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on Business Economics |
| By: | Karen E. Dynan; Douglas W. Elmendorf; Daniel E. Sichel |
| Abstract: | The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-54&r=bec |
| By: | Beverly J. Hirtle; Kevin J. Stiroh |
| Abstract: | The U.S. banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks' retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across U.S. banks is linked to significantly lower equity market and accounting returns for all banks but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low-return one. |
| Keywords: | Banks and banking ; Retail trade ; Bank profits |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:233&r=bec |
| By: | Robert C. Feenstra; Barbara J. Spencer |
| Abstract: | We explore the relationship between proximity of buyers and sellers and the organizational form of outsourcing. Outsourcing can be "contractual" in which suppliers undertake specific investments or involve "generic" market transactions. Proximity expands the variety of products sourced through contracts abroad rather than at home, but the range of generic imports is unchanged. A higher-quality foreign workforce raises the variety of contractual trade, but at the expense of generics. We confirm these predictions using data for ordinary versus processing exports from Chinese provinces to destination markets and also the predictions of an extended model that allows for multinational production. |
| JEL: | F1 L24 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11885&r=bec |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects. |
| Keywords: | Petroleum products - Prices ; Monetary policy ; Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0510&r=bec |
| By: | Cedric Tille |
| Abstract: | A growing body of research emphasizes the direct impact of exchange rate movements on the value of U.S. foreign assets. Because a substantial amount of U.S. assets are denominated in foreign currencies, a depreciation of the dollar leads to large capital gains. First, we present a detailed decomposition of the U.S. balance sheet, which exhibits substantial leverage in terms of currencies and across asset categories. The United States holds 50 percent of GDP in foreign-currency assets and is long in FDI (foreign direct investment) and equity positions and short in debt and banking positions. Then, we incorporate these features of international financial integration in a simple general equilibrium model and analyze how they affect the international transmission of monetary shocks. We find that financial integration is a central component of the model, with the valuation gains from an exchange rate depreciation leading to a welfare effect that is at least as large as that stemming from nominal rigidities alone but possibly much larger. We characterize how interdependence is affected by the composition of the portfolio across asset categories and how structural features of the model interact with financial integration. |
| Keywords: | Foreign exchange ; Macroeconomics ; International finance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:226&r=bec |
| By: | Hui Guo; Jason Higbee |
| Abstract: | Guo and Savickas [2005] show that aggregate stock market volatility and average idiosyncratic stock volatility jointly forecast stock returns. In this paper, we quantify the economic significance of their results from the perspective of a portfolio manager. That is, we evaluate the performance, e.g., the Sharpe ratio and Jensen*s alpha, of a mean-variance manager who tries to time the market based on those variables. We find that, over the period 1968-2004, the associated market-timing strategy outperforms the buy-and-hold strategy, and the difference is statistically and economically significant. |
| Keywords: | Stock exchanges |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-073&r=bec |
| By: | Owen A. Lamont; Jeremy C. Stein |
| Abstract: | We document that net equity issuance is considerably more sensitive to aggregate stock returns and Q's than to firm-level stock returns and Q's. Very similar patterns also emerge when we look at merger activity. In light of earlier work (Campbell 1991, Vuolteenaho 2002) which finds that aggregate stock returns are less informative about future cashflows than are firm-level stock returns--and thus, potentially more strongly influenced by investor sentiment--these results suggest that both equity issuance and mergers are to a significant extent driven by market-timing considerations, as opposed to by purely fundamental factors. |
| JEL: | G14 G32 G34 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11882&r=bec |
| By: | Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi |
| Abstract: | In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks. |
| Keywords: | income shares; distribution risk; equity premium; limited market participation |
| JEL: | E3 G1 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:05.10&r=bec |
| By: | Ross Levine; Sergio Schmukler |
| Abstract: | What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989-2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets, with aggregate domestic trading activity being positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market. |
| JEL: | G15 F36 F20 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11894&r=bec |
| By: | Peter Kuhn; Fernando Lozano |
| Abstract: | After declining for most of the century, the share of employed American men regularly working more than 50 hours per week began to increase around 1970. This trend has been especially pronounced among highly educated, high-wage, salaried, and older men. Using two decades of CPS data, we rule out a number of factors, including business cycles, changes in observed labor force characteristics, and changes in the level of men's real hourly earnings as primary explanations of this trend. Instead we argue that increases in salaried men's marginal incentives to supply hours beyond 40 accounted for the recent rise. Since these increases were accompanied by a rough constancy in real earnings at 40 hours, they can be interpreted as a compensated wage increase. |
| JEL: | J22 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11895&r=bec |
| By: | Bjuggren, Per-Olof (Jönköping International Business School, JIBS); Wiberg, Daniel (Jönköping International Business School, JIBS) |
| Abstract: | A necessary criterion for a performance measure in corporate governance is the degree to which it mirrors how well the management succeeds in maximizing firm value. Such a performance measure is marginal q which links changes in firm value to the investments decided by the management. Empirical studies of investment and performance based on marginal q have demonstrated the usefulness of this measure. Most research however, has mainly focused on long-term performance. This paper takes a short-term perspective and, based on the marginal q-theory, considers how market values change in the extreme stock price cycle of a stock market bubble. We find an anomaly in form of a new industry specific effect that, in addition to investment, explains changes in firm value. |
| Keywords: | Marginal q; Investment; Stock bubbles; Different industries |
| JEL: | G14 G31 G34 L21 |
| Date: | 2005–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0045&r=bec |
| By: | James Dow; Itay Goldstein; Alexander Guembel |
| Abstract: | A fundamental role of financial markets is to gather information on firms’ investment opportunities, and so help guide investment decisions in the real sector. We argue in this paper that firms’ overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred from producing information. We discuss several commitment devices firms can use to facilitate information production. We show that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2005fe18&r=bec |
| By: | Udell, Gregory F.; Berger, Allen N. |
| Abstract: | The authors propose a more complete conceptual framework for analysis of credit availability for small and medium enterprises (SMEs). In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. They emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies, plus relationship lending. The authors argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadv antaged in lending to opaque SMEs. |
| Keywords: | Banks & Banking Reform,Financial Intermediation,Investment and Investment Climate,Economic Theory & Research,Financial Crisis Management & Restructuring |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3795&r=bec |
| By: | Baaij, M.G.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The focus in research upon resources, dynamic capabilities and competences has challenged firms to apply these concepts to improve their competitive position. Management consulting firms may assist clients in these efforts. However, the roles that management consulting firms fulfill in these processes can differ considerably and are under-researched. Therefore, insight in these different roles and the impact of these roles on clients? competitive positioning in their industries is required. The purpose of this paper is to develop a conceptual framework that highlights the importance of distinguishing both roles and the implications for management consulting firms and for their clients. We illustrate the framework by elaborating on the relationship between both roles and the strategic renewal context of client firms. We conclude by pointing out the increasing importance of the competence leverage role of management consulting firms and how this development might contribute to a more hypercompetitive context for their clients. |
| Keywords: | Competence Building and Leveraging;Management Consulting;Strategic Renewal;Exploitation & Exploration;Knowledge Broker; |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007851&r=bec |
| By: | Mom, T.J.M.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Both in theory as in practice insight is limited about how firms in dynamic environments could organize to manage concurrently both the strategic processes of competence building and competence leveraging. To contribute to this issue, a conceptual framework is developed which considers the ability to exchange knowledge across organization units as a prerequisite for firms to achieve both the goals of competence building and leveraging. The framework shows how several important managerial and organizational determinants, associated with cross-unit knowledge exchange, may stimulate competence-building processes and how they may stimulate competence-leveraging processes. The conceptual framework will be illustrated by two case studies in different contexts of Novartis, one of the leading European life-science companies. These two contexts of respectively ?organization-enabled? and ?web-enabled? knowledge exchange appear to be complementary. The conceptual framework and cases provide insight into (1) possibilities about how firms could organize to deal with the tension between competence building and leveraging processes, and (2) how managing the determinants of horizontal knowledge exchange can contribute to changing a firm?s actual mixture of competence building/leveraging processes into a more desired strategic mixture. |
| Keywords: | Competence Building;Competence Leveraging;Exploration & Exploitation;Horizontal Knowledge Flows;Novartis; |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007852&r=bec |
| By: | Fortanier, F.; Muller, A.R.; Tulder, R.J.M. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | This paper explores the hitherto underemphasized role of strategic fit between organizational structure and integration-responsiveness pressures as moderator in the internationalization-performance relationship. We suggest a new way of measuring organizational structure (and consequently strategic fit) based on archival data rather than questionnaires, and include these in our regression analysis on a sample of 332 Fortune companies. |
| Keywords: | Strategic Fit;Performance;Internationalization;Internationalization-Performance Relationship; |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007855&r=bec |
| By: | Kasper,Hans (METEOR) |
| Abstract: | This paper investigates the relationship between corporate culture and market orientation using a different methodology to those usually found done in empirical studies on this topic. Conventionally, one or two key informants provide information on the firm’s marketing practices in large scale quantitative cross-sectional studies; these few respondents provide their opinion on the firm’s actual marketing practices which are then considered as a reliable representation of both the (whole) firm’s culture and its market orientation. We have taken a different approach. Firstly, we chose to do multiple case studies in stead of cross sectional research. These case studies were small scale and qualitative; next a large(r) scale quantitative study was done within those organisations. Secondly, all employees in an organisation were invited to participate in the study: only then is it possible to measure culture as the shared beliefs in the company. Corporate culture itself as well as the marketing practices have been investigated as two separate constructs in our case studies. Both are measured via employee perceptions. Thirdly, we are looking at the possible configuration of market orientation and corporate culture. Almost all of the propositions generated are supported. The degree of openness appeared to be crucial to an organisation’s market orientation. Moreover, such a culture is also resultsoriented, employee-oriented and professional. It also has a balanced position on the two other dimensions: pragmatic/normative and loose/tight control. From the marketing perspective, the essential building blocks of a market oriented culture include: the internal cooperation, internal communication, drive to be the best, lack of pursuing self interest, learning from mistakes and from experiences in the market place, clarity about customer needs and better relative quality than competitors’. Because market orientation and corporate culture were measured as two distinct constructs, this study offers new insights in both domains as to what organisations should change to be(come) market oriented. |
| Keywords: | Strategy; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005051&r=bec |
| By: | Thomas H. Klier; Dan McMillen |
| Abstract: | A linearized version of Pinkse and Slade’s (1998) spatial probit estimator is used to account for the tendency of auto supplier plants to cluster together. By reducing estimation to two steps – standard probit or logit followed by two-stage least squares – linearization produces a model that can be estimated using large datasets. Our results imply significant clustering among older plants. Supplier plants are more likely to be in counties that are near assembly plants, that include interstate highways, and that are near other counties with supplier plants. New plants show no additional tendency toward clustering beyond that shown by older plants. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-18&r=bec |
| By: | Subhayu Bandyopadhyay; Howard J. Wall |
| Abstract: | With outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. When there is a minimum wage, an outsourcing tax might be desirable and the usual profit-shifting objectives of an export subsidy are mitigated, perhaps completely, because it might lead to higher unemployment. Also, increased international competition has no affect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. Under wage flexibility, an outsourcing tax cannot be justified and the profit-shifting motive is the same as in a model without outsourcing. Further, if export subsidies are not possible due to WTO regulations, it is optimal to subsidize rather than to tax outsourcing. Finally, the effect of increased foreign competition on welfare depends on the relative factor intensities of the two sectors. |
| Keywords: | Contracting out ; Labor market |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-074&r=bec |
| By: | Lorenz Goette (University of Zurich and CEPR and IZA Bonn); David Huffman (IZA Bonn) |
| Abstract: | This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: firms frequently cut real wages, increasing nominal wages by less than the inflation rate, but they very seldom cut nominal wages. This pattern suggests that workers exhibit a special resistance to nominal wage cuts, which is hard to explain if they are purely rational as assumed in standard economic models. We argue that resistance to nominal wage cuts is best understood in terms of a model where salient features of a situation trigger emotional responses and sway judgment of the entire situation. Since a cut in the nominal wage leads to a very salient reduction in pay, we argue that the reaction of workers is dominated by emotions. On the other hand, an increase in the nominal wage may produce a more deliberative evaluation, because there is no immediately salient feature. The individual needs to compare the inflation rate to the wage change before it becomes clear whether the change increases or decreases utility, thus producing a more measured response. We present evidence from experiments showing that self-reported emotions respond strongly to nominal wage cuts, but not to decreases in the real wage achieved through increasing the nominal wage by less than the inflation rate. Although emotions may benefit individual workers, by strengthening their bargaining position and preventing wage cuts, they may also lead to worse outcomes, in the form of higher unemployment. |
| Keywords: | wage rigidity, affect, emotions, money illusion, loss aversion |
| JEL: | E24 E31 E32 B49 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1895&r=bec |
| By: | Lucian Bebchuk; Yaniv Grinstein |
| Abstract: | We study the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation. Controlling for past stock performance, we find a positive correlation between CEO compensation and the CEO's past decisions to increase firm size. This correlation is economically meaningful; for example, other things being equal, CEOs who in the preceding three years were in the top quartile in terms of expanding by increasing the number of shares outstanding receive compensation that is higher by one-third than the compensation of CEOs belonging to the bottom quartile. We also find that stock returns are correlated with subsequent CEO pay only to the extent that they contribute to expanding firm size; only the component of past stock returns not distributed as dividends is correlated with subsequent CEO pay. Finally, we find an asymmetry between increases and decreases in size: while increases in firm size are followed by higher CEO pay, decreases in firm size are not followed by reduction in such pay. The association we find between CEOs' compensation and firm-expanding decisions undertaken earlier during their service could provide CEOs with incentives to expand firm size. |
| JEL: | D23 G32 G38 J33 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11886&r=bec |
| By: | Lucian A. Bebchuk; Robert J. Jackson, Jr. |
| Abstract: | Because public firms are not required to disclose the monetary value of pension plans in their executive pay disclosures, financial economists have generally analyzed executive pay using figures that do not include the value of such pension plans. This paper presents evidence that omitting the value of pension benefits significantly undermines the accuracy of existing estimates of executive pay, its variability, and its sensitivity to performance companies. Studying the pension arrangements of CEOs of S&P 500, we find that the CEOs' plans had a median actuarial value of $15 million; that the ratio of the executives' pension value to the executives' total compensation (including both equity and non-equity pay) during their service as CEO had a median value of 34%; and that including pension values increased the median percentage of the executives' total compensation composed of salary-like payments during and after their service as CEO from 15% to 39%. |
| JEL: | D23 G32 G34 G38 J33 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11907&r=bec |