The sample of 72 companies used in the statistical analysis was distributed in four

panels, corresponding to the demerging years, respectively, 2012, 2013, 2014, and 2015.

The demerging years were selected to allow a comparative analysis of the two sub-

periods, from before and after the demergers.

Statistical Analysis of ROA in the Ex-Ante and Ex-Post Demerger Sub-Periods

To ensure results’ robustness, a statistical analysis of ROA and ROE was performed

for the ex-ante and ex-post demerger sub-periods using the SPSS statistical software.

Table 2 centralizes the descriptive statistics results, respectively, the average and

standard deviation for ROA and each of the four panels, before and after the demerger.

Table 2. Descriptive statistics

ROA Group Statistics for the Period 2005–2019

Demerger Year No. Companies Sub-Periods N Mean Std. Deviation Std. Error Mean
2012 ≥2013 56 −0.001696 0.254298 0.033982
8
<2013 64 0.094323 0.269962 0.033745
2013 ≥2014 132 0.100722 0.211805 0.018435
22
<2014 198 0.060275 0.220937 0.015701
2014 ≥2015 85 0.111806 0.213411 0.023148
17
<2015 170 0.075973 0.119990 0.009203
2015 ≥2016 100 0.083060 0.151103 0.015110
25
<2016 275 0.098024 0.185228 0.011170

The first sub-period includes the demerger year, whereas the second sub-period

starts with the first year after the demerger. For the 2012 and 2015 panels, the ROA

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average from after the demerger decreased, registering a small decline for the 2015

panel and a dramatic fall for the 2012 panel, with the average ROA becoming negative. An

explanation for the situation of the 2012 panel could reside in the smaller number of

sampled companies. For the 2014 panel, a higher variation of ROA average after the

demerger can be noticed compared to the ex-ante demerger sub-period. In the 2015–

2019 sub-period, the ROA average is 11.2%, with a standard deviation of 21.3%, whereas

for the 2005–2014 sub-period, before the demerger, the ROA average was 7.6%, with a

standard deviation of 12%. To verify the statistical significance of ROA average differences

between the two sub-periods (before and, respectively, after the demerger) the T-Test

and F of Levene’s tests were used. The two sub-periods are considered as samples

originating either from equal or unequal variances’ populations. The T-Test is calculated

for both situations. The F test verifies variances’ equality for the two sub-periods and

indicates which of the two situations can be considered for interpreting the T-Test. The

T-Test values for the F test’s hypotheses are similar and do not affect the acceptance or

rejection of the null hypothesis, H0. The results obtained applying the T and F tests are

presented in Table 3. The F test does not reject the H0 hypothesis of ROA variances’

equality for the two sub-periods, for the 2012, 2013, and 2015 panels. For these panels,

the T-Test and P-value (Sig. (2-tailed)), corresponding to variances’ equality situation, in

the bolded rows of Table 3 are considered. For the 2014 panel, the Levene’s F test rejects

the H0 hypothesis; hence, we conclude the two sub-periods originate from unequal

variances’ samples, in the bolded row of Table 3. For the 2012 panel, the T-Test rejects

the H0 hypothesis of equality for ROA averages from before and after the demerger as

Sig. (2-tailed) is lower than 5%. The negative difference of ROA averages is significantly

different from zero, and the ex-post demerger ROA average is significantly lower

compared to the previous period, at a 5% significance threshold. The conclusion of the T-

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Test is also supported by a declining ROA trend for the 2013– 2019 sub-period on the

ROA chart of the 2012 panel, in Figure 3. For the 2013, 2014, and 2015 panels, the T-Test

fails to reject the H0 hypothesis as Sig. (2-tailed) is higher than 5%. For 2014 panel, the T-

Test fails to reject the H0 hypothesis of the two sub-periods of ROA averages’ equality;

Sig. (2-tailed) equals 15.3%, which is higher than 5% significance level.

Table 3. T-test for equality of means

Independent Samples Test
t-Test for Equality of Means
ROA Sig. (2- Mean Std. Error 95% CI of the Difference
F Sig. t df
Tailed) Difference Difference Lower Upper
Equal variances assumed 0.182 0.671 −1.997 118 0.048 −0.096019 0.048083 −0.191237 −0.000801
2012
Equal variances not assumed −2.005 117,341 0.047 −0.096019 0.047891 −0.190861 −0.001176
Equal variances assumed 0.531 0.467 1.656 328 0.099 0.040447 0.024421 −0.007595 0.088489
2013
Equal variances not assumed 1.670 288,897 0.096 0.040447 0.024215 −0.007214 0.088108
Equal variances assumed 14.380 0.000 1.715 253 0.088 0.035833 0.020894 −0.005316 0.076981
2014
Equal variances not assumed 1.438 111,271 0.153 0.035833 0.024910 −0.013527 0.085192
Equal variances assumed 0.251 0.617 −0.725 373 0.469 −0.014965 0.020647 −0.055565 0.025635
2015
Equal variances not assumed −0.796 213,698 0.427 −0.014965 0.018790 −0.052003 0.022074

0.20 7 0.14 6
0.16 6 0.12 5
0.12 5 0.10 4
0.08 4 0.08 3
ROA

ROA

ROE
ROE

0.04 3 0.06 2
0.00 2 0.04 1
-0.04 1 0.02 0
-0.08 0 0.00 -1
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Mean roa_2012 Mean roe_2012 Mean roa_2013 Mean roe

0.18 9 0.20 0.6

0.16 8 0.18 0.5
0.14 7
0.16 0.4
0.12 6
0.14 0.3
ROE
ROA

0.10 5
ROA

ROE

0.08 4 0.12 0.2

0.06 3 0.10 0.1
0.04 2 0.08 0.0
0.02 1 0.06 -0.1
0.00 0 0.04 -0.2
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Mean roa_2014 Mean roe_2014 Mean roa_2015 Mean roe_2015

Figure 3. Average evolutions of ROA and ROE in the 2005–2019 period

for the four panels

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The conclusion is that the differences between ROA averages of the two sub-periods

do not significantly differ from zero at a 5% significance threshold. For these panels, the

confidence intervals of averages’ differences between the two sub-periods change the

sign from “−” to “+”, suggesting the averages’ difference can be equal to zero;

respectively, the ROA averages of the two sub-periods can be equal. The diagrams from

Figure 3 reveal the evolution of ROA and ROE for the 2005–2019 period for the four

panels.

ROA shows a declining trend during the second sub-period for the panel with the

companies demerged in 2012 and a growing trend for the other three panels after the

corresponding demerger year.

Statistical Analysis of ROE in the Ex-Ante and Ex-Post Demerger Periods

Table 4 centralizes the descriptive statistics results, respectively, the average and

standard deviation for ROE and each of the four panels, before and after the demerger.

Table 4. Descriptive statistics

ROE Group Statistics for the Period 2005–2019
Demerger Year No. Companies Sub-Periods N Mean Std. Deviation Std. Error Mean
2012 ≥2013 56 0.938089 5.074939 0.678167
8
<2013 64 0.326131 0.776467 0.097058
2013 ≥2014 132 1.155887 10.360811 0.901793
22
<2014 198 0.096574 1.205931 0.085702
2014 ≥2015 85 1.865111 14.868298 1.61269
17
<2015 170 0.208705 0.335002 0.025693
2015 ≥2016 100 0.155248 0.242907 0.024291
25
<2016 275 0.167702 0.378698 0.022836

For the panels with companies demerged in 2012, 2013, and 2014, the average ROE

is higher in the ex-post demerger sub-period. For these panels, which registered a higher

ROE after the demerger, a larger variation of ROE in the second sub-period can also be

noticed, as, during this sub-period, the average standard deviations of ROE are

significantly larger compared to the previous sub-period.

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For the panel of 2015 demerged companies, the average ROE is slightly lower in the

ex-post demerger period of 2016–2019 compared to the previous sub-period of 2005–

2015. This panel displays a lower variation of ROE after the demerger. To verify the

statistical significance of ROE averages’ differences between the two sub-periods (from

before and, respectively, after the demerger) the T-Test and F of Levene’s tests were

used. The results obtained are presented in Table 5. The difference of sub-periods of ROE

averages is negative for the 2015 panel and positive for all the other panels, respectively,

the ex-post ROE averages were higher than the ex-ante ones. An explanation for 2015’s

panel could be the shorter ex-post sub-period, of only 4 years considered after the 2015

demerger. As in the ROA case, for the 2014 panel, the Levene’s F test statistics reject the

H0 hypothesis so that the two sub-periods originate from unequal variances’ samples, in

the bolded row of Table 5. For the other panels, the Levene’s F test fails to reject the H0

hypothesis of the sub-periods’ variances’ equality; as seen in the bolded rows of Table 5.

The T-Test fails to reject the H0 hypothesis of insignificant differences between the

ROE averages of the two sub-periods, having the value of Sig. (2-tailed) higher than 5%

for all the panels. The diagrams from Figure 3 reveal the evolution of ROE in the 2005–

2019 period for the four panels included in the sample. For the 2015 panel, there is an

unfavorable evolution compared to the previous period, yet this difference is statistically

insignificant. According to the results from Table 5 and to Figure 3, the ROE ex-post levels

are quite similar to the ex-ante demerger ones for all the panels.

Comparative Analysis of ROA and ROE for the Ex-Ante and Ex-Post Demerger Sub-

Periods

The comparative analysis of ROA and ROE was made for both company and panel

levels. For the companies from each panel, the statistical signification of the ROA and

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ROE average differences were computed for the two sub-periods delimited by the

corresponding demerger year.

Table 5. T-Test for equality of means

Independent Samples Test

t-test for Equality of Means
95% Confidence Interval of
ROE Sig. (2- Mean Std. Error
F Sig. t df the Difference
tailed) Difference Difference
Lower Upper
Equal variances assumed 3.307 0.072 0.953 118 0.343 0.611958 0.642427 −0.660222 1.884138
2012
Equal variances not assumed 0.893 57,255 0.375 0.611958 0.685077 −0.759754 1.983669
Equal variances assumed 3.744 0.054 1.425 328 0.155 1.059313 0.743206 −0.402739 2.521365
2013
Equal variances not assumed 1.169 133,370 0.244 1.059313 0.905856 −0.732389 2.851016
Equal variances assumed 7.068 0.008 1.455 253 0.147 1.656405 1.138671 −0.586077 3.898888
2014
Equal variances not assumed 1.027 84,043 0.307 1.656405 1.612898 −1.550995 4.863806
Equal variances assumed 1.455 0.229 −0.307 373 0.759 −0.012454 0.040622 −0.092330 0.067422
2015
Equal variances not assumed −0.374 274,000 0.709 −0.012454 0.033340 −0.078088 0.053181

The effects that demergers had upon these two profitability ratios were determined.

The tests’ results regarding the significance of sub-periods’ averages’ differences, for

ROA and ROE, for each company inside the 2012, 2013, 2014, and 2015 panels, as well

as at each panel level, are analyzed in Table 6.

Table 6. Summary of applying T-Test for means’ equality, at company level

Group Statistics of Companies At Panel Level

Effects after Demerger Significant Differences after Insignificant Significant Differences after Insignificant
for: Demerger Differences after All Demerger Differences after
Positive Negative Total Demerger Positive Negative Demerger
2012 panel
ROA 1 1 2 6 - X -
8
ROE 1 2 3 5 - - X
2013 panel
ROA 3 4 7 15 - - X
22
ROE 1 1 2 20 - - X
2014 panel
ROA 3 4 7 10 - - X
17
ROE 3 1 4 13 - - X
2015 panel
ROA 3 4 7 18 - - X
25
ROE 2 2 4 21 - - X

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The results from Table 6 reveal that for all panels, most of the companies (about 60%

of them) have not recorded significant changes in ROA and ROE in the ex-post period

compared to the ex-ante demerger period.

The weight of companies registering significant changes is higher in the case of ROA

compared to ROE, with the notable exception of the panel created for the companies

divided in 2012.

In case of ROA, for all analyzed panels, negative changes are predominant for the

companies which recorded significant changes, whereas, for ROE, the positive changes

are predominant, obviously for the companies displaying significant changes.

For all the panels, except for 2012, divided companies registered insignificant

changes for both ROA and ROE. For the 2012 panel, significant differences were reported

ex-post in case of ROA, with a negative trend, whereas ROE did not mark any significant

changes. One explanation could be that the number of companies included in the 2012

panel is considerably lower than for the panels with companies divided in the following

years.

The conclusions of this research reflect the working hypotheses of the statistical

tests initially established. The previous results lead to accepting the null hypothesis, H0,

for both indicators. There are no significant differences between the ex-ante and ex-post

demerger levels of ROA and ROE.

Statistical Analysis of ROA and ROE for the 2020 and 2021 Panels

Looking further to the panels with recently demerged, from 2020 and 2021, the

results of the descriptive statistics for ROA and ROE previous to the demerger years, i.e.,

for the entire period of 2005–2019, are centralized in Table 7 and Figure 4.

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Table 7. Descriptive statistics

Indicators for Period 2020 Panel 2021 Panel

2005–2019 ROA ROE ROA ROE
Mean 0.017033 0.034011 0.112941 0.173387
Median 0.035464 0.079699 0.061670 0.130952
Maximum 0.571602 17.54900 0.497373 0.650401
−41.1688
Minimum −14.49125 −0.187362 −0.745479
4
Std. Dev. 0.854532 2.693701 0.132229 0.224228
−11.3252
Skewness −16.39820 0.949292 −0.979728
0
Kurtosis 278.8407 190.7937 3.447364 6.491664
Sum 5.109931 10.20330 10.16470 15.60485
Sum Sq. Dev. 218.3374 2169.552 1.556131 4.474771
Observations 300 300 90 90

1.2
0.8
0.4
0.0
-0.4
-0.8
-1.2
-1.6
-2.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Mean roa_2020 Mean roe_2020

Figure 4. The evolution of average ROA and ROE for the 2020 panel

The ROA and ROE variables have registered a declining trend before 2020, the year of

the demerger, indicating that some form of reorganizing the activity of sampled economic

entities was needed (see Table 7 and Figure 4).

Regarding the economic entities divided in 2021, the ROA and ROE variation was

more intense, still with a declining trend in the period preceding the demerger (see Figure

5).

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0.32
0.28
0.24
0.20
0.16
0.12
0.08
0.04
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Mean roa_2021 Mean roe_2021

Figure 5. The evolution of average ROE and ROA for the 2021 panel

The decrease in profitability and efficiency revealed by ROE levels under the

economic crisis generated by the Covid-19 pandemic in 2020 is a factor which

determined the companies to reorganize and appeal to demergers. Investors often use

ROE measures to set their investment strategies in any given company.

The fact that ROA and ROE levels did not change significantly after the demerger can

reveal some interesting aspects. Given the technical construction of ROA and ROE ratios,

if their levels remain the same in the ex-post demerger period compared to the ex-ante

period, this could signal that the demerger process was carefully planned and

implemented. Since total assets (from the denominator of ROA ratio) decrease following

the demerger action and yet ROA remain virtually the same, it means the divided

companies maintained approximately the same efficiency as previously. The resulting

companies obtained a portfolio of assets with relatively the same profitability as cedent

company. The same reasoning is probably valid for ROE levels.

In the coming periods, both ROA and ROE could increase if their managers implement

investment strategies that best suit the specific features of their clients and markets.

The current crisis, generated by the Covid-19 pandemic, has produced and still

produces significant effects upon companies’ sustainable development. The current paper

evaluated whether demerger can represent a recovery solution for the companies in

distress or even generate beneficial effects upon sampled companies’ economic and

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financial profitability. Usually, demerger is justified by the necessity of reorganizing,

restructuring, and rethinking companies’ activity and business. The content analysis

showed that demerger was mainly performed for economic reasons, respectively, for

reasons of increasing the profitability and efficiency of company activities. Through the

demerger, the companies follow an increase of profitability and efficiency. Yet, the

demerger does not determine an immediate improvement (as proven by the statistical

analysis) but rather a preservation of existing efficiency levels for about four years, after

which it is possible to register a slight increase. The statistical analysis results revealed

that for all the panels, most of the companies (over 60% of them) did not register

significant changes in ROA and ROE levels in the ex-post period compared to the ex-ante

demerger period; respectively, the H0 hypothesis was validated.

The demerger did not generate an immediate increase of profitability ratios for

neither ROA or ROE, yet it did allow the companies to survive and continue the activity for

a period of at least 4 years after the demerger, as evidenced by the evolutions from

Figure 3. This study supports the conclusion that demerger determines increased

independence and a focus upon base activities, thereby ensuring long-term efficiency and

favoring companies’ sustainable development. A smaller company can benefit from more

efficient management, more efficient use of its resources, and preservation of financial

profitability levels for a longer-term. The results obtained are in the same line with

previous studies, as they support the conclusion of a positive impact of demerger upon

financial performances and efficiency of sampled companies. This study differs from

previous ones in this segment by the statistical analysis per formed in four stages, using

four panels, pertaining to the years when demergers took place. Our study encompasses

a longer period of time, of 15 years, to allow an ex-ante and an ex-post demerger

performance analysis, as well as a relatively significant number of divided companies (72

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companies). Moreover, the study performed a detailed analysis of 268 demerger projects.

We consider that both managers and investors can use the results obtained from this

research to assess the growth and development potential of the economic entities

resulted from the demerger. Our study can help managers identify the restructuring

method for the company they administrate. This study revealed that ROA and ROE levels

do not register an immediate increase after the demerger; however, this process allows

companies and managers to continue their activity in the medium and long run, for at

least four years (as it resulted from available data analysis). The demerger allows

increased independence and a focus upon the underlying activities, ensuring increase of

efficiency and a sustainable development of these companies. This aspect can be

revealed by the graphs put together for each separate panel (for both ROA and ROE

measures). The experience acquired by demerger companies, reflected by this research,

can represent a model of good practices for other companies confronted with financial

difficulties after the Covid-19 pandemic. 5.1.

The paper brings value to reference literature to complete the research area in

economic entities’ restructuring direction. This study represents a useful analysis tool for

characterizing the demerger phenomenon in any economy. The present study is the first

one in Romanian approaching demergers from a financial perspective, also looking to the

demerger effects upon the companies’ sustainable development. The statistical

processing from this research offers a complex analysis of the impact demergers have

upon Romanian companies’ financial performances and economic efficiency.

The research contributes to the existing literature in several ways.

First of all, it assessed the impact demergers had upon the sampled companies (72

Romanian companies), using ROA and ROE, during fifteen years. Secondly, it applied

some tests to check the statistical significance of the differences between the ex-ante

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and ex-post demerger performances and provided robust results. Thirdly, it found

whether demerger companies have endured in the market for at least 4 or 5 years after

the demerger (they did not file liquidation procedures) and if they registered positive

values of ROA and ROE. Fourthly, it assessed and analyzed in detail a great number of

demerger projects (268 projects) published in the 2012–2021 period. The analysis of

demerger projects is meant to identify the characteristics of this restructuring

phenomenon.

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Chapter 3. Financial Sustainability and Performance Reporting of Economic

Entities

3.1. Introduction

The periods of economic and financial crisis impose on companies the need to

develop a model of sustainable development. A sustainable company is an efficient

company, and efficiency can be defined in the form of financial performance, profitability,

or productivity.

Sustainability is an economic component that economic entities need to integrate

into their business strategies to meet the challenges and ensure the continuity and

development of their long-term activity. Sustainability has a financial side as well,

highlighted by financial indicators. Obtaining favourable financial results (profit) as well as

the efficiency in the use of resources can be considered an expression of financial

sustainability.

3.2. Literature review

In the literature, studies have addressed companies' sustainability in various sectors

of activity from a financial perspective, based on a set of economic and financial

measures.

Zabolotnyy and Wasilewski (2019) define the financial sustainability of a firm as the

ability to generate value for owners and provide continuity (the concept of continuity

refers to the going concern principle of accounting) of operations in the long term, using

an optimal combination of investments and sources of financing. They used the fuzzy

logic method to quantify complex interrelations among various financial factors and

divided the companies according to their financial sustainability level.

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“Financial sustainability is the main pillar of the economic sustainability of companies

that reflects the efficient use of the company assets to generate profit” (Sabău et al.,

2020).

Financial sustainability is a crucial aspect of firms' sustainable development.

Meanwhile, it concerns the existence and growth of the enterprise directly and is a key to

ensure enterprises' performance and sustainability (Popescu, 2019).

The approach to financial sustainability is found in various specialized studies

(Lebacq, 2013; Sanz, 2016; Paun, 2017; Maciková et al., 2018; Sannikova, 2019; Henock,

2019; Lampridi, 2019; Schwab et al. 2019, Tzouramani, 2020). Also, the effect of

sustainable development on financial performance has been a topic of research in other

specialized papers (Chang and Kuo, 2008; Wagner, 2010; Lassala et al., 2017; Alshehhi et

al., 2018; Martínez-Ferrero and Frías-Aceituno, 2015; Amacha and Dastane, 2017).

The paper by Chang and Kuo (2008) shows a positive relationship between the

sustainable development of a company and financial performance.

Usually, studies that considered the relationship between business sustainability and

financial performance concluded a positive relationship between the two.

3.3. Methodology and results

This section covers both published and forthcoming articles, an example being the

research on the "Financial Sustainability of Companies in the Agricultural Sector". The

mentioned article, currently forthcoming, offers a financial perspective on the

sustainability of companies in the agricultural sector, using the econometric processing of

the financial data for a sample of 524 companies in Romania, the analysis period being 16

years.

The financial performance of the economic entities has been subject of discussion in

most of the articles we have published in recent years; either it was analyzed in

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correlation with the degree of disclosure of environmental information; or it was analyzed

before and after the reorganization process of an entity; or it has been analyzed as

dynamic in different sectors of activity (pharmaceutical sector, construction, and textile

industry).

In diagnosing the financial health of the analyzed companies, we have used the

following measures: return on assets, return on equity, turnover, net result, liquidity

ratios, solvency ratio, degree of indebtedness, etc.

The financial health and implicitly the financial sustainability of the companies from

the textile, pharmaceutical, and construction sectors, from Romania, was also analyzed in

the articles:

- Evaluating the financial performance of Companies from the Pharmaceutical

Industry, an article published in 2016;

- The financial position and performance of the economic entities from the Light

Industry, an article published in 2015;

- Financial Reporting in the Furniture Industry, an article published in 2017.

Profitability continues to be the most important indicator of financial sustainability as

the survival of any business depends, to a large extent, on its periodic profitability

(Alshehhi et al., 2018).

„Financial performance shows the success of a company and the attractiveness of

shares in the financial markets. It helps investors make investment decisions in stock

markets and managers make financial decisions” (Madaleno and Bărbuță-Mişu, 2019).

Financial performance is usually measured by return on equity (ROE) and assets

(ROA). Return on Assets (ROA) gives us an overview of the ability of companies to

generate profit based on existing assets. We calculated ROA as Net income divided by

Total assets.

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Return on Equity (ROE) expresses financial performance, and it informs shareholders

about the company's capacity to use its invested capital (Equity) to generate profits. We

calculated ROE as Net income divided by Equity.

The article, “Evaluating the financial performance of Companies from the

Pharmaceutical Industry”, focused on investigating and analyzing the financial statements

for 12 drug-producing companies in Romania. The analysis is based on data

corresponding to the period 2008-2015.

Financial performance is a vast topic developed at all academic levels and in

professional practices. The interest shown in this topic was present in the concerns of

Romanian and foreign authors, experts in finance, accounting, financial management,

evaluation, general management, value management. Deari and Dincă (2015) have

analyzed the financial performances of 40 selected Romanian companies for the 2009-

2013 period. They found that the companies with a higher current to total assets ratio

have higher assets turnover and ROA.

The main objective of this study is represented by the analysis of the financial

performance of companies from the pharmaceutical sector in terms of their ability to

obtain profit in the difficult economic context of the period after 2008. The population on

which the study was conducted targets 12 economic entities which produce

pharmaceutical products. There were chosen the first 12 economic entities which

recorded the highest sales in 2015. The paper focuses on analyzing the performance of

economic entities from this sector. The author calculates the financial performance

indicators based on the information provided by the individual financial statements of

these categories of companies, elaborated for the period 2008-2015. The analysis

involved the investigation of financial statements from several consecutive financial

years over a period of 8 years (2008-2015). Examining the financial statements over

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several consecutive financial years is supposed to enhance the value of the analysis. The

financial situation in the case of an economic entity is highlighted through the financial -

accounting information published in financial reports, namely by reflecting the financial

position in the balance sheet and the financial performance in the profit and loss account.

Every economic decision taken by an entity involves a rigorous and precise analysis of all

economic and financial events and transactions as well as of the data provided by the

financial statements. This paper presents an analysis of the evolution and dynamics of

the financial performance reflected in the financial statements of the economic entities

from the pharmaceutical sector.

The study addresses the financial performance in terms of the profit and loss account

by analyzing the following indicators: turnover, the net result, and the return on equity

(ROE). Performance is not just about an entity's ability to make profit, but also its ability

to pay its short and long-term debts. Thus it was also calculated the degree of

indebtedness for the 12 economic entities from the pharmaceutical sector. An economic

entity's financial performance represents its ability to obtain profit from its business as a

result of carrying out its economic activity. Thus, for an economic entity to be efficient

from a financial point of view, it is imposed the condition to conduct a profitable activity,

which enables first of all the remuneration of all the factors of production involved, as

well as achieving a surplus, represented by the overall result of the economic activity. An

indicator that measures the performance of companies, used as a criterion for ranking

them in terms of their economic importance, is turnover. The turnover represents the

value of sales made over a period of time by an economic entity. This indicator allows

assessing the place of the company in its sector, its market position, its skills to launch

and develop different activities which would bring profit. However, the change of the

turnover is reflected on the main financial indicators as well as on the efficiency of the

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activity of economic entities. In the manufacturing sector, the net turnover expresses the

total volume of businesses and includes all the revenue from the sale of the products

obtained.

Another indicator showing the financial performance recorded by each sector is the

net result. This indicator expresses the efficiency of the entire activity developed by

economic entities. The indicator that expresses the ability of an economic entity to

generate profit is the rate of return on equity (ROE). Return on equity is a significant

indicator for assessing the economic and financial performance of a company for its

internal diagnosis and the analyses required by the external partners (Căruntu, 2009).

Return on equity expresses the ability of the equity to generate profit and the efficiency

of using the own equity. Depending on the value of this indicator, shareholders can

appreciate if their investment is justified and whether they should continue investing. A

high rate of return on equity thus enables the shareholders to obtain consistent revenues.

The higher the return on equity is, the more financial resources the company has at its

disposal (Vasilache, 2009).

The degree of indebtedness is an indicator that can quantify the amount of external

financing in relation to the possibility of self-financing of an economic entity. This

indicator may also be a barometer of the entity's independence face to its creditors

(Anton, 2009). The degree of indebtedness is calculated as the ratio between total debt

and equity. The higher this indicator is, the more dependent the economic entity is on

commercial loans or debts. A reasonable situation demands that this indicator does not

exceed the threshold of 0.5.

The economic entities from the pharmaceutical sector have managed to overcome

the difficult times specific for a period of economic crisis, registering an upward trend in

turnover. The indicator return on equity recorded fluctuating values with a decreasing

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tendency in 2009-2012, but with a strong recovery in the coming years. The carried out

diagnostic analysis has shown that the economic entities from the pharmaceutical sector

have gone through difficult periods, especially between the years 2009-2012. Another

finding of this study refers to the rather sensitive position concerning the degree of

indebtedness. In the case of four out of the twelve analyzed companies, the degree of

indebtedness has recorded relatively high values mostly in 2009-2011, which indicates a

relatively low potential for self-financing, meaning that the economic entities finance

themselves from external sources. One possibility for reducing debts would be

compensating claims with debts, and thus eliminating the possible delay penalties.

In conclusion, the economic entities from the pharmaceutical sector show an overall

positive financial performance that might generate significant added value, as evidenced

by the calculated indicators. The research has some limitations, inevitable in any scientific

endeavor of this kind that only opens up new horizons for future research. A first

restriction in appreciating the performances refers to the number of analyzed companies

and the temporary horizon.

The article, “The financial position and performance of the economic entities from the

Light Industry”, focused on investigating and analyzing the financial reports of 45

business economic entities representing the Romanian light industry. The study's main

purpose is to determine the financial health of the business economic entities from the

textile, clothing, and footwear industry.

The analysis implied the investigation of the financial statements of certain

consecutive financial years. Hence, for the analysed period of six years (2008-2013), the

examination of financial statements enhances the value of this paper. The selection of the

set of financial indicators was conditioned by the availability of financial data provided by

the Romanian Administration of Public Finance.

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Hence, this paper analyzes the evolution and dynamics of the financial standing and

financial performance reflected in the financial statements of the textile, clothing, and

footwear industry economic entities. The analysis is based on seven variables: asset

liquidity, solvency ratio, degree of indebtedness, labor productivity, turnover, net profit,

and financial return. The selected financial indicators can be used to make predictions

about the financial health of a business entity and the capacity to attract investment to

analyze tendencies and compare the performance/profitability between fields or

companies.

Achieving the objectives of the research takes into consideration the following

hypotheses:

H0: There are no significant differences in liquidity, solvency, and financial return of

companies in the three fields: textiles, clothing, and footwear

H1: There are significant differences between the liquidity, solvency, and financial

return of companies in the three fields: textiles, clothing, and footwear.

Moreover, the pieces of information needed for the analysis of a company's financial

standing are provided mainly by the balance sheet. The analysis of the financial standing

involves an analysis of the evolution and structure of assets, liabilities, and equity. The

rates of the structure of the financial standing (assets, liabilities, and equity) highlight the

entity's financial characteristics such as the ability to turn assets into cash, autonomy and

financial independence of the entity, the quality of the financial balance on short and long

term, etc. Regarding the financial standing, the financial equilibrium of an economic entity

may be measured with the help of the liquidity and solvency indicators. A first

embodiment of the entity's financial balance is achieved by ensuring the continuous

ability of the company to pay, both on short and long term. In general, liquidity and

financial solvency represent the entity's ability to meet its due payments (Borlea, 2010).

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The study shows that light industry business economic entities present, overall, a

favorable financial standing and positive financial performances, which may generate

them a significant added value. With the results of this study, the stakeholders (users of

the accounting information) may be able to shape the profile and observe the financial

structure of the economic entities from the light industry, also appreciating the policy of

collecting the claims, of managing current assets, the financial profitability, the ability to

pay debts and by default, the risk of insolvency.

In this regard, the values and tendencies registered by the calculated indicators

(especially the overall solvency and the degree of indebtedness) reveal that the business

economic entities from the light industry find themselves at a certain distance from the

risk of insolvency and inability in paying debts. However, it is required that the managers

of these companies be aware of the necessity of a precise diagnosis of the economic

entity in time, within the contemporary business environment, to be able to notify as

early as possible the financial difficulties (the level of the risk) and to plan a long term

strategy. Thus, financial and accounting information can help managers and other users

of accounting information to reduce uncertainty in the decision-making process.

Furthermore, our further research may be centered on a more detailed analysis of the

factors that affect liquidity, solvency, and profitability, but it should focus on an increase

in the sample size to analyse small and medium-sized economic entities too. An empirical

quantitative analysis (based on questionnaire) regarding the frequency which companies

from the light industries undertake analysis of their financial reports with, may also be

performed trying also to identify the main strategic alternatives used by the companies in

the light industry to meet the challenges of the heterogeneous business environment.

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The article, “Financial return in the field of constructions: What accounting issues

should an investor know?”, focused on analyzing the financial statements of companies

within the construction field.

The financial and economic crisis has affected the economic entities from the

constructions field quite significantly. The number of companies from the construction

field that have declared insolvency has increased from one year to another because of the

crisis. The top ten fields affected by insolvency in Romania in 2013 were those presented

in Table 1.

Table 1. Fields of activity most affected by insolvency

Fields of activity most affected by insolvency in 2013 Number of

economic entities
Wholesale and retail trade, repair of motor vehicles, motorcycles, of personal and 10,436
household goods
Constructions 3,889

Hotels and restaurants 3,418

Manufacturing 3,153

Transport, storage, and communication 2,049

Real estate, rentals 1,253

Professional, scientific, and technical activities 1,176

Agriculture, hunting, forestry 811

Activities of administrative services and activities of support services 688

It can be seen that the fields most affected by insolvency in 2013 are those in the

field of wholesale and retail trade, repair of motor vehicles, motorcycles, of personal and

household goods with 10,436 economic entities; followed by the construction field with

3,889 economic entities. This study includes an analysis of the financial indicators of five

construction companies in the city of Braşov. The field of activity of the analysed

economic entities is the construction of residential and non-residential buildings. The

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selected companies are large and medium-sized, and the selection is made based on the

value of their turnover and the number of employees.

The analysis of the financial statements was conducted over a period of six years

(2008-2013). A total of four relevant financial indicators were analysed in terms of

profitability of economic entities from the constructions field, namely: return of equity,

return of assets, turnover, and net result.

The profitability indicators analysed highlight the ability of an economic entity to

remunerate its capital, a consistent remuneration, aspect sought by any investor, will

cause the attraction of additional resources from the market. The analysed period 2008-

2013 is characterized by the decrease of the four reviewed indicators, especially the net

profit compared to the moderate decrease of the equity, leading to a lower financial

return. Through the analysis of the data taken from the financial statements, it can be

seen that construction companies from Braşov (Romania) registered financial difficulties,

recording a downward tendency of the indicators during the period analysed herein. The

financial difficulties and the decreases of the analysed indicators are the results of

underfunded works, high indebtedness to banks, non-collection of claims, increase in the

prices of utilities, raw materials, and other services provided by third parties.

The article, „Financial Reporting in the Furniture Industry”, focuses on investigating

and analysing the financial reports of 15 companies in the furniture industry in Romania.

The analysis is based on data collected between 2008 and 2016. This paper presents an

analysis of the evolution and dynamics of the financial position and the financial

performance reflected in the financial statements of the economic entities in the furniture

industry. The study is based on a set of 6 indicators: asset liquidity, general solvency,

degree of indebtedness, turnover, net result, and return on equity. The selected financial

indicators can be used to predict the financial health of an economic entity and the

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attractiveness of an investment, analyze trends, and compare performance/profitability

across industries or companies. The economic entities from the furniture industry

managed to overcome the specific difficult moments of the economic crisis, registering an

upward trend of the turnover. The economic entities analyzed in this paper are of large

dimensions, with a minimum number of 50 employees and a maximum of 4,100.

Generally, there exists a growing trend in this sector, with significant benefits for

Romania. From an economic point of view, the furniture industry is the most profitable

activity in terms of the possibilities of capitalizing wood. The rate of financial return has

registered fluctuating values, with a decreasing trend over the period between 2009 and

2012, but with a strong recovery in the coming years. The diagnostic analysis

demonstrated that the furniture industry has also experienced difficult times, especially

in the 2008-2012 period. Another finding of this study relates to the rather sensitive

position of the degree of indebtedness. For four out of the fifteen surveyed companies,

the borrowing rate has registered rather high values, especially in the 2008-2011 period.

This points to relatively low potential for self-financing, meaning that external sources

mainly finance the companies.

In conclusion, we can observe that the economic entities in the furniture industry

present, as a whole, a positive financial performance that can generate a significant

added value, as evidenced by the level of the calculated indicators. This research also has

some limitations. A first limit in the performance appraisal refers to the number of

companies that were analyzed, and to the time horizon.

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Chapter 4. Measuring the Risk of Insolvency. Prevention Methods

The insolvency situation of Romanian companies, after the crisis period of 2008, was

analyzed in the article "Insolvency Risk Prediction Using The Logit And Logistic Models:

Some Evidences From Romania". The analysis was performed over a period of 5 years for

70 companies from various sectors of activity, which went into insolvency in 2013.

We have designed a model for predicting insolvency risk that any interested party can

use since the data for the model are readily available on the site of the Romanian Fiscal

Administration Agency. The model uses five financial ratios, whose dynamics are

analyzed for at least three years. We have used a logit and logistic model to test the

model, which validated the significant influence of total assets efficiency and accounts

receivable conversion period upon insolvency risk. As such, managers and investors can

especially follow these two measures' evolution and make the best credit and investing

decisions concerning analyzed companies.

4.1. Introduction

In Romania recent years have accounted for a large number of companies which

became insolvent, turning the issue of estimating this risk into a priority, both for

managers (which need tools to predict and control the potential risks faced by their

companies), as well as for trading partners (who need such information to design proper

commercial credit and investment policies in relation with the analyzed company).

Most insolvency risk studies were based on multivariate, discriminant analysis,

whose results were used to generate score functions to estimate companies’ state of

health. However, many insolvency risks’ predicting models present a range of

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shortcomings which makes them not applicable to all the companies requiring insolvency

risks’ forecast at a certain moment in time.

On the one hand, many of these models were aimed for companies listed on the

stock exchange and on the other hand, even if such models are not intended for listed

companies, they are based on accounting information not accessible to external users,

thereby significantly reducing the range of models’ potential users. In the same time,

score functions’ based models have, due to their invariable coefficients, an applicability

confined to the economic-geographic area for which they were created. As such, the

coefficients determined by authors according to the economic-geographic features of the

industry and country for which they were designed, require caution while using them,

even in case of similar geographic and economic conditions, yet at different moments in

time. Unlike managers, which have at their disposal detailed information about their

companies’ economic and financial situation, the trading partners of unlisted Romanian

companies cannot access other information than excerpts from these

companies’financial statements data, published by the National Agency for Fiscal

Administration (NAFA) on its website. Moreover, this information is processed and

summarized and thus insufficient to be used in established prediction models to

determine insolvency risk. We propose a model for insolvency risk’s diagnosis which can

be used by any party (especially external users) interested in the health of a Romanian

company, based on public and official information originating from its annual financial

statements, whether listed or not on the Stock Exchange and regardless of its size. The

model is primarily intended for trading partners, who can thus establish the economic and

financial health of their potential partners and identify those facing insolvency risk. Based

on this information they can further decide about the opportunity of initiating or

continuing their business relations.

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4.2. Literature review

Starting with the 2008 global economic crisis, insolvency became a concept subject

to numerous studies and debates. Many researchers from Romania and abroad analyzed

and debated the delicate/thorny issue of economic entities’ insolvency.

European cross-border insolvency rules are established by EC’s Regulation

1346/2000 (Insolvency Regulation) regarding insolvency proceedings, applicable starting

May the 31-th 2002. In Romania insolvency is regulated and defined by art. 3, paragraph

1, of Law 85/2006 as "the state of the debtor's heritage characterized by lack of funds

available for payment of due debts". From a legal perspective, the causes leading to the

dissolution of a company are those provided by Law 31/1990 on trading companies,

republished, and are divided into common causes for all types of companies and specific

causes for equity companies, respectively for partnerships. There are a variety of models

for predicting bankruptcy. In the literature we can find several types of insolvency risk

prediction models, respectively MDA (Multiple Discriminate Analysis) models, logical

regression models, neural networks’ models or mixed logit ones. The scoring method has

become very popular over time due to its use of statistical methods for financial

situation’s analysis, starting from a set of ratios. The most common scoring method’s

models are Altman’s, Springate’s, Koh’s model, Conan-Holder’s, and the one of Banque de

France. Scientific models for bankruptcy prediction based on financial indicators have

been developed for the first time in the USA in the 1960’s, by Altman (1968) and Beaver

(1966). The first wide range model of bankruptcy risk analysis, commonly known as the Z

score function, belonged to Altman, who published it firstly in 1968. Altman’s model is

based on the discriminate analysis, creating classification/prediction models which

include data and observation in certain a priori determined classes. Altman et al. (1977)

built another model known as Zeta model, analyzing 53 bankrupt and 58 viable

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companies during 1969-1975. Ohlson (1980) and Platt & Platt (1990) conducted the first

studies using the logit model for predicting companies’ state of insolvency. Zmijewski

(1984) advanced the probit model to predict companies’ bankruptcy risk. The econometric

models are based on logit and probit models in particular. Default-prediction literature

acknowledged logit model as being the most used technique to determine default’s

probability. The results of Ohlson’s model have shown that firm size, financial structure,

performance and current liquidity were the main determinants of companies’ insolvency.

Shumway (2001) proposed a hazard model for predicting bankruptcy firms, defined as a

multi-period logit model. One main feature of the hazard model is that explanatory

variables vary over several time periods, resulting in more efficient estimators. In his work

he studied 300 bankrupt firms from the 1962 to 1992 period. Decision trees method for

predicting insolvencies (the advantages of using CHAID classification trees compared to a

neural network model) was used by Zheng and Yanhui (2007). Bankruptcy is due to

economic and financial factors, negligence, fraud, as well as other factors. Economic

factors, causing 37.1% of bankruptcies, relate particularly to industry weakness and

unfavorable location. Financial factors, holding the highest percentage, of 47.3%, include

too much debt and insufficient capital. The analysis showed that most financial factors

relate to huge errors, misjudgments, and management’s reduced capacity of financial

prediction (Brigham and Ehrhardt, 2007). There are many causes of business failure,

some related to managers’ experience and skills, while other causes are due to general

economic conditions, the recession. As such, Burksaitiene and Mazintiene (2011) aim to

provide managers with information about possible causes and consequences of failure in

their companies. Other authors tried to demonstrate Altman’s model effectiveness in

predicting retail companies’ financial difficulties (Hayes et al., 2010). Kiyak and

Labanauskaitė (2012) conducted a comparative analysis for several models of bankruptcy

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prediction and reliability, concluding that linear discrimination model most accurately

reflected the financial position of the company (for companies in Lithuania). Pereira and

Machado-Santos studied the way the established predictive models can be applied in

various fields or types of economies in different countries, analyzing Portugal’s textile

companies insolvency (2007); Zeytinoglu and Akar (2013) attempted to identify

bankruptcy risk for Istanbul Stock Exchange listed companies; Gharaibeh et al. (2013)

analyzed insolvency of Jordan Stock Exchange listed companies (the applicability of

prediction models for emerging economies - the case of Jordan); Szeverin and László

(2014) analyzed bankruptcy prediction models’ efficiency for small and medium size

economic entities in Hungary. Certain studies (Karas and Režňáková, 2014) examined

how bankruptcy prediction model’s efficiency is influenced by the choice of a certain

method, especially the linear discriminant analysis method. In Romania studies

developing scoring functions for bankruptcy’s risk analysis occurred much later compared

to research conducted worldwide. Anghel (2000) conducted a comprehensive bankruptcy

risk study, creating a score function based on a sample of 276 companies. Generally, the

idea of limiting the findings and applicability of a score function only to the economic

sector for which it was built is widely accepted, even if it turned out that some models

have a high degree of applicability. This is because the models recognized worldwide

were built under a stable economy, while the Romanian economy is still under a long

process of consolidation. Studies concerning bankruptcy risk’s estimation, aimed to

discriminate bankrupt companies from the ones with a good financial situation, based on

financial ratios, have been conducted by Vintilă and Toroapă (2012), which developed a

bankruptcy predicting econometric model. Korol and Korodi (2011) aimed to demonstrate

Fuzzy logic’s effectiveness in predicting bankruptcy risk and proposed an econometric

model in this regard. To highlight the financial strength and ability to meet obligations of

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Romanian companies listed on Bucharest Stock Exchange, Armeanu et al. (2012) have

performed an Altman scoring function on a sample of 60 companies, using seven financial

indicators, representative for company’s activity: total assets, net turnover, operating

result, net cash flow from operating activities, net profit, debt – total liabilities and

average market capitalization.

4.3. The Model to Estimate Insolvency Risk and Data Analysis

The purpose of our paper is to develop an insolvency risk’s diagnosis model, usable

by any party interested in an economic entity’s health. The model can be applied by users

with access to detailed financial statements, as well as by people with access only to

summary information published by financial authorities. Unlike models based on score

functions, influenced by invariable coefficients, our model is based solely on financial

ratios fluctuations’ analysis over time. In this way, the model can be applied to any

company, regardless of the economic, geographical and temporal conditions. This study

was conducted under the conditions of eliminating any outside influences, specific for the

industry, geographic area, size of companies or the general health of the economy, relying

exclusively on economic and financial information derived from the annual financial

statements published by the commercial companies. The model, designed for an early

warning of financial difficulty of economic entities, is based on a set of five measures,

respectively: general solvency, patrimonial solvency, accounts receivable conversion

period, assets’ liquidity and assets’ efficiency ratio. The selection of financial indicators

was conditioned by the availability of financial data provided by Romania’s Administration

of Public Finance. To identify insolvency symptoms’ occurrence, we have analyzed 350

financial statements from the last 5 years prior to insolvency of 70 Romanian economic

entities. For all the 70 economic entities the insolvency proceedings opened in 2013. Our

model is designed to identify the elements which help assess the probability a company

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enters a state of insolvency, respectively the elements signaling decreasing financial

stability of analyzed economic entities. Sampled economic entities, described in Table 1,

originated from 12 activity sectors, and were completely randomly selected, without any

focus on certain sectors of activity, territorial settlements and size of economic entities.

The purpose was to generate a basis for heterogeneous research, able to provide

generally valid and reliable results.

Table 1. The activity sector of the sampled economic entities

Sector of activity No. of analyzed entities
Wholesale and retail trade, repair of motor vehicles, personal and
16
household goods
Constructions 13
Manufacturing, Manufacturing products 13
Hotels and restaurants 8
Transport, storage and communication 6
Professional, scientific and technical activities 5
Agriculture, hunting, forestry 2
Activities of administrative services and activities of support services 2
Other activities of collective, social and personal services 2
Information and communication 1
Education 1
Water supply; sanitation, waste management 1
TOTAL 70
Source: Authors’ decision

Analyzing sampled economic entities’ financial statements, a first relevant financial

indicator regarding insolvency risk and potentially bankruptcy (analyzed in its evolution

for 5 years preceding the year of entering into insolvency) is general solvency.

This measure is intended to provide an overview of economic entity's ability to meet

its payments to creditors, both on short and long term, as a a ratio of total assets into

total debt and liabilities. In table 2 below we present general solvency’s evolution for

sampled economic entities over the 5 years preceding their 2013 entering into insolvency.

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Table 2. Distribution of sampled economic entities according to their general solvency

Years of analysis
General solvency level
2008 2009 2010 2011 2012
Unsatisfactory <1 28.57% 45.71% 50.00% 50.00% 61.43%
Satisfactory [1 ; 1.3] 38.57% 32.86% 27.14% 25.71% 22.86%
Good > 1.3 32.86% 21.43% 22.86% 24.29% 15.71%
Source: Data processed by the authors

The financial statements data revealed that starting with the third year of analysis

preceding insolvency, more than 75% of companies showed a decreased general solvency

and more than half experienced a reduced capacity of covering their financial

commitments to creditors, both on short and long term. In the year preceding official

insolvency’s state (2012), weight of companies with decreasing general solvency reached

over 84%, of which over 61% are already in general insolvency. Data analysis reveals

sampled economic entities are actually insolvent starting with at least three years before

the year of entering insolvency and also that their general solvency is decreasing

throughout the review period, with a sharp decline in 2012. General solvency decrease,

especially in the year preceding entry into insolvency was due to a slight total assets’

decrease during the period 2008-2011 and an abrupt decline in 2012, and to a relatively

steady growth of total debt throughout the period under review, also with a sharp

increase in 2012.

The second financial indicator we found useful in assessing imminent insolvency risk

is patrimonial solvency, calculated as a ratio of company’s equity into its equity and

liabilities (equity + debt + accrued income + provisions). In the five years preceding entry

into insolvency state, analyzed companies experienced a continue de-capitalization, with

a strong manifestation in 2012. Situation is described in table 3 below.

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Table 3. Distribution of economic entities according to patrimonial solvency

Year of analysis
Patrimonial solvency level
2008 2009 2010 2011 2012
Unsatisfactory < 0,3 72.86% 82.86% 81.43% 80.00% 85.71%
Satisfactory [0.3 ; 0.5] 10.00% 4.29% 4.29% 10.00% 5.71%
Good > 0.5 17.14% 12.86% 14.29% 10.00% 8.57%
Source: Data processed by the authors

Financial statements’ analysis reveals that, starting with the third year of analysis

preceding the entry into insolvency, more than 85% of analyzed companies have

registered a low patrimonial solvency, out of which over 80% recorded a significant de-

capitalization trend. In 2012, the weight of companies showing decreasing patrimonial

solvency reached over 91%, of which over 85% are actual insolvent. Overall analysis of

sampled companies’ patrimonial solvency reveals most of them are actually insolvent

starting with at least three years before the year of entry into insolvency. Their

patrimonial solvency decreased throughout the review period, with a sharp turn in 2012,

the year preceding entry into insolvency, thereby achieving a high level of indebtedness

both on short and long term. Analyzed commercial entities showed continuous increase

of indebtedness’ degree. Their indebtedness recorded very high values in 2012, when

analyzed companies’ de-capitalization reached peak values. Entering insolvency for an

economic entity is closely related to a low assets’ liquidity level, which in turn can very

easily lead to slowing or even shutting down payments to its creditors. The third measure

we have identified is accounts receivable conversion period, or accounts receivable to

daily sales ratio. The measure is a reflection of commercial credit policy’s effectiveness, a

vital instrument of validating company efforts and generating the cash needed for

settling financial commitments and resuming company business cycle. The 70 sample

companies recorded, from 2010 and until 2012, for 3 consecutive years, significant and

steady growth of accounts receivable conversion period. Thus, in the period prior entry

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into insolvency, analyzed companies recorded increasing delays in cashing the goods sold

or services delivered, making it more difficult to repay existing debt and being

subsequently compelled to call in additional debt to continue. The progressive increase of

account receivable conversion period was due to a slight yet steady turnover’s decline

during the five years analyzed and to a sudden rise of accounts receivable in the last two

years’ prior entry into insolvency, namely 2011 and 2012; these two elements combined

generated a sharp increase of accounts receivable conversion period. Our model’s fourth

measure is assets’ liquidity, or the ratio of current assets into total assets, designed to

provide information regarding company’s operational flexibility and its capacity to serve

commercial and financial commitments. Analyzed companies recorded, starting with the

third year before entry into insolvency, increases of asset liquidity, which could be a

positive sign of their ability to service debts and therefore to keep away from insolvency

risk. However, looking further into the evolution of current assets’ components, we find

that asset liquidity’s increase was unhealthy. Two components of this assets liquidity’s

increase, respectively inventories and cash, fluctuated, yet remained somehow stable

during the 2008-2011 period. This was followed by inventories and cash decreases in

2012. Thus, their cumulated evolution for the entire period is negative and opposite of

growth tendency registered by assets’ liquidity. The only current assets’ component

which recorded a sharp increase, especially in 2012, is accounts receivable, whose 2012

growth has been strong enough to more than compensate cash and inventories’

decreases and determine assets liquidity’s increase. However, correlating this with the

evolution of accounts receivable conversion period, we find out that, although assets’

liquidity grew in the period preceding the entry into insolvency, analyzed companies

actually had increasing difficulties in covering their debts as they come due. The fifth

measure we have considered is assets’ efficiency, the ratio between company turnover

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and total assets employed to generate respective sales. Overall, the 70 companies

analyzed have recorded a slight decrease in total assets’ efficiency. To illustrate we have

analyzed the deterministic evolution 2012/2011 (the most relevant years of the five

analyzed) of assets’ efficiency ratio, taking into account the two level one influence

factors (total assets and sales turnover), as well as second level (fixed assets and current

assets) and third level factors (inventories, accounts receivable and cash). The findings are

quite relevant and they correspond with the downward overall trend of analyzed

companies and the entry into insolvency. The modification 2012/2011 of average (for the

70 companies) total assets’ efficiency was of +3.24 lei (960.05 lei in 2012 compared to

956.82 lei in 2011) and is analyzed in table 4 below, with a deterministic factors’

contribution measurement.

Table 4. Factors’ contributions to total assets’ efficiency modification 2012/2011

Factors’
Measures
Contributions

1. Contribution of total assets:

+44.6411
1.1 Contribution of fixed assets:

-8.6356
1.2 Contribution of current assets:

+53.2768
1.2.1 Contribution of inventories:

+23.1899
1.2.2 Contribution of accounts’ receivable:

-36.3151
1.2.3 Contribution of cash and short-term investments:

+66.4021
2. Contribution of sales turnover:

-41.4028
Source: authors’ calculation

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Where:
TAE – total assets’ efficiency, the ratio of sales to total assets;
Index of TA 12/11 – index of total assets 2012/2011;
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠12/11– index of sales 2012/2011;
k% CA – percentage contribution of current assets tototal assets’ change 2012/2011;
k% A/R – percentage contribution of accounts receivable to total assets’ change
2012/2011; k% M – percentage contribution of cash&liquid assets to total assets’ change
2012/2011.

From table 4 we can find that total assets’ efficiency increased in 2012 compared to

2011 (a level higher by 3.23 lei for 1000 lei invested in total assets).

Nevertheless, this is not a favorable evolution, since it was due to total assets’

decrease (thereby creating an apparently positive contribution of 44.64 lei) combined with

a milder sales turnover’s decrease (with a negative contribution of - 41.4 lei). We can

substantiate this by deepening total assets’ contribution analysis. As such, we can find

fixed assets had a negative contribution of -8.64 lei, which reveals that sample

companies made a reduced level of investments, most likely destined to replace

depreciated fixed assets (obviously creating new fixed assets is virtually excluded under

such circumstances). Furthermore, looking into the structure of current assets we can

find that their apparently positive contribution (of +53 lei) was actually due to decreases

in inventories and cash and increases in accounts receivable. This corresponds to the

perfect recipe for insolvency (lower inventories, hence lower prospects of future sales

combined with a slower recovery of accounts receivable and reduced cash amounts).

After checking and correcting data for routing checks, descriptive statistics and means by

year of selected ratios are presented in table 5 below. Descriptive statistics shows

selected companies have on average 59% current assets and 41% noncurrent assets. On

average selected companies have general solvability ratio of 1.32, respectively

patrimonial solvability ratio of -1.31. Moreover, on average, companies generated 2.6

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RON of sales for each RON invested in total assets and collected their account receivables

in 98 days.

Table 5. Descriptive statistics

Variable Obs. Mean Std. Dev. Min Max
AL (assets liquidity) 347 0.59 0.31 0.00 1.00
GS (general solvability) 346 1.32 2.15 0.00 27.74
PS (patrimonial solvability) 347 -1.31 11.09 -200.09 1.00
TAE (total assets effic.) 346 2.60 5.94 0.00 87.57
A/R (Accts. Receivable Conv. Period) 321 98.02 129.69 0.00 781.03
Y (dependent variable) 347 0.66 0.47 0.00 1.00
Source: authors’ calculation

4.4. Data and methodology

Applying the model

We have applied the model for an economic entity (randomly selected) not listed in

the Bulletin of Insolvency Proceedings. Practically, entity’s insolvency risk simulation was

conducted from a trading partner’s point of view. The model implies calculating the five

measures and establishing each measure’s negative evolutions from one year to another

(labeled YES if there is a negative trend and NO otherwise). The following steps consist in

checking the years in which all five measure showed negative evolutions and finally

counting the consecutive years in which all five indicators had negative evolutions. In case

of our analyzed economic entity, there was no year in which all five measures

concurrently recorded negative evolutions, therefore it appears it presents no insolvency

risk. In the same way, the test can be performed for any economic entity, provided there

is data available from the financial statements for the last five consecutive years. Table 6

shows means of selected ratios by year. Assets liquidity, total assets’ efficiency and A/R

conversation period have positive trends, whereas general solvability, patrimonial

solvability negative.

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Table 6. Means by year

Year AL GS PS TAE A/R
2008 0.56 1.98 0.04 2.05 93.95
2009 0.54 1.54 -0.41 2.43 62.31
2010 0.59 1.13 -0.51 2.06 106.03
2011 0.63 1.10 -0.75 2.04 106.00
2012 0.64 0.83 -4.97 4.44 124.02
Total 0.59 1.32 -1.31 2.60 98.02
Source: Data processed by the authors

In case of analyzed economic entity, we can notice a good general and patrimonial

solvency, exceeding the 1.3, respectively the 0.5 reference thresholds for general,

respectively patrimonial solvency, throughout analyzed period. These values demonstrate

economic entity's ability to pay its debts, a low degree of indebtedness and consequently

a virtually non-existent insolvency risk. These arguments are also supported by the

correlated evolutions of the measures presented in table 7.

Table 7. Indicator evolution analysis

Negative evolution period No. of
downside
Indicator evolution
2010 2011 2012 2013 consecutive
periods
Decreasing general solvency (< 1.3) NO NO NO NO
Decreasing patrimonial solvency (<0.5) NO NO NO NO
Increasing A/R conversion period YES YES YES NO
Simultaneous increase of assets’ liquidity and of
NO NO NO NO
A/R conversion period
Declining of total assets’ efficiency YES YES YES YES

Simultaneous negative trend for all indicators NO NO NO NO 0

Source: Data processed by the authors

Linking economic and financial measures analyzed here to identify the causes that

led the 70 sampled Romanian economic entities into insolvency in 2013 we have noticed

a negative trend at least three years before the year of starting the insolvency

proceedings (see table 8 below).

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Table 8. Indicators evolution analysis

Years of manifestation
Negative trend indicator
2009 2010 2011 2012

Decreasing general solvency (< 1.3) YES YES YES YES

YES YES YES YES
Decreasing patrimonial solvency (<0.5)

Increasing A/R conversion period YES YES YES

Simultaneous assets’ liquidity and A/R YES YES YES

conversion period’s increases

Decreasing total assets’ efficiency YES YES YES

Source: Data processed by the authors

An economic entity’s potential trade partner can perform the analysis of five financial

measures using at least four yearly financial statements and assessing their evolution for

at least three years. Based on this set of measures’ evolution analysis, we can estimate

the level of insolvency risk presented by a potential trading partner and the potential

hazards which can affect its economic and financial situation. Should the five financial

measures concurrently display a negative evolution, then, according to the number of

years of downside trend, it is possible to determine the level of insolvency risk. If there is

just one negative evolution (a negative evolution means that in a given year all the five

measures have concurrently negative evolutions), then the company has a low risk of

becoming insolvent; if two consecutive negative evolutions occur, then the company

records an average risk of going insolvent; and if there are three consecutive years of

negative evolutions the company has an increased risk of becoming insolvent.

General form of the logit and logistic model

We rely our estimations on a Logit and Logistic model, considering a class of binary

response models with the following form (Måns, 2009):

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𝑃𝑟(𝑌 = 1/𝑥) = 𝐺(𝑋𝐵)

𝑃𝑟(𝑌 = 1/𝑥) = 𝐺(𝐵0 + 𝐵1𝑋1 + 𝐵2𝑋2 + ⋯ 𝐵𝑘𝑋𝑘 ) (1)

where G is a function taking on values strictly between 0 and 1: 0 < 𝐺(𝑧) < 1, for all

zreal numbers. The general form of the model (1) is a function of the xvector, through the

index:

𝑥𝐵 = 𝐵0 + 𝐵1𝑋1 + 𝐵2𝑋2 + ⋯ 𝐵𝑘𝑋𝑘 (2)

which is simply a scalar. The condition 0 < 𝐺(𝑥𝐵) < 1ensures estimated response

probabilities lie strictly between 0 and 1. G usually refers to the cumulative density

function (dcf), and non-linear function which is monotonally increasing in the index z

(i.e.𝑥𝐵), with:

𝑃𝑟(𝑌 = 1/𝑥) → 1, as 𝑥𝐵 → ∞

𝑃𝑟(𝑌 = 1/𝑥) → 0as 𝑥𝐵 → −∞

The most common non-linear function is the logistic distribution, yielding the logit

model, as follows:

𝐺(𝑥𝐵) = 𝑒𝑥𝑝(𝑥𝐵) 1+𝑒𝑥𝑝(𝑥𝐵) = Λ(𝑥𝐵) (3)

which has values between 0 and 1, for all values of the xBscalar term. The

equation (3) refers to thecumulative distribution function (cdf)for a logistic variable.

Since𝑃𝑟(𝑌 = 1/𝑥) in the equation (1) is categorical, we use the logit of Y as the response in

our regression equation instead of just Y, as follows:

𝐿𝑛 ( 𝑃𝑖 1−𝑃𝑖 ) = 𝐵0 + 𝐵1𝑋1 + 𝐵2𝑋2 + ⋯ 𝐵𝑘𝑋𝑘 (4)

The logit function (4) is the natural log of the odds Y will equal one of 0 and 1

categories. P is defined as the probability of Y=1.

The logit and logistic model

In this part we use a logit and logistic model to have a more rigorous estimate of

selected companies’ insolvency risk and validate the results of our previous model. Before

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running regression, we have checked the data for routine controls. For example, assets

liquidity, general solvability, assets’ efficiency or accounting receivables conversion period

cannot be negative. Since all selected companies have gone bankrupt we offer in this

paper a unique methodology to estimate and evaluate insolvency risk. This case is not

treated in previous empirical research. Hence, dependent variable is calculated based on

general solvability. General solvability is the main indicator reflecting insolvency risk. As

such we transform this indicator into two categories to denote the solvency, respectively

insolvency risk. Thus, if a company’s general solvability index (with current year against

previous year’s values) is lower than one, it denotes a solvability concern and is quantified

with 1. Otherwise, if the index has a higher than one value (also with current year against

previous year’s values) the situation is quantified with zero, meaning solvability is not a

concern. Thus, the dependent variable takes either 1 or 0 values.

The model we use to analyze the probability that a company becomes insolvent

reads:

𝐿 = 𝑃𝑖 1 − 𝑃𝑖 = 𝐵0 + 𝐵1𝐿𝑜𝑔𝐴𝐿 + 𝐵2𝐿𝑜𝑔𝑃𝑆 + 𝐵3𝐿𝑜𝑔𝑇𝐴𝐸 + 𝐵4𝐿𝑜𝑔𝐴/𝑅 (5)

Where: L denotes the calculated dependent variable of insolvency; for the

comparison we have left solvency outside the model as a benchmark category;

LogAL represents log of assets liquidity;

LogPS the log of patrimonial solvability;

LogTAE the log of total assets' efficiency and

LogAR the log of A/R conversion period.

As logging the level of data variables results in negative observations, (since a

large proportion of data from all matrixes of respective explanatory variables contain

values above 0 and below 1), we have transformed these data, taking the log of

explanatory variables in levels added by one (Guerin, 2006). Using this transformation, we

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take care of negative values and we can interpret the coefficients from LOGIT regression

as elasticity for the large values of transformed variable. The situation is represented in

table 9 below.

Table 9. Regression results

VARIABLES LOGIT LOGISTlC Predicted probabilities
(Antilog-odds ratio)
log of assets liquidity 0.640 0.463 .713893
[0.67] [0.60]
log of patrimonial solvability -0.160 -0.117 .595157
[-0.57] [-0.49]
log of total assets' efficiency -1.224*** -1.064*** .596553
[-2.90] [-3.12]
log of A/R conversion period -0.388*** -0.367*** .840716

[-2.67] [-2.97]
Constant 2.838*** 2.614***
[3.52] [3.92]
Observations 258 258
Number of groups 67
Notes: z-statistics in brackets, ***, ** and * indicate significance of coefficients at 1, 5 and 10 per
cent, respectively.
Source: Authors’ calculations

For the estimation purpose, we use LOGIT and Logistic regression as robustness

check to logit model. Moreover, the LOGIT model produces predictions more consistent

with underlying theory1, justified as LOGIT assumes log of odds ratio is linearly related to

dependent variable, meaning that their marginal effect does not have a constant impact

upon dependent variable. It also resolves predicted values’ problem, because its logistic

function has always values between 0 and 1 for all real numbers. After running the logit

regression some important variables resulted insignificant for the 1, 5 and 10% levels. The

likelihood ratio and Wald test suggest that we reject H0, respectively insignificant slope

While Linear Probability Model measures the change in probability of the slope coefficient for a unit increase in the
1

dependent variable, with the effect of all other variables held constant, in the logit model the slope coefficient of a
variable gives the change in the log of the odds associated with the unit change in that variable, again holding all
other variables constant.

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coefficients are jointly zero. The p-value of the Wald test is 0.0230, so the null hypothesis

is rejected at the 5% significance level. Interpreting results in terms of log of odds ratio2,

means we have to account for partial slope coefficients in estimated equation measuring

change in estimated logit for a unit change in value of the given regressors (holding other

things constant).

Interpretation of results and discussions

Estimated coefficients of total assets' efficiency and A/R conversion period of -

1.064,respectively -0.367, in the logistic model mean that, other things held constant,

assets efficiencyand A/R conversion period are 10.64 and 3.67 times less likely to

contribute to company insolvency. Thus, the value of -1.224 from table 9 for total assets’

efficiency indicates that, holding other variables constant, total assets’ efficiency would

have a log of odds ratio of contributing to company insolvency, which is 1.22 less than

that of a having a log of odds ratio contributing to company solvency, other things being

equal. The value of -0.388 for A/R conversion period indicates that, other things being

equal, A/R conversion period would have a log of odds ratio of contributing to company

insolvency, which is 0.388 less than that of having a log of odds ratio contributing to

company solvency, other things held constant. To find predicted value of log odds ratio,

predicted probabilities are calculated taking into account mean values of continuous

variables. In terms of predicted probabilities3 the probability of companies becoming

insolvent is of 0.56811 (56.8 per cent)4 (Wooldridge, 2015). Contribution of total asset

liquidity upon predicted insolvency probability is 71.3 per cent. The contribution of

patrimonial solvability, total assets' efficiency and A/R conversion period, upon predicted

insolvency probability are 59.51 per cent, 59.65 per cent and 84.07 per cent, respectively.

2
Odds interpretation is obtained by taking the antilog of various slope coefficients.
3
In order to find the predicted value of log odds ratio, predicted probabilities are calculated taking into account the mean
values of continuous variables.

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Regression results show assets liquidity and patrimonial solvability are insignificant

factors for insolvency risk. In other words, assets composition (current assets vs.

noncurrent assets) has not played a significant role for insolvency risk. Also, patrimonial

solvability calculated as equity to total assets has not significantly contributed to

insolvency risk. This denotes risk originated from debt financing rather than equity

financing. Total assets' efficiency and A/R conversion period are confirmed to be

significantly related to insolvency risk with a negative contribution on insolvency. Results

are in line with theoretical expectations. Hence, as total assets’ efficiency increases,

insolvency risk decreases. This means in turn that as assets generate more sales,

insolvency risk becomes lower. Moreover, as companies decrease A/R conversation

period, insolvency risk increases too. This means that reducing credit period to customers

generated higher risk. Usually, as A/R collection period increases, future becomes more

unpredictable and insolvency risk increases as well. However, our result in this case is

slightly contradictory. The explanation of this result may be the fact that as companies

shortened A/R conversation period, clients were more likely to switch to competitors,

thus sales decreased.

4.5. Conclusions

Our sample with the 70 economic entities, is heterogeneous, with companies

belonging to different sectors; they have different size and originate from different

geographical areas. It is well known that score functions are appropriate for the period or

economic situation in which they were created. Compared to this function, our model,

comprising a set of five measures, can provide generally valid and reliable results and

allows for data generalization and results’ implementation under any economic

circumstances. Correlated analysis of economic and financial measures was meant to

shape a clearer picture regarding imminent insolvency risk for the 70 economic entities

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studied. All five measure composing the model recorded a downward trend (in the last

three years preceding the entry in a state of insolvency) and values outside ranges

deemed as normal for healthy companies (recording levels lower than the minimum

accepted values). From third year-on, more than 50% of analyzed companies experienced

deterioration of marked indicators. Thus 75%, respectively 85% of analyzed companies

showed a negative general, respectively patrimonial solvency, with a high level of debts

toward creditors and failure to serve their due payments. Simultaneously, for three

consecutive years, there can be noticed a significant and constant increase of A/R

conversion period. Increasing delay in cashing receivables, caused mainly by commercial

credit policy relaxation and insufficient analysis of potential credit beneficiaries, was the

main insolvency reason. The increasing delays in collecting receivables led to delays in

paying debt toward creditors and calling additional debt to continue their business. A

second reason which caused many Romanian companies enter insolvency in 2013, was

decrease of assets’ efficiency, as companies registered a diminishing turnover along a

lesser assets’ decrease. This latter evolution is most likely a direct consequence of the

delay of transforming receivables into cash (of increased balance of accounts receivable).

The inability to honor creditors’ obligations (general solvency with low and declining

values), accelerated de-capitalization (unsatisfactory and declining level of economic

solvency), growing delays in collecting the value of goods and services sold (increasing

A/R conversion period), the lack of real liquidity (declining assets’ liquidity) and inefficient

use of assets (downward trend of assets’ efficiency) are the five measures that, together,

led to a situation of imminent insolvency, within a three years’ period. Consequently,

there can be seen a correlation of the five economic and financial measures and they have

fairly equal influence in their ability to forecast whether an economic entity is at risk to

become insolvent and then declared bankrupt.

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Chapter 5. Other Research Directions

This chapter includes two articles published, în 2019 and 2020, in the prestigious

Romanian journal “Romanian Journal of Economic Forecasting”, official publication of the

Institute for Economic Forecasting.

5.1. Cyclicality of Fiscal Policy in the European Union

The article “Cyclicality of Fiscal Policy in the European Union” analyzes the way in

which fiscal policy works across the phases of the economic cycle, more precisely it

checks the pro-cyclical features of this policy. The sample includes the EU countries,

except for Cyprus and Malta, for the 1995-2014 period. To measure the pro-cyclicality

and the way in which fiscal policy responds to economic, social and political stimuli we

used multiple regressions, tested for time-series for each country at a time, as well as for

panel data for the entire sample. We started from an a-priori premise that the developed

countries lead a non-cyclical/counter-cyclical policy, whereas the developing countries

have a pro-cyclical one; yet, the analysis of the fiscal policy instruments adopted during

the analyzed period showed that this particular insight is not necessarily valid for all the

cases. We have found that throughout the entire analyzed period, most of the countries

led a pro-cyclical fiscal policy, no matter if they were developed or developing countries.

The influence the policy variable has upon the fiscal policy cyclicality is a constant result

across the entire study.

This study brings a new perspective upon pro-cyclicality and anti-cyclicality of fiscal

policy’s public expenditures side and its determinants for the EU member countries, with

the view of establishing a model which could support fiscal policy’s sustainability. Starting

from the Halland and Bleaney (2011) model we analyzed the way in which government

expenditures’ evolution responds to economic, social and political stimuli.

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In our analysis, we noticed that inequality appears as the most important for the

developing countries, and it is significant for the entire sample of analyzed countries,

including the developed ones. For all the regressions, no matter the method or sample

considered, politics appear as a factor which strongly impacts government expenditures.

The influence political norms have upon fiscal policy’s cyclicality is consistent across the

entire study, resonating with the results of Alesina et al. (2008), stating that in countries

with non-consolidated democracies, where corruption is active, pro-cyclicality is even

more present. Such results are consistent during the study for both groups of developed

and developing countries, offering a significant insight about the importance of designing

good political institutions, as well as for decreasing corruption when aiming to conduct a

sustainable fiscal policy. When analyzing the influence the public debt exerts upon

government expenditures, we can see some significant results for selected EU countries;

however, since debt is not decomposed into its external and internal components, the

information does not provide a strong reason to associate the pro-cyclicality with an

incomplete credit market in the EU - where countries would often resort to accessing

more expensive external debt during recessions, worsening locally the economic context.

To properly test the application of an incomplete credit market theory at the level of

Member States and to expand the existent study, a useful future direction would include

such a decomposition, as well as the addition of cyclicality’s revenue-side analysis.

5.2. Explaining The EU Regional Economic Growth Through Regional - And Country-Level

Achievements in Education

The article “Explaining The EU Regional Economic Growth Through Regional - And

Country-Level Achievements in Education” looks to identify what mix of public policies,

among which the education and ICT policies are the main focus, is able to stimulate

economic growth in the EU, when a special attention is given to the distinction between

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the New Member States and Old Member States. The multilevel analysis represents the

main quantitative method used here.

The empirical analysis uses Eurostat panel data running from 2001 to 2017,

aggregated at the region- as well as at the country level. All 28 EU countries are included

in the analysis. According to the NUTS 2016 classification, the 281 NUTS2 statistical

regions of the EU group together basic regions for the application of regional policies. The

selection of variables included in this study first depends on the data availability in

Eurostat, and secondly has theoretical grounds.

The paper concludes is that only a mix of regional-national policy measures in

education/ ICT could accelerate regional economic growth in the EU. Only a hierarchical

model with time occasions nested in regions and regions nested in countries could reveal

the impact of the two types of policy measures. When looking back at the last 17 years,

important discrepancies still exist between NMS and OMS, and this is reflected in the

impact of policy measures as well. Discouraging early leavers from education, increasing

expenditure on R&D and enhancing the ICT development help boosting regional growth in

both NMS and OMS, but the regional educational attainments are effective in NMS, while

extending the technology sector is more effective in OMS. This finally leads to the

conclusion that the EU regional policy is a key policy in stimulating regional growth.

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(B-ii) The evolution and development plans for career development

This section of the habilitation thesis summarizes the plans for the evolution and

development of the future professional career, both as far as the teaching activities and

the research activity are concerned. The plan is based on the experience accumulated as a

university teacher from 2000 to the present.

1. Teaching experience

Throughout the last 21 years, my teaching and research activity has taken place in

the Department of Finance, Accounting, and Economic Theory, Faculty of Economics and

Business Administration, Transilvania University of Brasov. In this context, I have

participated in various didactic, scientific, and research activities.

In 2000, on the basis of competition, I held the position of instructor, and then I have

climbed the ladder of professional development, respectively assistant (in 2002), lecturer

(in 2004), and associate professor (in 2013). Throughout the mentioned period, I have

held classes and seminars on the subjects: Financial systems and reporting of the

economic entities, International Financial Reporting Standards, Taxation, In-depth

Accounting, etc.

Throughout this period, I have been constantly concerned with the development of

my teaching skills. In this context, I have participated in training and professional

development courses, in the "Training of External Evaluators" in the field of higher

education quality, organized in Brasov, by the Romanian Agency for Quality Assurance in

Higher Education (ARACIS) together with the Department for Distance Learning and Part-

Time Education (DIDIFR) of the Transilvania University of Brașov. As a result of the

training programs in the Distance Education Technology, I have been awarded a

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certificate attesting my ARACIS External Expert Evaluator competencies for the distance

learning study programs.

Since 2008, I have been the coordinator of the Accounting and Management

Informatics study program, bachelor level, distance learning, participating in this capacity

in the elaboration of the periodic evaluation reports.

A continuous preoccupation has been that of improving the students’ specialized

practice from the Accounting and Management Informatics study program, both in my

capacity of supervisor and of tenured teacher of some specialized subjects. Every year I

coordinate and evaluate series of students as far as their practice activity is concerned.

We have supervised a large number of BA and MA students in carrying out their

bachelor's and dissertation projects, seeking to propose topics with a high degree of

novelty, harmonized and adapted to the demands of the labour market. At the same time,

I have supervised students in writing their papers for contests and for the sessions of

student scientific conferences. I would like to mention the yearly participation in the BA

and MA graduation boards as member, or chairperson, for the Accounting and

Management Informatics study programs.

The appreciation of my professional activity has contributed to having received the

vote from my colleagues in order to be part in the Council of the Faculty of Economics and

Business Administration, in the period 2008-2015 and in the Board of the Department of

Finance, Accounting and Economic Theory, in the period 2015-2019.

Another responsibility I have been assigned is that of being in charge with the

evaluation and quality assurance at the level of the Finance, Accounting and Economic

Theory Department. In order to improve the teaching and research activity, by the

Erasmus program, I have participated in experience exchanges; I have had teaching and

research activities at prestigious universities in Greece.

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2. Experience in research

After defending my doctoral thesis, entitled "Accounting instruments and statements

utilized in accounting analysis and decision-making process ", under the guidance of

Professor Dr. Mihaela Dumitrana, at ASE Bucharest, my scientific research has mostly

focused on the financial and non-financial reporting of economic entities as well as on the

financial analysis of the main indicators provided by the financial statements.

My scientific preoccupations converge on topics that fall both into the field of finance

in general (corporate finance in particular) and the taxation and accounting field,

emphasizing sustainability reporting and measuring the financial performance of

Romanian companies.

The studies and research carried out have been capitalized, since 2000 until now by

the publication of:

- 6 ISI Web of Science articles;

- publishing a number of 5 books as author or co-author at nationally acknowledged

publishing houses;

- 15 articles indexed in international databases;

- 9 scientific papers published in the volumes of national or international

conferences.

The relevance and impact of my research activity are demonstrated by the fact that

my scientific papers have been cited in ISI Web of Science indexed journals, in BDI indexed

journals, and in specialized books.

Similarly, the research career substantiates by the quality of member and financial

manager in 8 research projects won as a result of the competitions organized at the

national level:

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- (2006-2008) Member in the research team of the project Laboratory of Statistical

Analysis and Prospects of Social-Economics phenomena and Marketing research

(ASPECKT), approved by O.M.Ed.C. 5066/6.09.2006, CNCSIS code 76/2006, beneficiary:

Transilvania University of Brașov.

- (2008-2011) Member in the research and management team of the project "The

development of entrepreneurial skills of the staff in the energy field", September 2008.

Project won in a national competition, co-financed by the European Social Fund by the

Sectorial Operational Program Human Resources Development 2007-2013. POSDRU

contract /9/3.1/S/ 7/25, beneficiary: The Training and Development Centre (PERFECT

SERVICE S.A.) in Bucharest.

- (2009-2010) Member in the research and management team of the project

"Adapting professional life to the requirements and needs of family life - increasing the

chances of women and vulnerable groups on the labour market", 09.02.2009. Project

won in a national competition, co-financed by the European Social Fund through the

Sectorial Operational Program Human Resources Development 2007-2013. POSDRU

contract/40/3.2/ G/10786, beneficiary: The Training and Development Centre (PERFECT

SERVICE S.A.) in Bucharest.

- (2011-2013) Member in the implementation team - financial manager in the

project "Education and training in support of economic growth and development of the

knowledge-based society", PERFORMER. POSDRU contract/86/1.2/S/ 62508, Priority

Axis "Education and training in support of economic growth and development of the

knowledge-based society". The major field of intervention "Quality in the higher

education", beneficiary: Transilvania University of Brașov.

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- (2012-2015) Member in the research team of the project "Risk and performance in

the future of the Romanian banking". National competition research contract, no.

836/16.11.2011, beneficiary: Credit Coop Central Cooperative Bank, Brașov Agency.

- (2008-2009) Member of the implementation team - financial manager of the

project "Financial support for the research-testing laboratory of wood products aligned to

European standards". Contract no. 17787/24.11.2008, signed by the Transilvania

University of Brașov and Kronospan Romania L.T.D. in Brașov.

- (2009-2013) Member of the implementation team - financial manager of the

project "Financial support for the research-testing laboratory of wood products aligned to

European standards". Contract no. 240/27.04.2009, signed by Transilvania University of

Brașov and FLAK CONSULTING S.R.L from Brașov.

- (2012-2015) Member in the research team of the project "Risk analysis and the

profitability growth factors of the Unirea Cooperative bank Brașov". Contract no.

1310/22.10.2012, beneficiary: Unirea Cooperative Bank Brașov

3. Relationship with the business environment

Immediately after graduating from the Faculty of Economic Sciences at the

Transilvania University of Brașov, I collaborated with various economic entities, holding

the economist position in the financial-accounting department. In addition to the

financial-accounting activity, I also dealt with internal and external financial reporting,

consolidated reporting, an example being the collaboration with the Swedish company -

Assa Abloy.

Equally, I have been an active member of CECCAR Brașov since 2008, as an

accounting expert and qualified lecturer in the National Program for Continuous

Professional Development, for the subjects: Taxation, International Financial Reporting

Standards (IFRS) and Financial Accounting. I collaborated, as a training lecturer, with two

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other private economic entities: the “Perfect Service” Training and Development Centre in

Bucharest (2002-2007) and the “Form Expert” Training and Development Centre in

Bucharest (2008-2009).

4. Future career development and evolution strategies

My main preoccupation in the next period will be focused on setting up and

consolidating some research teams that will contribute to the development of scientific

research in areas of interest.

Starting from the results of the research I have carried out so far, and from the

research directions proposed in this habilitation thesis, I propose to continue my research

activity in several directions, noting that the central pillar of these preoccupations will be

the concept of integrated reporting and sustainable development of economic entities.

The main objectives I propose in the field of scientific research are:

- to continue the research activity in the field of sustainability and environmental

reporting, with implications on the sustainable development and on the increase of the

financial performance of the economic entities;

- to expand the research area to an integrated reporting and the relationship of

dependence with the efficiency and sustainable development of the companies in

Romania, but also in the EU countries.

- to study the modern methods of research, analysis, and evaluation of performance

at the level of economic entities;

- the impact of the crisis caused by the pandemic triggered by the SARS-CoV-2 virus

on the financial performance of economic entities in different business sectors;

- the study of risk factors that may affect the financial performance of economic

entities;

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- the intensification of the scientific and didactic research activity in the direction of

the financial management and planning at the level of economic entities;

- to get involved in research and partnership projects for the development of the

relations between specialists from different universities, from the country and abroad;

- to encourage the development of interdisciplinary collaboration with teachers

from other departments of the faculty and the university in order to write scientific

papers and research projects;

- to improve the visibility of my research activity by publishing in ISI journals, with

the highest possible impact factor;

- to participate in international conferences in order to increase my visibility and

that of the institution I come from, at national and international level, and for the widest

possible dissemination of my research results;

- to continue the collaboration with the research team already formed that consists

of colleagues from the Faculty of Economics and Business Administration, Transilvania

University of Brașov, but also with colleagues and specialists from other university

centres.

- to obtain the habilitation certificate and to evolve to a higher didactic degree.

The main objectives I propose in the field of teaching are:

- to improve the teaching activity by getting involved alongside the students in the

educational process;

- to improve and update the contents of the taught subjects;

- to publish new teaching courses adapted to the current demands of the labour

market;

- to enrich the documentary fund with specialized publications for the library of the

Transilvania University of Brașov;

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- to aim at the publication of books or chapters in books at prestigious international

and national publishing houses with my teacher colleagues;

- to develop collaborative relationships with financial institutions and private

economic entities in order to improve the practical activities and to adapt the theoretical

and practical training of the future economists to the real requirements of the labour

market;

- to support students by developing appropriate internship programs;

- to collaborate with specialists from the private sector in the teaching activity;

- to participate in the establishment of partnerships between the faculty and the

business environment in order to stimulate research and the development of innovative

ideas;

- to actively participate in maintaining and intensifying the collaboration with the

CECCAR Braşov professional entity;

- to attract and get students involved in research papers and their presentation in

student conferences and in AFCO - Graduates in front of companies;

- to deepen the pedagogical skills necessary for the application of updated models

of good practice in the training of the future specialists in the field of finance-accounting.

- to participate in seminars, workshops or other training options aimed at

developing teaching performance and to participate in experience exchanges in the

country and abroad, with partner universities part of the Erasmus + program.

In conclusion, I consider that my skills, competencies, teaching experience, and

scientific research, but also the experience I gained from the relationship with the

business environment, will be particularly useful in carrying out the process of

supervising and coordinating the research activities undertaken by PhD students in

Finance, especially in the field of Corporate Finance.

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