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on Business Economics |
| By: | Timothy Cogley (W. P. Carey School of Business Department of Economics) |
| Abstract: | This paper uses consumption data to estimate the trend growth rate for the “new economy.'' The analysis starts with the assumption that a trend break in GDP should be accompanied by a trend break in consumption. But because consumption is forward looking and smoother than GDP, it should be easier to detect a trend break in the former. The forward looking nature of consumption allows us to incorporate the private expectations of U.S. households about the new economy. The relative smoothness makes it easier to separate changes in trend growth from ordinary cyclical movements. The evidence confirms that there has been an increase in trend growth over the last 5 years, but the increase seems rather modest. The new economy is likely to grow more rapidly than in the 1970s, but not as fast as in the 1950s or early 1960s. |
| JEL: | C11 C32 C53 |
| URL: | http://d.repec.org/n?u=RePEc:asu:wpaper:2133301&r=bec |
| By: | Manuel Santos (W. P. Carey School of Business Department of Economics); Jorge Aseff (No affiliation) |
| Abstract: | In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a package of call options on the firm's stock. We then offer a characterization of optimal stock option compensation schemes. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some efficient algorithms for the computation of optimal contracts in which the observable outcome is drawn from a continuous distribution. These algorithms are useful to address some important issues such as the calibration of a principal-agent model, the degree of risk aversion compatible with current compensation schemes, and the performance of stock option contracts. |
| URL: | http://d.repec.org/n?u=RePEc:asu:wpaper:2133304&r=bec |
| By: | Fabien Couderc (University of Geneva and FAME) |
| Abstract: | This paper investigates instantaneous probabilities of default implied by rating and default events. We propose and apply an alternative measurement approach to standard cohort and homogenous hazard estimators. Our estimator is a smooth nonparametric estimator of intensities, free of bias and unambiguously more accurate. It also avoids the Markovian framework and takes care of censoring. Using Standard & Poor’s ratings database we then show that intensities vary both with respect to calendar time and ageing time. We deeper investigate the behaviour of through-the-cycle default probabilities, update and complement knowledge on documented non Markovian patterns. Results do not support associated timeliness problems but indicate a low reactivity of ratings in terms of magnitude. Because of their target horizon, they indeed integrate the mean reverting feature of default intensities. |
| Keywords: | default intensity; hazard estimation; censored duration; non Markovian framework; through-the-cycle ratings |
| JEL: | C14 C41 G20 G33 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp141&r=bec |
| By: | Fabien Couderc (University of Geneva & FAME); Olivier Renault (Warwick Business School,UK) |
| Abstract: | This paper studies times-to-default of individual firms across risk classes. Using Standard & Poor’s ratings database we investigate common drivers of default probabilities and address two shortcomings of many papers in the credit literature. First, we identify relevant determinants of default intensities using business cycle and credit market proxies in addition to financial markets indicators, and reveal the time-span of their impacts. We show that misspecifications of financial based factor models are largely corrected by non financial information. Second, we show that past economic conditions are of prime importance in explaining probability changes: current shocks and long term trends jointly determine default probabilities. Finally, we exhibit industry contagion indicators which might be helpful to capture leading and persistency patterns of the default cycle. |
| Keywords: | censored durations; proportional hazard; business cycle; credit cycle; default determinants; default prediction |
| JEL: | C14 C41 G20 G33 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp142&r=bec |
| By: | Giovanni Dosi; Giorgio Fagiolo; Andrea Roventini |
| Abstract: | In this paper, we present an evolutionary model of industry dynamics yielding en- dogenous business cycles with 'Keynesian' features. The model describes an economy composed of firms and consumers/workers. Firms belong to two industries. The first one performs R&D and produces heterogeneous machine tools. Firms in the second industry invest in new machines and produce a homogenous consumption good. Consumers sell their labor and fully consume their income. In line with the empirical literature on investment patterns, we assume that the investment decisions by firms are lumpy and constrained by their financial structures. Moreover, drawing from behavioral theories of the firm, we assume boundedly rational expectation formation. Simulation results show that the model is able to deliver self-sustaining patterns of growth characterized by the presence of endogenous business cycles. The model can also replicate the most important stylized facts concerning micro- and macro-economic dynamics. Indeed, we find that investment is more volatile than GDP; consumption is less volatile than GDP; investment, consumption and change in stocks are procyclical and coincident variables; employment is procyclical; unemployment rate is countercyclical; firm size distributions are skewed but depart from log-normality; firm growth distributions are tent-shaped. |
| Keywords: | Evolutionary Dynamics, Agent-Based Computational Economics, Animal Spirits, Lumpy Investment, Output Fluctuations, Endogenous Business Cycles. |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2005/04&r=bec |
| By: | Mark Bergen (University of Minnesota); Mark Ritson (London Business School); Shantanu Dutta (University of Sourthern California); Daniel Levy (Bar-Ilan University); Mark Zbaracki (University of Pennsylvania) |
| Abstract: | In this paper we argue that pricing is all about price changes, and that the costs of price changes are often simultaneously subtle and substantial. We discuss a framework to deal with the dynamics of changing prices. This framework incorporates customer interpretations of price changes, an awareness of the organizational costs of price changes, investments in future pricing processes, and an understanding of the role that supply chains play in price change strategy. The framework can be used at the tactical level to improve the specific price changes chosen and made, at the managerial level to decide whether or not to make a particular price change at all, and at the strategic level to determine what price adjustment processes should be invested in to improve pricing effectiveness in the future. |
| Keywords: | Menu Cost, Myth, Costly Price Change, Cost of Price Adjustment, Dynamic Pricing, Customer Cost of Price Adjustment, Organizational Cost of Price Adjustment, Managerial Cost of Price Adjustment, Supply Chain, Investment in Pricing Processes, Price Change Tactic, Price Change Strategy, Pricing Tactics, Pricing Strategy, Pricing Effectiveness |
| JEL: | M31 M10 M20 L11 L16 E31 D40 D20 |
| Date: | 2005–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505006&r=bec |
| By: | Thomas Seegmuller (EUREQua) |
| Abstract: | The overlapping generations model, like the one studied by Reichlin (1986) or Cazzavillan (2001), can be interpreted as an optimal growth economy where consumption is totally constrained by capital income. In this paper, we analyze steady states and dynamic properties of an extended version of such framework by considering that only a share of consumption expenditures is constrained by capital income. We notably establish that the steady state is not necessarily unique. Moreover, in contrast to the intuition, consumer welfare can increase at a steady state following a raise of the share of consumption constrained by capital income, i.e. the market imperfection. Concerning dynamics, we show that endogenous fluctuations (indeterminacy and cycles) can emerge depending on two parameters : the elasticity of intertemporal substitution in consumption and the elasticity of capital-labor substitution. Such fluctuations appear when these two parameters take values in accordance with empirical studies and without introducing increasing returns or imperfect competition. |
| Keywords: | Finance constraint, steady states, indeterminacy, endogenous cycles |
| JEL: | C62 D91 E32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:v05029&r=bec |
| By: | Hector Chade (W. P. Carey School of Business Department of Economics); Bart Taub (University of Illinois) |
| Abstract: | In an economy with a continuum of individuals, each individual has a stochastic, continuously evolving endowment process. Individuals are risk averse and would therefore like to insure their endowment processes. It is feasible to obtain insurance by pooling endowments across individuals because the processes are mutually independent. We characterize the payoff from an insurance contracting scheme of this type, and we investigate whether such scheme would survive as an equilibrium in a noncooperative setting. |
| URL: | http://d.repec.org/n?u=RePEc:asu:wpaper:2132868&r=bec |
| By: | Besancenot, Damien (University of Paris 2 and LEM (Laboratoire d'économie mathématique)); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | As a reaction to the corporate scandals of the early 2000s, the US Administration dramatically tightened sanctions against managers who disclose misleading financial information. This paper argues that such a reform might come with some unpleasant macroeconomic effects. The model is cast as a game between the manager of a publicly listed company and the supplier of an essential input, under asymmetric information about the type of the firm. The analysis focuses on the Hybrid Bayesian Equilibrium where at least some managers choose to communicate a false information about the true type of the firm. We show that by dissuading "virtuous lies", whereby a manager strives to win time for a financially distressed company, a tougher sanction brings about a higher frequency of default. |
| Keywords: | Financial distress; Disclosure; Honesty; Corporate regulation; Hybrid Bayesian Equilibrium |
| JEL: | D82 G33 G38 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-05005&r=bec |
| By: | Gaia Garino; Christopher Martin |
| Abstract: | We analyse the impact of labour turnover on profits. We extend the efficiency wage model of Salop (1979) by separating incumbent and newly hired workers in the production function. We show that an exogenous increase in the turnover rate can increase profits, but only where firms do not choose the wage. This effect of turnover varies across firms as it depends on turnover costs, the substitutability of incumbents and new hires and other factors. We test our model on UK cross-sectional establishment-level data. We find that the data are consistent with our predictions. |
| Keywords: | Labour Turnover; Turnover Costs; Optimal Turnover |
| JEL: | J21 J23 E3 F4 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:05/10&r=bec |
| By: | Campa, Jose M. (IESE Business School); Hernando, Ignacio (Banco de España) |
| Abstract: | This paper looks at the performance record of M&As that took place in the European Union financial industry in the period 1998-2002. First, the paper reports evidence on shareholder returns from mergers. Merger announcements brought positive excess returns to the shareholders of the target company around the date of the announcement, with a slight positive excess return in the 3-month period prior to announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for either targets or acquirers. The paper also provides evidence on changes in operating performance for the subsample of mergers involving banks. M&As usually involved targets with lower-than-average operating performance for their sector. The transactions resulted in significant improvements in the target banks' performance, beginning on average two years after the transaction was completed. Return on equity of the target companies increased by an average of 7%, and the same firms also experienced efficiency improvements. |
| Keywords: | mergers and acquisitions; financial industry; |
| Date: | 2005–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0588&r=bec |
| By: | Andrew Burke; Holger Görg; Aoife Hanley |
| Abstract: | The paper uses a unique dataset comprise almost the population of 179,306 new ventures who enter the UK market in 1998. The central hypothesis is that the survival function of new ventures has a different specification in dynamic compared to static markets. Estimation of a hazard function supports this hypothesis. In dynamic markets the survival of new ventures is positively related to industry concentration and negatively related to industry growth. The opposite is found to be true for static markets. The results shed new insights into the competitive dynamics of new ventures, optimal strategies for firm survival and also highlight some important effects for competition policy. |
| Keywords: | new firms, start-ups, survival, turbulence, dynamic markets |
| JEL: | L11 M13 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:esi:egpdis:2005-12&r=bec |
| By: | Cédric Perret-Gentil (Union Bancaire Privée); Maria-Pia Victoria-Feser (HEC,University of Geneva) |
| Abstract: | This paper investigates model risk issues in the context of mean-variance portfolio selection. We analytically and numerically show that, under model misspecification, the use of statistically robust estimates instead of the widely used classical sample mean and covariance is highly beneficial for the stability properties of the mean-variance optimal portfolios. Moreover, we perform simulations leading to the conclusion that, under classical estimation, model risk bias dominates estimation risk bias. Finally, we suggest a diagnostic tool to warn the analyst of the presence of extreme returns that have an abnormally large influence on the optimization results. |
| Keywords: | Mean-variance e .cient frontier; Outliers; Model risk; Robust es-timation |
| JEL: | C13 C51 G11 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp140&r=bec |
| By: | Paola Giuri; Salvatore Torrisi; Natalia Zinovyeva |
| Abstract: | This paper explores the complementarity between skills, organizational change and investments in information and communication technology (ICT). Our work contributes to the literature on the effects of ICT by testing the hypothesis of complementarity in a panel of 540 Italian manufacturing firms during the period 1995-2000. Our analysis provides strong support to the hypothesis of complementarity between skills and ICT (which is at the core of the skill-biased technical change theory). We also find some evidence in favour of the skill-biased organizational change hypothesis. The results obtained by drawing on different statistical methods suggest that interactions among ICT, skills and organizational change are complex and non-linear and difficult to explain. |
| Keywords: | Organisational Change, ICT Investment, Workplace Organization, Human Capital, Productivity |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2005/11&r=bec |
| By: | Vereecke, Ann; Muylle, Steve |
| Abstract: | Supply chain collaboration is claimed to yield significant improvements in multiple performance areas: it is believed to reduce costs, to increase quality, to improve delivery, to augment flexibility, to cut procurement cost and lead time, and to stimulate innovativeness. Yet empirical support for the relationship between supply chain collaboration and performance improvement is scarce. Our research adds to this emerging stream of research by providing empirical evidence from the engineering/assembly industries, based on data collected through the International Manufacturing Strategy Survey (IMSS) in Europe. The study reveals that supply chain collaboration is no guarantee for success: performance improvement is only weakly related to the extent of collaboration with customers or suppliers. However, strong improvers in multiple performance areas are found to be heavily engaged in collaboration projects with customers and suppliers, through extensive information exchange and higher levels of structural coordination. |
| Keywords: | supply chain management, collaboration, performance improvement Note |
| Date: | 2005–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2005-3&r=bec |
| By: | De Vos, Ans; Meganck, Annelies; Buyens, Dirk |
| Abstract: | This article examines HR managers’ and employees’ views on the factors affecting employee retention. This is done by integrating findings from the literature on retention management with the theoretical framework of the psychological contract. In a first study a sample of HR managers from a diverse group of public and private firms described the factors they believed to affect employee retention and the retention practices set up in their organization. In a second study, a large and diverse sample of employees reported on the importance attached to five types of employer inducements commonly regarded as retention factors. They also evaluated their employers’ delivery of these inducements and provided information on their loyalty, intentions to stay and job search behaviors. The results of both studies are discussed and implications for HR managers are highlighted. |
| Keywords: | Note |
| Date: | 2005–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2005-5&r=bec |
| By: | Sami Dakhlia (University of Alabama); Paul Pecorino (University of Alabama) |
| Abstract: | In the standard model of a rent-seeking contest, firms optimally employ resources in an attempt to win the contest and obtain the rent. Typically, it is assumed that these resources may be hired at any desired level at some fixed, exogenous per-unit cost. In many real-world rent-seeking contests, however, these resources consist of scarce, talented individuals. We model a rentseeking contest in which the talent available for employment is scarce and in which the rent obtained from winning the contest may also differ from participant to participant. Talent scarcity leads to preemptive hiring by the player receiving the larger rent. In the traditional analysis, as the size of the rents converges, the levels of effort and the probability of winning also converge. By contrast, when talent is scarce, the player receiving the larger rent hires it all and wins the contest with probability 1. This is true even if the difference in rents is small. Interestingly, this outcome may be Pareto-inferior to the outcome associated with the interior Nash equilibrium. We also characterize the condition under which talent ceases to be scarce. For a simple rentseeking game, this requires at least 50% more talent than is employed at the interior Nash equilibrium. |
| Keywords: | rent-seeking, scarce talent, labor market, lobbying, preemptive hiring |
| JEL: | D44 D72 J4 |
| Date: | 2005–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505002&r=bec |
| By: | Nigel Driffield (Aston Business School, Birmingham, UK); Vidya Mahambare (Cardiff Business School, Cardiff UK); Sarmistha Pal (Department of Economics & Finance, Brunel University, UK) |
| Abstract: | While the aggregate macroeconomic analysis of the recent Asian Crisis highlights the moral hazard problem of bad loans in poorly supervised and regulated East Asian economies, there is very little firm-level analysis to characterize it. The present paper attempts to fill in this gap of the literature and focuses on the process of dynamic adjustment of the actual leverage towards the optimum. Our results based on the Worldscope firm-level panel data indicate a close correspondence between excess leverage and excess capital stock and also reveal signs of corporate inertia. This inertia has been evident not only among firms with excess capital stock, but also among those with larger share of short-term debt in the worst affected countries, especially during the pre-crisis and crisis periods; the adjustment process was however speeded up in the post-crisis period. One possible way out of this problem of bad loans would be to develop the equity market and induce the firms to rely more on equity finance. |
| Keywords: | Moral hazard, Over-lending and over-investment, Speed of adjustment, Inertia, Generalised Methods of Moments |
| JEL: | G32 |
| Date: | 2005–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505011&r=bec |