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on Business Economics |
| By: | Coles, Jeffrey; Lemmon, Michael; Meschke, Felix |
| Abstract: | This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)). Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application. |
| JEL: | L20 G34 G32 |
| Date: | 2007–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4374&r=bec |
| By: | R. Antonietti; D. Antonioli |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:593&r=bec |
| By: | Lisa Lynch |
| Abstract: | Using a unique longitudinal representative survey of both manufacturing and nonmanufacturing businesses in the United States during the 1990's, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, nonunionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation. |
| Keywords: | organizational innovation, productivity, human capital, technological change |
| JEL: | D2 J24 M5 O3 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:07-18&r=bec |
| By: | Reena Aggarwal; Isil Erel; René Stulz; Rohan Williamson |
| Abstract: | Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country-level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not. |
| JEL: | G30 G32 G34 G38 K22 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13288&r=bec |
| By: | Dirk Hackbarth (Department of Finance, Olin School of Business, Washington University in St. Louis); Jianjun Maio (Department of Economics, Boston University and Department of Finance, the Hong Kong University of Science and Technology) |
| Abstract: | This paper develops a continuous time real options model to study the interaction between industry structure and takeover activity. In an asymmetric industry equilibrium, firms have an endogenous incentive to merge when restructuring decisions are motivated by operating and strategic benefits. The model predicts that (i) the likelihood of restructuring activities is greater in more concentrated industries or in industries that are more exposed to exogenous shocks; and (ii) the magnitude of returns arising from restructuring to both merger firms and rival firms are higher in more concentrated industries. While recent real options models contend that competition erodes the option value of waiting and hence accelerates the timing of mergers, in our model, increased competition delays the timing of mergers. |
| Keywords: | industry structure; anticompetitive effect; real options; takeovers. |
| JEL: | G13 G14 G31 G34 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-018&r=bec |
| By: | Michael R. King; Eric Santor |
| Abstract: | This study examines how family ownership affects the performance and capital structure of 613 Canadian firms using a panel dataset from 1998 to 2005. In particular, we distinguish the effect of family ownership from the use of control-enhancing mechanisms. We find that freestanding family-owned firms with a single share class have similar market performance than other firms based on Tobin's q ratios, superior accounting performance based on ROA, and higher financial leverage based on debt-to-total assets. By contrast, family-owned firms that use dual-class shares have valuations that are lower by 17% on average relative to widely-held firms, despite having similar ROA and financial leverage. Finally, concentrated ownership by either a corporation or a financial institution does not significantly affect firm performance. |
| Keywords: | Financial markets; International topics |
| JEL: | G12 G15 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-40&r=bec |
| By: | Tarek Coury; Vladimir P. Petkov |
| Abstract: | This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort. The delegation contract allows for continual interference with managerial incentives: in each period the principal rewards the manager according to her performance. We show that when the cost of delegation is low relative to profits, the principal can attain the precommitment price plan in a perfect rational expectations equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the equilibrium strategies for the case of linear-quadratic payoffs. |
| Keywords: | Durable Goods Monopoly, Delegation, Perfect Rational Expectations Equilibrium |
| JEL: | L12 D42 C73 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:336&r=bec |
| By: | Haertel, Thomas; Lucke, Bernd |
| Abstract: | We study the Beaudry and Portier (2006)-hypothesis of delayed-technology diffusion and newsdriven business cycles. For German data on TFP and stock prices we find qualitatively similar empirical evidence. Quantitatively, however, an impulse response analysis suggests that a substantial part of the total TFP response is immediate rather than delayed. We relate this to disembodied technological change and noisy data on TFP. Nevertheless, we confirm the technology interpretation of structural shocks by showing that they are Granger-causal for data on patents granted by the German patent agency. |
| Keywords: | news, business cycles, TFP, structural VAR |
| JEL: | E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:5732&r=bec |
| By: | Boyan Jovanovic |
| Abstract: | This paper extends Lucas (1978) to a production economy with two capital goods. It is an RBC model in which each unit of investment requires a new idea, an "option". When options are scarce, new capital is harder to put in place and the value of old capital rises. Thus the stock market and Tobin's Q are negative indexes of intangibles. During a boom, Q rises gradually, as options are used up. Because investment represents an exercise of options, it has an intertemporal substitution tradeoff that is absent in the adjustment-cost model. Equilibrium may be efficient even without markets for knowledge; the stock market may suffice. |
| JEL: | E3 E44 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13307&r=bec |
| By: | Mishra, SK |
| Abstract: | The paper discusses how and why the theories of neo-classical economics are inadequate to provide a framework to human resource management and therefore must give way to dynamic gradual optimization procedure based on the principles of bounded rationality and satisficing behaviour in dealing with the problems of an adaptive complex system of business organization. It also widens the scope of human resource management to include crowd-sourcing. |
| Keywords: | Human resource management; bounded rationality; adaptive complex system; satisficing behaviour; dynamic gradual optimization; crowd-sourcing |
| JEL: | L20 J50 J20 |
| Date: | 2007–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4366&r=bec |
| By: | Debashis Pal; Arup Bose; David Sappington |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2007-05&r=bec |
| By: | Schlicht, Ekkehart |
| Abstract: | The expansion of higher education in theWestern countries has been accompanied by a marked widening of wage differentials and increasing overqualification. While the increase in wage differentials has been attributed to skill-biased technological change that made advanced skills scarce, this explanation does not fit well with the observed increase in overqualification which suggests that advanced skills are in excess supply. By “Reder-competition” I refer to the simultaneous adjustment of wage offers and hiring standards in response to changing labor market condition. I present a simple model of Reder competition that reproduces the simultaneous increase in wage differentials and overqualification in response to an increase in education. |
| Keywords: | Hiring standards, employment criteria, selection wages, efficiency wages, mobility, skillbiased technical change, overeducation, wage dispersion |
| JEL: | D43 J31 J63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:5727&r=bec |
| By: | Antonelli Cristiano (University of Turin); Scellato Giuseppe |
| Abstract: | The analysis of social interactions as drivers of economic dynamics represents a growing field of the economics of complexity. Social interactions are a specific form of interdependence whereby the changes in the behavior of other agents affect the structure of the utility functions for households and of the production functions for producers. In this paper, we apply the general concept of social interactions to the area of the economics of innovation and technological change. In particular, we discuss how both the knowledge spillovers literature and the Schumpeterian notion of creative reaction can be reconciled within a general framework building on the concept of social interactions within complex dynamics. The paper presents an empirical analysis of firm level total factor productivity (TFP) for a sample of 7020 Italian manufacturing companies observed during years 1996-2005. We show that changes in firm level TFP are significantly affected by localised social interactions. Such evidence is robust to the introduction of appropriate regional and sectoral controls, as well as to econometric specifications accounting for potential endogeneity problems. Moreover, we find evidence suggesting that changes in competitive pressure, namely the creative reaction channel, significantly affect firm level TFP with and additive effect with respect to localised social interactions deriving from knowledge spillovers. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:uto:labeco:200709&r=bec |
| By: | Judith Hellerstein; Melissa McInerney; David Neumark |
| Abstract: | We present evidence on changes in workplace segregation by education, race, ethnicity, and sex, from 1990 to 2000. The evidence indicates that racial and ethnic segregation at the workplace level remained quite pervasive in 2000. At the same time, there was fairly substantial segregation by skill, as measured by education. Putting together the 1990 and 2000 data, we find no evidence of declines in workplace segregation by race and ethnicity; indeed, black-white segregation increased. Over this decade, segregation by education also increased. In contrast, workplace segregation by sex fell over the decade, and would have fallen by more had the services industry - a heavily female industry in which sex segregation is relatively high - not experienced rapid employment growth. |
| Keywords: | segregation, education, race, ethnicity, sex |
| JEL: | J11 J15 J16 J21 J24 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:07-15&r=bec |
| By: | Randall P. Ellis (Department of Economics, Boston University); Ching-to Albert Ma (Department of Economics, Boston University) |
| Abstract: | In our theoretical model some firms do not offer health insurance to their employees because of large between-firm heterogeneity in expected employee health care costs. Because job turnover rates for healthier employees reduce by less than those for sicker employees when firms offer health insurance, expected health costs will increase when health insurance is offered. We call this adverse job turnover. State regulations on annual premium changes, and insurer reluctance to rapidly increase premiums mean that coverage is only offered to small firms at premiums above initial expected costs. The resulting separating equilibrium is one in which some firms face high initial premiums, choose not to offer insurance, and tolerate higher turnover rates than other firms the same industry that offer insurance. High administrative costs at small firms exacerbate selection. Using 1998-99 MEDSTAT MarketScan and 1997 Employer Health Insurance Survey data we find that expected employee health expenditures at firms offering insurance have lower within-firm and higher between-firm variance than at firms not offering insurance. Turnover rates are systematically higher in industries not offering insurance, and small firms have lower withinfirm variance but greater between-firm variance than large firms in their employee’s age and income distributions. These support our model. |
| Keywords: | health insurance, job turnover, adverse selection |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-035&r=bec |
| By: | Otto H. Swank (Erasmus Universiteit Rotterdam); Bauke Visser (Erasmus Universiteit Rotterdam) |
| Abstract: | Transparent decision-making processes are widely regarded as a prerequisite for the working of a representative democracy. It facilitates accountability, and citizens may suspect that decisions, if taken behind closed doors, do not promote their interests. Why else the secrecy? We provide a model of committee decision-making that explains the public’s demand for transparency, and committee members’ aversion to it. In line with case study evidence, we show how pressures to become transparent induce committee members to organize pre-meetings away from the public eye. Outcomes of pre-meetings are less determined, more anarchic, than those of formal meetings, but within bounds. We characterize feasible deals that are credible and will be endorsed in the formal meeting. |
| Keywords: | Committee decision-making; reputational concerns; transparency; pre-meetings; deliberation |
| JEL: | D71 D72 D82 |
| Date: | 2007–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070055&r=bec |
| By: | Francois Gourio (Boston University, Department of Economics); Anil K Kashyap |
| Abstract: | Using plant-level data from Chile and the U.S., we show that investment spikes are highly pro-cyclical, so much so that changes in the number of establishments undergoing investment spikes (the “extensive margin”) account for the bulk of variation in aggregate investment. The number of establishments undergoing investment spikes also has independent predictive power for aggregate investment, even controlling for past investment and sales. We re-calibrate the Thomas (2002) model (that includes fixed costs of investing) so that it assigns a prominent role to extensive adjustment. The recalibrated model has different properties than the standard RBC model for some shocks. |
| Keywords: | adjustment costs, investment, investment tax credit, fixed costs, extensive margin. |
| JEL: | E22 E23 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-007&r=bec |
| By: | Antonio, TESORIERE |
| Abstract: | This paper examines a three-stage model of divisionalization wher, first, two parents firms create independent unts, second, the parents firms allocate cost reducing levels over these units, and third, the resulting uits compete in a Cournot mrket given their current costs of production. The introduction of the cost reduction phase is shown to reduce the incentives toward divisionalization severely, relative to other existing models. Namely, the scope for divisionalization in equilibrium reduces as the marginal cost of the cost reducing investment decreases, and eventually vanishes. A second-best welfare analysis shows that, for any given market structure, the equilibrium investment decisions of the parent firms are socially optimal. In addition, the no divisionalization outcome is sustainable in equilibrium only if it is socially optimal. |
| Keywords: | Divisionalization; Horizontal Mergers; Research Joint Mergers |
| JEL: | L11 L13 L22 |
| Date: | 2007–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2007021&r=bec |
| By: | Mark Sanders; Jaap Bos; Claire Economidou |
| Abstract: | In this paper, we present a model of the industry life cycle that drives and is driven by R&D. In the model, firms have the option to improve the quality of their output or to invest R&D resources in efficiency gains. Faced with this tradeoff, less mature industries, in which young firms dominate, opt for quality improvements instead of efficiency improvements, whereas more mature industries will do both. This switch is endogenous and depends on the level of quality achieved. We explore these two hypotheses empirically using a panel of manufacturing industries across six European countries over the period 1980-1997. Our empirical results provide support for the model's predictions. |
| Keywords: | Growth, Life Cycle, Innovation, Stochastic Frontier Analysis, Manufacturing Industries |
| JEL: | C23 L23 L60 O32 O47 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0718&r=bec |
| By: | Bronwyn H. Hall; Francesca Lotti; Jacques Mairesse |
| Abstract: | Italian manufacturing firms have been losing ground with respect to many of their European competitors. This paper presents some empirical evidence on the effects of innovation on employment growth and therefore on firms' productivity with the goal of understanding the roots of such poor performance. We use firm level data from the last three surveys on Italian manufacturing firms conducted by Mediocredito-Capitalia, which cover the period 1995-2003. Using a slightly modified version of the model proposed by Harrison, Jaumandreu, Mairesse and Peters (HJMP 2005), which separates employment growth rates into those associated with old and new products, we find no evidence of significant employment displacement effects stemming from process innovation. The sources of employment growth during the period are split equally between the net contribution of product innovation and the net contribution from sales growth of old products. However, the contribution of product innovation to employment growth is somewhat lower than in the four European countries considered in HJMP 2005, and the contribution of innovation in general to productivity growth is almost nil in Italy during this period. |
| JEL: | D24 J0 J20 L20 O30 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13296&r=bec |
| By: | Patrick Legros Author-X-Name-First: Patrick (ECARES, Université Libre de Bruxelles; and CEPR); Andrew F. Newman (Boston University) |
| Abstract: | We develop a tractable model of the allocation of control in firms in competitive markets, which permits us to study how changes in the scarcity of assets, skills or liquidity in the market translate into control inside the organization. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and following a uniform increase in productivity. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-003&r=bec |
| By: | Jason Allen; Ying Liu |
| Abstract: | The authors examine the degree of contestability in the Canadian banking system using the <em>H</em>-statistic proposed by Panzar and Rosse (1987) and modified by Bikker, Spierdijk, and Finnie (2006). A modification is necessary because the standard approach of controlling for size using total assets leads to an upward bias in the <em>H</em>-statistic. The authors propose a variety of model specifications and test for contestability using detailed quarterly balance-sheet data from 2000 to 2006. Contrary to Bikker, Spierdijk, and Finnie (2006), the authors find that the Canadian banking sector is in equilibrium and characterized by monopolistic competition. This result is in line with earlier studies of the Canadian banking sector (Nathan and Neave 1989) as well as cross-country studies that use cruder measures of Canadian banking inputs (Claessens and Laeven 2005). As in Bikker, Spierdijk, and Finnie (2006), the authors show that projecting revenue on total assets leads to an upward bias regarding the level of competition. |
| Keywords: | Financial institutions |
| JEL: | E5 E6 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:07-7&r=bec |
| By: | Alonso, Irasema (Yale University); Prado, Jr., Jose Mauricio (Institute for International Economic Studies, Stockholm University) |
| Abstract: | We examine the potential importance of consumer ambiguity aversion for asset prices and how consumption ‡fluctuations influence consumer welfare. First, considering a simple Mehra-Prescott-style endowment economy with a representative agent facing consumption fluctuations calibrated to match U.S. data, we study to what extent ambiguity aversion can deliver asset prices that are consistent with data: a high return on equity and a low return on riskfree bonds. For some configurations of preference parameters— a discount factor, a degree of relative risk aversion, and a measure of ambiguity aversion— we find that it can. Then, we use these parameter configurations to investigate how much consumers would be willing to pay to reduce endowment fluctuations to zero, thus delivering a Lucas-style welfare cost of fluctuations. These costs turn out to be very large: consumers are willing to pay over 10% of consumption in permanent terms. |
| Keywords: | Ambiguity aversion; asset prices; business cycle |
| JEL: | D14 E32 G12 |
| Date: | 2007–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0752&r=bec |
| By: | Katsimi, Margarita; Moutos, Thomas |
| Abstract: | In this paper we reexamine the Feldstein-Horioka finding of limited international capital mobility by using a broader view (i.e., including human capital) of investment and saving. We find that the Feldstein-Horioka result is impervious to this change. |
| Keywords: | human capital, current account, investment-saving correlation, capital mobility |
| JEL: | E2 F2 I2 Q4 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:5735&r=bec |
| By: | Drew Fudenberg; David K Levine |
| Date: | 2007–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:843644000000000332&r=bec |
| By: | Simon Gilchrist (Department of Economics, Boston University and NBER); Fabio M. Natalucci (Federal Reserve Board); Egon Zakrajsek (Federal Reserve Board) |
| Abstract: | We study the effect of variation in interest rates on investment spending, employing a large panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data—based on trades in the secondary market—enable us to construct a firm-specific measure of the user cost of capital based on the marginal cost of external finance as determined in the market for long-term corporate debt. Our results imply a robust and quantitatively important effect of the user cost of capital on the firm-level investment decisions. According to our estimates, a 1 percentage point increase in the user cost of capital implies a reduction in the rate of investment of 50 basis points and, in the long-run, a 1 percent reduction in the stock of capital. |
| Keywords: | Investment, user cost of capital, corporate bond yields |
| JEL: | E22 E44 E62 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-028&r=bec |
| By: | Patrick Legros (ECARES, Université Libre de Bruxelles; and CEPR); Andrew F. Newman (Boston University and CEPR); Eugenio Proto (University of Warwick) |
| Abstract: | We consider an endogenous growth model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labor, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation and growth depends on the interaction of the markets for labor and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-002&r=bec |
| By: | Stefania Albanesi (Columbia University, NBER, and CEPR); Claudia Olivetti (Boston University) |
| Abstract: | Until the early decades of the 20th century, women spent more than 60% of their prime- age years either pregnant or nursing. Since then, improved medical knowledge and obstetric practices reduced the time cost associated with women?s reproductive role. The introduction of infant formula also reduced women?s comparative advantage in infant care, by providing an e¤ective breast milk substitute. Our hypothesis is that these developments enabled married women to increase their participation in the labor force, thus providing the incentive to invest in market skills, potentially narrowing gender earnings di¤erentials. We document these changes and develop a quantitative model that aims to capture their impact. Our results suggest that progress in medical technologies related to motherhood was essential to generate the signi?cant rise in the participation of married women between 1920 and 1960, in particular those with children. By enabling women to reconcile work and motherhood, these medical advancements laid the ground for the revolutionary change in women?s economic role. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2007-030&r=bec |