nep-bec New Economics Papers
on Business Economics
Issue of 2006‒12‒16
24 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The rise of individual performance pay By Kvaløy, Ola; Olsen, Trond E.
  2. Managerial Reputation Concerns, Outside Monitoring, and Investment Efficiency By Lily Qiu
  3. Subjective evaluation of performance through individual evaluation interview : theory and empirical evidence from France By Marc-Arthur Diaye; Nathalie Greenan; Michal Urdanivia
  4. Mergers and risk By Craig H. Furfine; Richard J. Rosen
  5. Family Firms, Paternalism, and Labor Relations By Holger M. Mueller; Thomas Philippon
  6. Financial market integration and the value of global diversification: evidence from US acquirers in cross-border mergers and acquisitions By Francis , Bill B; Hasan , Iftekhar; Sun , Xian
  7. Labor-Managed Firms By Louis Putterman
  8. Business cycles: a role for imperfect competition in the banking system By Federico S. Mandelman
  9. Ressources, compétences et stratégie de la firme : Une discussion de l’opposition entre la vision Porterienne et la vision fondée sur les compétences. By Fernand AMESSE; Arman AVADIKYAN; Patrick COHENDET
  10. The Role of Debt and Equity Finance over the Business Cycle By Francisco Covas; Wouter J. den Haan
  11. The performance of the European market for corporate control : evidence from the 5th takeover wave By Martynova,Marina; Renneboog,Luc
  12. Endogenous timing with free entry By Antonio TESORIERE
  13. How does leadership support the activity of communities of practice ? By Paul Muller
  14. Outsourcing Induced by Strategic Competition By Yutian Chen; Pradeep Dubey; Debapriya Sen
  15. Service Offshoring: A Challenge for Employment? Evidence from Germany By Deborah Schöller
  16. Organizing Innovation: Complementarities Between Cross-Functional Teams By James H. Love; Stephen Roper; Giovanni Mangiarotti
  17. Bargaining, Reputation and Equilibrium Selection in Repeated Games with Contracts By Dilip Abreu; David G. Pearce
  18. Private monitoring with infinite histories By Christopher Phelan; Andrzej Skrzypacz
  19. Understanding the processes of firm growth - a closer look at serial growth rate correlation By Alex Coad
  20. Equilibrium Layoff as Termination of a Dynamic Contract By Wang, Cheng
  21. Innovation and firm growth in "complex technology" sectors : a quantile regression approach By Alex Coad; Rekha Rao
  22. Oil dependence and economic instability By Luís Aguiar-Conraria; Yi Wen
  23. Mark-up and Capital Structure of the Firm facing Uncertainty By Jean-Bernard Chatelain
  24. Establishment size dynamics in the aggregate economy By Esteban Rossi-Hansberg; Mark L. J. Wright

  1. By: Kvaløy, Ola (Norsk hotellhøgskole, Institutt for økonomi og ledelse, University of Stavanger); Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Why does individual performance pay seem to prevail in human-capital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer-dependent incentives. In a setting with team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.
    Keywords: Relational contracts; multiagent moral hazard; indispensable human capital
    JEL: D23 J33 L14
    Date: 2006–12–11
  2. By: Lily Qiu
    Date: 2005
  3. By: Marc-Arthur Diaye (CEE - Centre d'Etudes de l'Emploi - [Ministère de la Recherche][Ministère chargé de l'Emploi], EPEE - centre d'Etudes des Politiques Economiques de l'université d'Evry - [Université d'Evry-Val d'Essonne]); Nathalie Greenan (CEE - Centre d'Etudes de l'Emploi - [Ministère de la Recherche][Ministère chargé de l'Emploi]); Michal Urdanivia (CEE - Centre d'Etudes de l'Emploi - [Ministère de la Recherche][Ministère chargé de l'Emploi], CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Individual evaluation interviews have become a widespread practice. 52 % of employees in French manufacturing firms over 50 employees declared an annual individual evaluation interview in 1997. However whereas the problem of constructing an optimal contract with subjective evaluation (which is defined simply as a signal in most papers) receives a large attention, firm-level evaluation interviews are strikingly left aside from economic analysis. This paper aims at identifying the underlying logics of individual evaluation interviews in the case of individual production and of team production. Especially, it aims at analyzing the relationships between effort, wage distribution within the firms and individual evaluation interviews. From a theoretical standpoint, three papers by Alchian and Demsetz (1972), by Che and Yoo (2001) and by MacLeod (2003) are closely related to our paper and from an empirical point of view, a recent paper by Engellandt and Riphahn (2004). We test in our paper four predictions. First, evaluation interviews have a positive impact on effort. Second, evaluation interviews increase the effort through two<br />effects : the classical incentive effect and also a high selection effect. Third, evaluation interviews are associated with positive beliefs regarding wage and work recognition. Finally, evaluation interviews are associated with monetary gains for employees. These predictions are tested using a matched employer/employee survey on Computerization and Organizational Change (survey «Changements Organisationnels et Informatisation», C.O.I.), conducted in 1997 over a sample of about 4 000 firms and 9 000 employees.
    Keywords: Subjective evaluation, Principal-Agent model, personnel economics, super-modularity.
    Date: 2006–12–07
  4. By: Craig H. Furfine; Richard J. Rosen
    Abstract: This paper examines the impact of mergers on default risk, finding that, on average, a merger increases the default risk of the acquiring firm. This is surprising for two reasons: risk reduction is among the reasons commonly cited for mergers, and asset diversification should reduce default risk unless the newly-merged firm takes some action to increase risk. We associate the risk increase with mergers satisfying one of a trifecta of conditions related to agency problems: mergers financed with stock, acquirers with a high market- to-book ratio, and acquirers with poor stock price performance prior to a merger announcement. We also demonstrate higher levels of default risk are not accompanied by higher post- merger returns.
    Keywords: Bank mergers ; Risk management
    Date: 2006
  5. By: Holger M. Mueller; Thomas Philippon
    Abstract: Using firm-, industry-, and country-level data, we document a link between family ownership and labor relations. Across countries, we find that family ownership is relatively more prevalent in countries in which labor relations are difficult, consistent with firm-level evidence suggesting that family firms are particularly effective at coping with difficult labor relations. Our cross-country results are robust to controlling for minority shareholder protection and various other potential determinants of family ownership. Our results also hold if we use strike data from the 1960s to predict cross-country variation in family ownership thirty years later. We address causality in two ways. First, we instrument our measure of the quality of labor relations using 'Labor Origin', a variable describing the extent to which the emerging European liberal states in the 18th and 19th centuries confronted guilds and labor organizations. Second, making use of within-country variation at the industry level, we show that - controlling for industry and country fixed effects - industries that are more labor dependent have relatively more family ownership in countries with worse labor relations.
    JEL: D21 D23 G30 J5
    Date: 2006–12
  6. By: Francis , Bill B (Lally School of Management and Technology); Hasan , Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute and Bank of Finland); Sun , Xian (US Department of Treasury, Risk Analysis Department)
    Abstract: Using theories of internal capital markets, this paper examines the link between financial market integration and the value of global diversification. Based on a sample of 1,491 completed cross-border mergers and acquisitions (M&As) conducted by US acquirers during the 1990–2003 period, we find that, in general, US shareholders gain significant positive abnormal returns following the announcement of the merger/acquisition. Specifically, firms that acquire/merge with targets from countries with financially segmented markets experience significantly higher positive abnormal returns than those that acquire/merge with targets from countries with financially integrated capital markets. We find that the significantly higher positive returns are driven particularly by deals between firms from unrelated industries. These firms with higher announcement returns are also characterized by positive and significant post-merger operating performance. This finding is consistent with our event study results and suggests that the overall improvement in the merged firms’ performance is likely due to the influx of internal capital from wholly integrated acquirers to segmented targets, firms that, on average are usually faced with higher capital constraints.
    Keywords: financial market integration; global diversification; internal capital markets; mergers; acquisitions
    JEL: G15 G31 G34
    Date: 2006–12–14
  7. By: Louis Putterman
    Date: 2006
  8. By: Federico S. Mandelman
    Abstract: This paper studies the cyclical pattern of ex post markups in the banking system using balance-sheet data for a large set of countries. Markups are strongly countercyclical even after controlling for financial development, banking concentration, operational costs, inflation, and simultaneity or reverse causation. The countercyclical pattern is explained by the procyclical entry of foreign banks, which occurs mostly at the wholesale level and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies, which are aimed at deterring entry into retail niches and which, in turn, dampen bank markups. In the second part of the paper, I develop a general equilibrium model that accounts for these features of the data. I find that this monopolistic behavior in the intermediary financial sector increases the volatility of real variables and amplifies the business cycle. I interpret this bank-supply channel as an extension of the credit channel pioneered by Bernanke and Blinder (1988).
    Date: 2006
  9. By: Fernand AMESSE; Arman AVADIKYAN; Patrick COHENDET
    Abstract: En distinguant information et connaissance nous développons une approche de la firme fondée sur les compétences intégrant les perspectives stratégiques et évolutionnistes. Nous insistons particulièrement sur la dynamique de co-construction des compétences distinctives au niveau de la firme et des compétences communes au niveau de l’industrie. Nous illustrerons ce processus de co-construction à travers les cas de la modularité et de la gestion de plateforme s cognitives dans un contexte inter organisationnel.
    Keywords: information, connaissance, approche fondée sur les compétences, dynamique de coordination inter organisationnelle ; compétences distinctives et communes, modularité.
    JEL: L10 L22 O32 M10
    Date: 2006
  10. By: Francisco Covas; Wouter J. den Haan
    Abstract: The authors show that debt and equity issuance are procyclical for most listed U.S. firms. The procyclicality of equity issuance decreases monotonically with firm size. At the aggregate level, however, the authors' results are not conclusive: issuance is countercyclical for very large firms that, although few in number, have a large effect on the aggregate because of their enormous size. If firms use the standard one-period contract, then the shadow price of external funds is procyclical and the cyclicality decreases with firm size. This property generates equity to be procyclical and--as in the data--the procyclicality decreases with firm size. Other factors that cause equity to be procyclical in the model are a countercyclical price of risk and a countercyclical cost of equity issuance. The model (i) generates a countercyclical default rate, (ii) magnifies shocks, and (iii) generates a stronger cyclical response for small firms, whereas the model without equity does the exact opposite.
    Keywords: Financial stability; Business fluctuations and cycles
    JEL: E3 G1 G3
    Date: 2006
  11. By: Martynova,Marina; Renneboog,Luc (Tilburg University, Center for Economic Research)
    Abstract: For the 5th takeover wave, European M&As were expected to create significant takeover value: the announcement reactions were strongly positive for target shareholders (more than 35%) and the bidding shareholders also expected to gain a small though significant increase in market value of 0.5%. While, most of the expected takeover synergies are captured by the target firm shareholders, The combined value creation is significantly positive. However, the expected value strongly depends on the wave pattern, with optimistic expectations at the climax of the wave and a more pessimistic outlook at the decline. We establish that the characteristics of the target and bidding firms and of the bid itself have a significant impact on takeover returns. While some of our results have been documented for other markets of corporate control (e.g. US), a comparison of the UK and Continental European M&A markets reveals that the corporate environment is an important factor affecting the market reaction to takeovers: (i) In case a UK firm is taken over, the abnormal returns exceed those in bids involving a Continental European target. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure environment in Continental Europe enable bidding firms to invent takeover strategies that allow them to act opportunistically towards target firm's incumbent shareholders; more specifically, partial acquisitions and acquisitions with undisclosed terms of transaction.
    Keywords: takeovers;mergers and acquisitions;diversification;hostile takeover;means of payment;cross-border acquisitions;private target;partial acquisitions
    JEL: G34
    Date: 2006
  12. By: Antonio TESORIERE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: A free entry model with linear costs is considered where firms first choose their entry time and then compete in the market according to the resulting timing decisions. Multiple equilibria arise allowing for infinitely many industry output configuations encompassing one limit-output dominant firm and the Cournot equilibrium with free entry as extreme cases. Sequential entry is never observed. Both Stackelberg and Cournot-like outcomes are sustainable as equilibria however. When the number of incumbents is given, entry is always prevented, and industry output is sometimes larger than the entry preventing level
    Keywords: Free entry, Market leadership, Entry prevention
    JEL: L11 L13
    Date: 2006–11–15
  13. By: Paul Muller
    Abstract: the purpose of this paper is to present leadership as an important mechanism underlying the coordination and the cohesion of communities of practice. More precisely, it will be shown that an important factor conditioning the coordination and the cohesion of a community rests on the leaders’ capacity to influence individual behaviors. This capacity of influence is grounded on the high degrees of reputation and trust they enjoy within the community. However, coordination of individual behaviors is not ensured by the mere existence of leadership. A simulation model points out the conditions under which leadership forms an efficient coordinating device.
    Keywords: communities of practice, leadership, reputation, exit, loyalty, coordination, social simulation.
    JEL: L23 D23
    Date: 2006
  14. By: Yutian Chen; Pradeep Dubey; Debapriya Sen
    Date: 2006–12–08
  15. By: Deborah Schöller (Universität Hohenheim)
    Abstract: Besides material offshoring, economists have started to analyze the impact of service offshoring on domestic employment. Services are of particular interest since their significance has grown not only in terms of quantity, but also of qualitative understanding. One decade ago, most services were considered non-tradable, but the appearance of new information and communication technologies has contributed to overcoming geographical distance. The introduction of the paper aims at giving an appropriate definition of service offshoring also taking into account the different motives behind offshoring. The theoretical part gives a brief literature overview of the predicted effects of offshoring on domestic employment. The empirical part first compares import data of computing and information as well as other business services and states that service offshoring is more relevant in Germany than in most other countries. Secondly, German service offshoring intensities are calculated on a sectoral basis using input-output data. This measurement represents the proportion of imported service inputs used in home production. Germany’s average service offshoring intensity more than doubled from 1991 to 2002. Besides this, indications for a possible negative correlation between German service offshoring and manufacturing employment are given. Thirdly, the impact of service offshoring on German domestic manufacturing employment is estimated at a sectoral level. The author refers to the labor demand specification of Hamermesh using sectoral wages, output and other input prices as exogenous variables. The estimation results indicate that service offshoring was negatively related to manufacturing employment in Germany between 1991 and 2000.
    Keywords: Service Offshoring, Employment, Globalization
    JEL: F1 F2
    Date: 2006–12
  16. By: James H. Love; Stephen Roper; Giovanni Mangiarotti
    Abstract: Cross-functional teams play a potentially important part in the innovation process enabling knowledge sharing, the development of trust and overcoming spatial and organizational barriers. Using a supermodularity approach, we focus on potential complementarities which may arise when cross-functional teams are used in different elements of the innovation process in UK and German manufacturing plants. Using optimal combinations of cross-functional teams in the innovation process increases innovation success in the UK by 29.5 per cent compared to 9.5 per cent in Germany. Patterns of complementarity are complex, however, but are more uniform in the UK than in Germany. The most uniform complementarities are between product design and development and production engineering, with little synergy evident between the more technical phases of the innovation process and the development of marketing strategy. In strategic terms, our results suggest the value of using cross-functional teams for the more technical elements of the innovation process but that the development of marketing strategy should remain the domain of specialists.
    Keywords: Innovation; cross-functional terms; complementarities; UK; Germany
    JEL: O15 O31 O32
    Date: 2006
  17. By: Dilip Abreu; David G. Pearce
    Date: 2006–12–08
  18. By: Christopher Phelan; Andrzej Skrzypacz
    Abstract: This paper develops new recursive methods for studying stationary sequential equilibria in games with private monitoring. We first consider games where play has occurred forever into the past and develop methods for analyzing a large class of stationary strategies, where the main restriction is that the strategy can be represented as a finite automaton. For a subset of this class, strategies which depend only on the players’ signals in the last k periods, these methods allow the construction of all pure strategy equilibria. We then show that each sequential equilibrium in a game with infinite histories defines a correlated equilibrium for a game with a start date and derive simple necessary and sufficient conditions for determining if an arbitrary correlation device yields a correlated equilibrium. This allows, for games with a start date, the construction of all pure strategy sequential equilibria in this subclass.
    Date: 2006
  19. By: Alex Coad (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], LEM - Laboratory of Economics and Management - [Sant'Anna School of Advanced Studies])
    Abstract: Serial correlation in annual growth rates carries a lot of information on growth processes - it allows us to directly observe firm performance as well as to test hypotheses. Using a 7-year balanced panel of 10 000 French manufacturing firms, we observe that small firms typically are subject to negative correlation of growth rates, whereas larger firms display positive correlation. Furthermore, we find that those small firms that experience extreme positive or negative growth in any one year are unlikely to repeat this performance in the following year.
    Keywords: Serial correlation, firm growth, quantile regression.
    Date: 2006–12–06
  20. By: Wang, Cheng
    Abstract: In a dynamic model of the labor market with moral hazard, equilibrium layoff is modeled as termination of an optimal long-term contract. Termination, together with compensation (current and future), is used as an incentive device to induce worker efforts. I then use the model to study analytically the effects of a firing tax on termination and worker compensation and utility. There are three layers to the impact of a firing tax on layoff and worker utility. A higher firing tax could either reduce aggregate termination and increase worker utility, or increase aggregate termination and reduce worker utility, depending on the structure of the environment.
    Date: 2006–12–11
  21. By: Alex Coad (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], LEM - Laboratory of Economics and Management - [Sant'Anna School of Advanced Studies]); Rekha Rao (LEM - Laboratory of Economics and Management - [Sant'Anna School of Advanced Studies])
    Abstract: Innovation is commonly seen as the principal engine of economic development. In this paper, we investigate the microfoundations of economic growth by relating innovation to sales growth at the firm-level, for incumbent firms in four «complex technology» sectors. The average firm, which experiences only modest growth, may grow for a number of reasons that may or may not be related to «innovativeness». However, given that firms are heterogeneous and that growth rates distributions are typically heavy-tailed, it may be misleading to use regression techniques that focus on the average firm. Using a quantile regression approach, we observe that innovativeness is of crucial importance for a handful of «superstar» fast-growth firms.
    Keywords: Innovation, firm growth, quantile regression.
    Date: 2006–12–06
  22. By: Luís Aguiar-Conraria; Yi Wen
    Abstract: We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making fluctuations driven by self-fulfilling expectations easier to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.
    Keywords: Petroleum industry and trade ; Economic stabilization
    Date: 2006
  23. By: Jean-Bernard Chatelain (PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: This note shows that, with pre-set price and capital decisions of firms facing uncertainty and financial market imperfections, price, mark up and the expected degree of capacity utilization (resp. capital) decreases (resp. increases) with the firm internal net worth.
    Keywords: Capital, Pricing, capital market imperfections
    Date: 2006–12–09
  24. By: Esteban Rossi-Hansberg; Mark L. J. Wright
    Abstract: Why do growth and net exit rates of establishments decline with size? What determines the size distribution of establishments? This paper presents a theory of establishment dynamics that simultaneously rationalizes the basic facts on economy-wide establishment growth, net exit, and size distributions. The theory emphasizes the accumulation of industry-specific human capital in response to industry-specific productivity shocks. It predicts that establishment growth and net exit rates should decline faster with size and that the establishment size distribution should have thinner tails in sectors that use human capital less intensively or physical capital more intensively. In line with the theory, the data show substantial sectoral heterogeneity in U.S. establishment size dynamics and distributions, which is well explained by variation in physical capital intensity.
    Date: 2006

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