The Effect of Financial Risk Taking on Profitability in the Pharmaceutical Industry

Round 1

Reviewer 1 Report

The main motivation of the paper is not clear.

The theoretical basis for the study was not well developed, and the analysis and conclusions were somewhat superficial.    

My suggestions for improvements is if authors are willing to revise and resubmit are:
 

1. The paper needs better organization and present its main argument supported with theory. Part of this problem arises from covering too much information in each paragraph without explaining and Justifying each point and its role in the paper. 
2. The paper needs to provide substantial background on the choice of the regional economies and proportionally contribution of Pharma sector their economies GDPs;
3. The paper needs a clear research question or aim;
4. The author has not tried to explain the variations in the ownership of financial assets driven by the market dynamics contributing to changing ROE
5. The empirical purpose of the paper is less clear, is to propose a model that has a less explanatory power or to demonstrate that model does not explain the sector behaviour?

Author Response

We say thank you for the reviewer for the really hard work to correct and develop our study.

The study was checked after the corrections by a native and professional language lecter, thus, we tried to comply with the reviewers' comments

We answer for the review in below:

1. The paper needs better organization and present its main argument supported with theory. Part of this problem arises from covering too much information in each paragraph without explaining and Justifying each point and its role in the paper. 

In the study, we considered necessary to discuss the industry situation and the international accounting principles that affect the recognition of financial returns and thereby the ROE indicators.

2. The paper needs to provide substantial background on the choice of the regional economies and proportionally contribution of Pharma sector their economies GDPs;

We adjusted this information in the Introduction.

3. The paper needs a clear research question or aim;

We adjusted this information in the Abstract: the main objective of the study is to gain a better insight into the main management characteristics of the actors in the sector.

4. The author has not tried to explain the variations in the ownership of financial assets driven by the market dynamics contributing to changing ROE

In the study we wanted to focus on basically the data based on accounting statements.

5. The empirical purpose of the paper is less clear, is to propose a model that has a less explanatory power or to demonstrate that model does not explain the sector behaviour?

We would like to demonstrate that more efficient management of financial investments (acquisitions, loans) in the pharmaceutical industry generates higher profitability on equity. We tried to set up a regression modell by which it can be detected close relationship between the financial investment policy decisions (which also reflected in the financial return per asset indicator) and the equity based profitability within this industry, but that model does not explain the sector behaviour. Our consequence is that the lack of correlation and the low reliability of the model suggest that better management of financial assets and therefore, the higher financial income do not lead to higher pre-tax profits. This may be because more efficient lending, acquisition and financial investment decisions are forced by the need to cover rising interest costs or indirect costs (R&D, marketing) specific to the industry, so the impact on pre-tax profit, and hence ROE, will not be detectable.

Adjustments have been made to the best of our knowledge and we hope to meet the reviewer's expectations.

Thank you!

Reviewer 2 Report

The article covers an interesting topic and the authors have done some interesting analysis but the presentation and robustness of the analysis could be improved.

There are some typos around the article, such as ((Table 2.) on line 319.

The section regarding disclosures (Funding, Data Availability, acknowledgment) needs to be improved.

The methodology could be improved adding more control variables.

I thin that with some work this is a publishable article but need to improve some deficiencies.   

Author Response

Thank you for the comprehensive review and thanks for the suggestions for improving the study!

The study was checked after the corrections by a native and professional language lecter, thus, we tried to comply with the reviewers' comments

 

We answer for the three points of the reviews in one paragraph in below:

 

1. There are some typos around the article, such as ((Table 2.) on line 319.
2. The section regarding disclosures (Funding, Data Availability, acknowledgment) needs to be improved.
3. The methodology could be improved adding more control variables.

 

We considered the suggestions, we corrected the typos and we improved the scope of results with some new results: we examine all companies, the strength of the cause-and-effect relationship between variables remains unchanged: the financial income per asset has no role in the variation in ROE indicators, so our theoretically plausible initial hypothesis is not confirmed. If we introduce the country variable in this previous model as a dummy, the reliables of the model remains unchanged.

Adjustments have been made to the best of our knowledge and we hope to meet the reviewer's expectations.

Thank you!

Reviewer 3 Report

The study is quite relevant nowadays, but it needs to be improved in different aspects. In a scientific article, it is very important to define the objectives (these must be well defined), on the other hand, it is also very important to link the literature review with the results section so that there can be discussion (the authors do not present discussion of the results section). The authors use the technique of linear regression analysis because they intended a study an impact, so in this type of study, hypotheses must be formulated considering the evidence in the literature, the article fails a lot in this part, the authors consider a hypothesis (which never formulated) and then test a set of hypotheses.

The suggested changes are presented in more detail:

Abstract

• The objective should be clarified.

Introduction

• The introduction should define the purpose of the work, including specific hypotheses to be tested. Should they improve the introduction by specifying the purpose of the study and the relevance of the theme, why is this study important? And what does he add to the literature?
• In line 37 the sentence begins with "According to the authors" refer to which authors? Please note that in the previous sentence the authors are in parentheses.
• In line 43 "processes. (Munos, 2009)." They must remove the endpoint before the citation. Just like in line 154.
• In line 51 the citation (Lakatos et. al., 2020) should appear before the endpoint.
• Beware of abbreviations the first time it appears should be specified their meaning, for example, IFRS, V4.
• Why did they use the ROE indicator to measure the return on equity variable and did not use another indicator (ROA, ROS, CROA, CROE, CROS) they refer to in the literature review?

Methodology

• In the references, they should put a reference to the database from which they extracted the data and put a quotation in the text.
• In the methodology, the authors speak of a hypothesis, but then in the results section, they test a set of hypotheses. The hypotheses should be formulated in the introduction section.
• It is understood that a cross-sectional study was conducted due to data limitations. Was the cross-sectional study conducted for the year 2019? They should indicate in the methodology the year under study.
• The authors speak in one hypothesis but are analyzing more than one hypothesis that needs to be formulated in the introduction section.

Findings

• The sentences of lines 253 to 256 must be clarified, it is not understood what the authors mean!
• In line 262 "more than six times higher than the...", Poland's is more than 5 times higher, so it is better to change the sentence to "more than five times higher than the...".
• They should read the text that describes the various Tables and standardize, because sometimes they use the values found in Table 1 other times they use approximate values with one decimal place and others with two decimal places, this type of analysis is confusing for a reader, for example, in line 264 they place the value 4.5% (value rounded to one decimal place) and in the next row they place the value of table 1 (7.25%).
• In line 275 "although half of the sample" should be replaced by "although half of the companies of the sample". The same should be done in line 283, "top 25% of the sample" replaced by "top 25% of the companies of the sample".
• In line 283 where is "At least 16% of the Polish" should be "At least 15% of the Polish" according to the data in Table 1.
• In the first row of Table 1 and Table 4, what does "fin" mean? It should be replaced by "financial". In Table 4 "inv" also must be replaced by "investment".
• In the Tables in the source, replace "own calculation using SPSS" with "Own elaboration". And the text that is in the title of the tables "Columns: HU – Hungary, PO – Poland, CZ – Czech Republic, SK – Slovakia" can be placed under the tables as a note, i.e. Note: HU – Hungary, PO – Poland, CZ – Czech Republic, SK – Slovakia.
• In all tables, you should use as decimal separation the point and not the comma, because in the text the authors using the endpoint for decimal separation (the article must be uniform).
• In lines 293 and 309 remove the endpoint at the end of the word Table 2 and on line 309 remove one of the parentheses "((Table 2.)".
• In the methodology the authors refer to distribution characteristics of the variables and then in the results sometimes comment that " which also results in a distribution of data strongly extending to the right" (line 282 and 283) and in line 342 "did not result in a right-sided distribution in the Hungarian",  so I recommend that they put in Tables 1 and 2 the values of the of Skewness and kurtosis coefficients to justify these sentences.
• The article indicates that clusters were obtained from the variables: financial return on assets ratio and ROE, but does not clarify why they chose 2 clusters?
• They should assign a name to each cluster based on the literature (in the introduction section they should present literature to explain the clusters) and in this way improve section 3.2 characterizing the two clusters.
• Regarding multiple linear regression, never refer to the verification of assumptions for its application, only speak in the coefficient of determination, then and the other assumptions: multicollinearity (VIF), normality and homoscedasticity of the residues?
• The sentence of lines 387 and 388 should be clarified, which quartiles they used, that is, what values did they consider outliers?
• I highlight the importance of the formulation of hypotheses and from what I see there are several, but to formulate them there must be theoretical support.
• In relation to the application of linear regression try to apply the model to the total sample of companies, without dividing by country or by groups. The result may be more interesting. Then the authors can also try introducing the country variable in this previous model as a dummy.
• The idea of linear regression with clusters presents a coefficient of determination of 0%, with certainty that this model does not even verify the assumptions of the application of linear regression. Is there theoretical support to apply this model? An alternative they can try is to carry out the regression analysis for all companies and introduce the variable clusters as a dummy.
• In the results and discussion section, the authors did not present any discussion of the results. They must do so to improve the article.

Conclusions

• Authors should present the implications of the study either in the conclusions or in the discussion.

References

• Review references section and the references in the text according to Instructions for Authors
• Check whether the citations are matched in the text with those in the references section. For example, in references 33 and 34 the authors' surname does not match the citation in the text.

Good work and good luck

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The revised manuscript is acceptable.

Author Response

Thank you very much for the supportive review!

Reviewer 2 Report

I think that there was a substantial improvement. The paper could be clearer but I think it is reasonably good enough. There are some minor suggestions:

 

• Funding: (either delete or add an statement saying something like “no external funding…”)
• Data Availability Statement. As in the previous case either delete or add statement clarifying.
• Acknowledgments: In this section, you can acknowledge any support given which is not covered 499 by the author contribution or funding sections. This may include administrative and technical sup- 500 port, or donations in kind (e.g., materials used for experiments). Please correct this.
• Table 3. Heading presentation “High turnover” should be either on one line ofr two lines but not in one line and two lines,

Author Response

Thank you very much for the supportive review! We corrected and completed the indicated parts of the article:

• Funding: (either delete or add an statement saying something like “no external funding…”)
• Funding: This paper is supported by EFOP-3.6.3-VEKOP-16-2017-00007 – „Young researchers for alent” – supporting careers in research activities in higher education program. This project is co-financed by the European Union and the European Social Fund.
• Data Availability Statement. As in the previous case either delete or add statement clarifying.
• Data Availability Statement: The data presented in this study are openly available in EMIS database
• Acknowledgments: In this section, you can acknowledge any support given which is not covered by the author contribution or funding sections. This may include administrative and technical sup- 500 port, or donations in kind (e.g., materials used for experiments). Please correct this.
• Only the all the authors worked ont he article, this row was deleted.
• Table 3. Heading presentation “High turnover” should be either on one line or two lines but not in one line and two lines,
• We edited it in two lines

Reviewer 3 Report

An opportunity for improvement was given by the reviewers and the authors limited themselves to changing some of the "easiest" recommendations. Some things are presented without theoretical support (such as explaining why the ROE indicator was chosen). In the statistical part, they did nothing to determine which indicator had the greatest correlation with the financial investment. The authors were unable to formulate the hypothesis(es) in this scientific study. In the results section, they use statistics to test a set of hypotheses that are not formulated in the introduction section. The results of the presented regression models are not of quality, so you should consider introducing other variables into the model or perhaps using data from several years and using the panel data model. In the article, there is no discussion, and a discussion is fundamental in a scientific article. There are no implications either. Some in-text citation rules and bibliographic references were not complied with. Therefore, I consider that an article of this nature does not meet the requirements to be published in Economies.

Author Response

Thank you very much for your detailed and fair review again! We corrected and completed the indicated parts of the article:

An opportunity for improvement was given by the reviewers and the authors limited themselves to changing some of the "easiest" recommendations. Some things are presented without theoretical support (such as explaining why the ROE indicator was chosen).

We corrected this part of the article as follows: we wanted to demonstrate that the pharmaceutical companies put their company in a better position in the equity investment market by making higher risk financial investment decisions. This better position is shown by the dividend expectations that approximate by the ROE the best.

In the statistical part, they did nothing to determine which indicator had the greatest correlation with the financial investment.

We corrected this part of the article as follows: There are more companies those realise financial income but the values of financial instruments of them in the balance sheet show 0. So the contact of the financial instruments ratio and the average return of the financial investments with ROE indicates weaker correlations. This is the reason why these factors as input variables haven't been involved into the regression model.

The authors were unable to formulate the hypothesis(es) in this scientific study. In the results section, they use statistics to test a set of hypotheses that are not formulated in the introduction section.

 We formulate the hypothesis in the introduction section (in the rows of 164-170) as follows: the pharmaceutical companies make higher risk financial investment decisions (and thus realise higher financial returns on their total assets) in order to put their company in a better position in the equity investment market, which expressed by the return of equity (ROE) indicator that  approximates the best way the dividend expectations. So the ROE in the pharmaceutical industry in the Visegrad Countries is significantly affected by the indicator of the financial income per all asset, and in the material and method section (in the row 270) as follows:

ROE =  + Financial income/All assets +   (p < 0,05)

(5)

The results of the presented regression models are not of quality, so you should consider introducing other variables into the model or perhaps using data from several years and using the panel data model.

In the EMIS database the required data was only available for the last year, so we were unable to use data from earlier years (research in this area will be continued using a different database, using a panel method). We tried to introduce the countries as dummy variable and also the financial investment ratio and the average return on financialfin investments separately as input variable, but we did not find correlation between these factors and ROE.

In the article, there is no discussion, and a discussion is fundamental in a scientific article.

We tried to manage in every case the given results and their evaluation in one section in the chapter 3, because we considered it necessary and logical to write the evaluation of results directly after the calculation of results. At the time of writing this article, we had seen a similar solution in previous Businesses articles, which is why we dared to use this form of editing.

There are no implications either.

We formulated the conclusion as follows (in the rows of 500-504): the conslusion is that, since statistical relationship is not detectable between the ROE expressing dividend expectations and the financial income per asset indicator, it is not typical for pharmaceutical companies to make higher risk decisions in the financial investment market in order to achieve a better position in view of equity investors.

Some in-text citation rules and bibliographic references were not complied with.

We checked the references and corrected the inaccurate ones in the text and in the list.

 

 

Round 3

Reviewer 3 Report

I see the authors are not familiar with formulating hypotheses. Formally, when one intends to study causal relationships, a hypothesis must be formulated as follows: Hypothesis: The X variable positively (or negatively) influences the Y variable. So that later it can be tested with statistical methods. What is your hypothesis understudy? I continue to indicate that the authors are not testing a single hypothesis, see, for example, table 4 induces you to test two hypotheses:

Hipótese 1: The financial investment ratio in the pharmaceutical industry in each of the countries (CZ, PO, HU, SK) influence negatively (but here you wanted to study positively?) the return on equity (ROE).

Hipótese 2: The Average return on financial investment in the pharmaceutical industry in each of the countries (CZ, PO, HU, SK) influence negatively (but here you wanted to study positively?) the return on equity (ROE).

Table 5 suggests the formulation of another hypothesis, Table 6 also suggests the formulation of another hypothesis. Table 7 is the one that responds to the hypothesis that I think they want to formulate and that I await its formulation. Why the results in tables 4, 5 and 6 do not simplify and instead present a correlational study and show that the correlations between the variables under study are not significant, indicating in which countries the correlations are higher and lower. I can't understand why they apply a regression when the correlation of the variables must be very weak and the regression model shows poor quality results, as you have already indicated, it does not check the assumptions.

Yes, in chapter 3 the results are presented and interpret! But, they do not discuss, that is, compare the results obtained with those existing in the literature. Does your study corroborate or not with other studies in the literature review? What studies (authors) meet your conclusions or which studies (authors) contradict your conclusions. This part is fundamental in an article, that is, making the connection between theory and results.

In lines 158 to 160, it is not enough to put a justification, this justification has to be supported in the literature. Who are the authors who support the statement presented?

In formula (5) they must remove (p < 0.05).

They must check if they are complying with the instructions for authors, https://www.mdpi.com/journal/economies/instructions

Good Work

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Round 4

Reviewer 3 Report

I wish you the best of luck in continuing your investigation and in future investigations.