nep-bec New Economics Papers
on Business Economics
Issue of 2007‒11‒17
24 papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. To each according to her luck and power: Optimal corporate governance and compensation policy in a dynamic world By Thomas H. Noe; Michael J. Rebello
  2. Executive Compensation: The View from General Equilibrium By Danthine, Jean-Pierre; Donaldson, John B
  3. Legitimacy of Control By Wendelin Schnedler; Radovan Vadovic
  4. Commitment or Control? Human Resource Management Practices in Female and Male-Led Businesses By Verheul, I.
  5. Strategic Debt: Evidence from Bertrand and Cournot Competition By Jong, A. de; Nguyen, T.T.; Dijk, M.A. van
  6. Wage/Tenure Contracts with Heterogeneous Firms By Melvyn Coles; Ken Burdett
  7. Learning-by-Exporting? Firm-Level Evidence for UK Manufacturing and Services Sectors By Richard Harris; Qian Cher Li
  8. Firm Survival, Performance, and the Exchange Rate By Jen Baggs; Eugene Beaulieu; Loretta Fung
  9. Business Cycle Fluctuations and the Life Cycle: How Important is On-The-Job Skill Accumulation? By Gary D. Hansen; Selo Imrohoroglu
  10. Off-shoring and productivity growth in the Italian manufacturing industries By F. Daveri; C. Jona-Lasinio
  11. Measuring performance and valuing firms: In search of the lost capital By Magni, Carlo Alberto
  12. The Impact of Corporate Venturing on a Firm?s Competence Modes By Burgers, J.H.; Bosch, F.A.J. van den; Volberda, H.W.
  13. Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach By Francis X. Diebold; Canlin Li; Vivian Z. Yue
  14. Industry Valuation Driven Earnings Management By Jiao, T.; Mertens, G.M.H.; Roosenboom, P.
  15. The impact of trust on the mode of transaction governance between manufacturer and distributor By Berulava George; Lezhava David
  16. Labor Adjustment: Disentangling Firing and Mobility Costs By Luigi Guiso; Luigi Pistaferri; Fabiano Schivardi
  17. Global Links: Multinationals in Canada: An Overview of Research at Statistics Canada By Baldwin, John R.; Gellatly, Guy
  18. Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets By Francis X. Diebold; Kamil Yılmaz
  19. Banking competition and financial fragility: Evidence from panel-data By Ruiz-Porras, Antonio
  20. Entrepreneurial Orientation as a main Resource and Capability on Small Firm’s Growth By Ferreira, João; Azevedo, Susana
  21. Tracking Canadian Trend Productivity: A Dynamic Factor Model with Markov Switching By Michael Dolega
  22. Corporate Governance as a Commitmente and Signalling Device By Angelo Baglioni
  23. Determinants of Business Cycle Synchronization in East Asia: An Extreme Bound Analysis By Toan Nguyen
  24. Why New Business Development Projects Fail: Coping with the Differences of Technological versus Market Knowledge By Burgers, J.H.; Bosch, F.A.J. van den; Volberda, H.W.

  1. By: Thomas H. Noe; Michael J. Rebello
    Abstract: We model long-run firm performance, management compensation, and corporate governance in a dynamic, nonstationary world. We show that managerial compensation and governance policies, which, in a single-period context, can best be rationalized by self-serving managerial influence over board policy, are shareholder-wealth maximizing in a dynamic setting. For example, shareholder wealth is maximized by governance policies that tie board deference to generous compensation and link the level of current compensation more to luck than performance. Further, under shareholder-wealth maximizing polices, managerial diversion of firm resources for private consumption is likely to accompany stock price declines which immediately follow sustained price increases and lax board oversight. Unless the the likelihood of a control transfer is large, stock-based managerial compensation may not produce as much shareholder value as simple salary contracts.
    Keywords: governance, institutional design
    JEL: G20 G34
    Date: 2007
  2. By: Danthine, Jean-Pierre; Donaldson, John B
    Abstract: We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own firm ensures that her interests are aligned with the goals of firm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends.
    Keywords: incentives; optimal contracting; stochastic discount factor
    JEL: E32 E44
    Date: 2007–11
  3. By: Wendelin Schnedler; Radovan Vadovic
    Abstract: What is the motivational effect of imposing a minimum effort requirement? Agents may no longer exert voluntary effort but merely meet the requirement. Here, we examine how such hidden costs of control change when control is considered legitimate. We study a principal-agent model where control signals the expectations of the principal and the agent meets these expectations because he is guilt-averse. We conjecture that control is more likely to be considered legitimate i) if it is not exclusively aimed at a specific agent or ii) if it protects the endowment of the principal. Given the conjecture the model predicts that hidden costs are lower when one of the two conditions is met. We experimentally test these predictions and find them confirmed.
    Keywords: moral-hazard, intrinsic motivation, guilt aversion
    JEL: C7 C9 M5
    Date: 2007–08
  4. By: Verheul, I. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper investigates the commitment-orientation of HRM practices in female- and male-led firms. A distinction is made between emphasizing commitment or control in the design of HRM practices. To test for gender differences use is made of a sample of 555 Dutch firms. Contrary to what is generally believed it is found that ? when controlled for relevant factors related to the business (e.g., firm size, age, sector) ? HRM in female-led firms is more control-oriented than that in male-led firms. More specifically, female-led firms are more likely to be characterized by fixed and clearly defined tasks, centralized decision-making and direct supervision of the production process.
    Keywords: gender;entrepreneurship;human resource management;commitment;control;
    Date: 2007–10–30
  5. By: Jong, A. de; Nguyen, T.T.; Dijk, M.A. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm?s leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms? competitive behavior in the product market in their capital structure decisions.
    Keywords: Strategic debt;Cournot competition;Bertrand competition;demand and cost uncertainty;leverage;
    Date: 2007–09–11
  6. By: Melvyn Coles; Ken Burdett
    Abstract: This paper investigates equilibria in a labor market where heterogeneous firms post wage/tenure contracts and risk-averse workers, both employed and unemployed, search for new job opportunities. Different firms, even those with the same productivity, typically offer different contracts. Equilibrium finds workers never quit from higher productivity firms to lower productivity firms, but turnover is inefficiently low as employees with large tenures at low productivity firms may reject job offers from more productive firms. A worker who quits to a more productive firm may take a wage cut in anticipation of better wage promotion prospects. Wages within a firm might also increase by a discrete amount at the end of an initial "probationary" spell.
    Date: 2007–11–12
  7. By: Richard Harris; Qian Cher Li
    Abstract: This study empirically assesses the microeconomic exporting-productivity nexus for both the UK manufacturing and services sectors during 1996-2004, based on a weighted FAME dataset. Our results show that firms that are older, that possess intangible assets or that have higher (labour) productivity in the year prior to exporting, are significantly more likely to sell overseas. In testing the post-entry ‘learning-by-exporting’ effect, we employ three approaches to controlling for endogeneity and sample selection, viz. instrumental variables, control function and matching, and find that this effect is present in many industries but not universal, and also varies amongst different types of exporting firms. Our overall estimate for the UK economy suggests a substantial post-entry productivity effect for firms new to exporting; a negative effect for firms exiting overseas markets; and large productivity gains while exporting for those that both enter and exit.
    Keywords: exports; control function; GMM; matching; TFP; sample selection
    JEL: D24 F14 L25 R38
    Date: 2007–08
  8. By: Jen Baggs; Eugene Beaulieu; Loretta Fung
    Date: 2007–10–26
  9. By: Gary D. Hansen; Selo Imrohoroglu
    Abstract: We study the effects of on-the-job skill accumulation on average hours worked by age and the volatility of hours over the life cycle in a calibrated general equilibrium model. Two forms of skill accumulation are considered: learning by doing and on-the-job training. In our economy with learning by doing, individuals supply more labor early in the life cycle and less as they approach retirement than they do in an economy without this feature. The impact of this feature on the volatility of hours over the life cycle depends on the value of the intertemporal elasticity of labor supply. When individuals accumulate skills by on-the-job training, there are only weak effects on both the steady-state labor supply and its volatility over the life cycle.
    JEL: E32 J22 J24
    Date: 2007–11
  10. By: F. Daveri; C. Jona-Lasinio
    Abstract: We employ input-output tables to study the relation between off-shoring and productivity growth in the Italian manufacturing industries in 1995-2003. Our results indicate that not all types of off-shoring are positively related to productivity growth. In particular, the international outsourcing of intermediates within the same industry (“narrow off-shoring”) is beneficial for productivity growth, while the off-shoring of services is not. We also find that the way in which off-shoring is measured may matter considerably. The positive relation between off-shoring of intermediates and productivity growth disappears when our direct measure of off-shoring is replaced with the Feenstra-Hanson measure employed in other studies.
    Keywords: International trade, Productivity growth; offshoring; Italian economy
    JEL: F16 F23 O4
    Date: 2007
  11. By: Magni, Carlo Alberto
    Abstract: Residual income as commonly described in academic papers and in real-life applications may be formally described as a function of three variables: (i) the capital invested, (ii) the rate of return, (iii) the opportunity cost of capital. This paper shows that a different paradigm of residual income is generated if a fourth element is added: (iv) the capital that investors lose if they infuse their funds into the firm (or project). The lost-capital paradigm has various interesting economic, nancial, accounting interpretations and bears intriguing formal and conceptual relations to the standard paradigm. It may be soundly employed in real-life applications as a tool for rewarding managers as well as for appraising firms. Firm value is shown to be a function of total abnormal earnings and independent of time, if the new paradigm is used: what matters is only the book value and the sum of total expected residual incomes, not the periods in which they are generated. This aggregation property is particular important for highlighting the link between accounting values and market values. A numerical example illustrates the practical implementation of the new paradigm to the Economic Value Added and the Edwards-Bell-Ohlson model; also, a model is presented which has the nice property of being aligned in sign with the Net Present Value: this makes it a good candidate for use in value-based management.
    Keywords: Corporate finance; management accounting; residual income; performance measurement; lost capital; value-based management; firm valuation; abnormal earnings aggregation.
    JEL: G11 G12 M41 G31 M52 G30 M40
    Date: 2007–09
  12. By: Burgers, J.H.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In this conceptual paper we investigate how corporate venturing influences an organization?s competences. The impact of various types of corporate ventures on the portfolio of strategic options of a firm?s competence modes (Sanchez, 2004a; Sanchez and Heene, 2002) will be assessed by distinguishing two fundamentally different dimensions of corporate venturing, technology and product (Block & MacMillan, 1993). We argue that the level of product and factor market dynamism mediates the effect of corporate venturing on a firm?s competence modes. Corporate ventures that significantly increase the level of product or factor market dynamics will lead to an increased flexibility in all five competence modes. These ventures will have a direct effect on the lower-order competence modes and an indirect, lagged effect on higher-order competence modes through feedback loops. The developed framework and the propositions contribute to managing the ability of a firm to change its coordination-, resource and operating flexibility in order to sustain value creation.
    Keywords: competence-based management;corporate venturing;product and factor market dynamism;flexibility;
    Date: 2007–09–11
  13. By: Francis X. Diebold; Canlin Li; Vivian Z. Yue
    Abstract: The popular Nelson-Siegel (1987) yield curve is routinely fit to cross sections of intra-country bond yields, and Diebold and Li (2006) have recently proposed a dynamized version. In this paper we extend Diebold-Li to a global context, modeling a potentially large set of country yield curves in a framework that allows for both global and country-specific factors. In an empirical analysis of term structures of government bond yields for the Germany, Japan, the U.K. and the U.S., we find that global yield factors do indeed exist and are economically important, generally explaining significant fractions of country yield curve dynamics, with interesting differences across countries.
    JEL: C01 G12
    Date: 2007–11
  14. By: Jiao, T.; Mertens, G.M.H.; Roosenboom, P. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper investigates whether industry valuation impacts firms? earnings management decisions. Existing accounting literature assumes that industry valuation has a constant impact on this decision. We argue that a higher industry valuation increases the perceived benefits of earnings management at a time when the negative consequences associated with accrual reversal and the probability of detection are believed to be lower. Using a sample of quarterly data of U.S. firms from 1985 to 2005, we find that the four-quarter lagged industry valuation has a positive relationship with industry aggregate (current) discretionary accruals. More specific, one standard deviation increase in the aggregate industry valuation is associated with a significant increase of 2.4 cents in quarterly earnings per share. Our results are robust after controlling for several factors, including bubble years, size, leverage and performance.
    Keywords: Industry valuation;Earnings management;Market to book ratio;
    Date: 2007–10–25
  15. By: Berulava George; Lezhava David
    Abstract: The goal of the project is to explore main determinants of transaction governance mode between manufacturer and distributor firms. The model proposed in this paper integrates the concept of trust with main transaction cost economics’ dimensions and is formulated in the form of multinomial logit function. The model will be estimated with data from a sample of Georgian manufacturing industry. The main hypothesis of the study is that trust will modify the influence of traditional transaction cost economics dimensions on the choice of exchange governance mode.
    JEL: D23 L14 L22
    Date: 2007–11–06
  16. By: Luigi Guiso; Luigi Pistaferri; Fabiano Schivardi
    Abstract: This paper studies the costs of adjusting employment, distinguishing between firms’ firing and workers’ mobility costs. We construct a simple dynamic general equilibrium model of labor demand and supply and show that only the joint response of employment and wages to firm level shocks can discriminate between the two types of costs. We use matched employer-employees data for Italy to estimate the model and find that both types of costs are present, that they are sizeable (in the range of 19,000 euros in total) and that firing costs account for almost 90 percent of total adjustment costs.
    Keywords: Adjustment costs, mobility costs, matched employer-employees data
    JEL: C33 D21 J63
    Date: 2007
  17. By: Baldwin, John R.; Gellatly, Guy
    Abstract: The paper's main objective is to provide a concise synthesis of a wide array of data and research on multinationals originating in Statistics Canada, focusing on both historical and current studies. Chapter 2 discusses the macroeconomic contribution of foreign multinationals, focusing on two leading indicators of foreign multinational activity, foreign control and foreign direct investment. This chapter also describes studies that evaluate the contribution that foreign-controlled companies make to aggregate trade flows, linking changes in multinational trade intensity to the strategic reorganization of their production activities. Chapter 3 concentrates on the strategies and activities of foreign multinationals that are relevant to ongoing debates over whether the presence of foreign multinationals promotes, or hampers, Canada's industrial competitiveness. This chapter first examines evidence that domestic and foreign firms respond differently to domestic market conditions. Second, it asks whether foreign firms compete in different ways than domestic firms do. Third, it examines the relative emphasis that foreign multinationals place on innovation and technology practices, and reports on the relationship between these activities and observable market outcomes. Fourth, it reports on the contribution that foreign-controlled firms make to productivity growth. Fifth, it discusses new research that focuses on the relationship between foreign ownership and head-office employment. Studies in these areas speak directly to the issue of whether foreign multinationals truncate or develop their corporate activities in host markets. Chapter 4 focuses on studies that examine the foreign activities of Canadian-owned multinationals and how their domestic plants compare to foreign-controlled plants operating in Canada. Chapter 5 offers an appraisal of Statistics Canada's research on multinationals.
    Keywords: Business performance and ownership,
    Date: 2007–11–13
  18. By: Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yılmaz (Department of Economics, Koç University)
    Abstract: We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of sixteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts.
    Keywords: Asset Market, Asset Return, Stock Market, Emerging Market, Market Linkage, Financial Crisis, Herd Behavior, Contagion
    JEL: F30 G15 F36
    Date: 2005–10
  19. By: Ruiz-Porras, Antonio
    Abstract: We study how banking competition may affect the stability of banking systems. We develop our study by expanding the failure-determinant methodology to include panel-data techniques and by controlling the effects of financial structure and development. We use indicators for 47 countries between 1990 and 1997. The main findings show that banking concentration and foreign ownership are associated to bank-based financial systems and financial underdevelopment. They also show that banking credit and bank-based financial systems enhance banking fragility. Banking concentration is not a significant determinant. Furthermore our findings suggest that financial structure and, maybe, the property regime matter to assess fragility.
    Keywords: Banks; competition; fragility; financial systems
    JEL: L16 D40 G10 G21
    Date: 2007–10–29
  20. By: Ferreira, João; Azevedo, Susana
    Abstract: This research provides a useful framework for identifying a small firms’ propensity to engage in entrepreneurial orientation. We examine the impact of the Entrepreneurial Orientation (EO) as a main resource and capability on small firm' growth. The growth seems to come out as an important demonstration of the entrepreneurial orientation of small firms (Davidsson, 1989; Green and Brown, 1997; Janney and Gregory, 2006). Thus, this research builds on prior conceptual research that suggests a positive integration between entrepreneurial orientation and resource-based view. In the first instance, the research will focus on reviewing literature in the emerging area of entrepreneurial orientation as it applies to growth oriented small firms and resource-based view of the firm. Secondly, an empirical study was developed based on a stratified sample of small firms of manufacturing industry. Data were submitted to a multivariate statistical analysis and a linear regression model was performed in order to predict the influence of the resources and capabilities on small firms' growth. In this sense, we consider the construct growth as a dependent variable and the ones relates with resources and capabilities (entrepreneur resources, firm resources, networks and EO) as independent variables. The research results suggest a set of resources and capabilities that promote the growth of the small firms. Also, the EO seems to have a predictive value on growth. Explaining variables related with resources and capabilities and EO were identified as essential in growth oriented small firms. It was still possible to conclude that the entrepreneurial firms which grew seem to have resources and develop more capabilities and take advantage in the search for those competences. This attitude reflects on the EO of the firm. This study has important implication for both researchers and practitioners. It highlights the necessity of firms to develop superior EO of all their members and also to invest on better resources and consequently superior capabilities as a way of reaching higher levels of growth. While previous authors have attempted to analyse certain aspects of this process (linkage between entrepreneurial orientation and growth), this research developed a framework that combines these and others factors (resource-based view) pertinent to growth oriented small firms. The results support the necessity to identify explicative variables of multiple levels to explain the growth of small firms. The adoption of an entrepreneurial orientation as an indispensable variable to the growth oriented small firms seems pertinent.
    Keywords: Resources-Based View; Entrepreneurial orientation; Growth of Small Firms
    JEL: M13 L1
    Date: 2007–11–09
  21. By: Michael Dolega
    Abstract: The author attempts to track Canadian labour productivity over the past four decades using a multivariate dynamic factor model that, in addition to the labour productivity series, includes aggregate compensation and consumption information. Productivity is assumed to switch between two regimes (the high-growth state and the low-growth state) with different trend growth rates according to a first-order Markov process. The author finds that labour productivity in Canada fell from the high-growth to the low-growth state towards the end of the 1970s, and that it has not yet reverted to the high-growth state. In particular, the model primarily attributes the resurgence of labour productivity growth in the late nineties to transitory effects.
    Keywords: Productivity
    JEL: O4 O51 C32
    Date: 2007
  22. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: A model is presented, where firms issuing equity differ in the ability of their controlling shareholders to extract private benefits: this creates a lemon problem, leading to cross-subsidization across issuers. A governance institution is introduced, enabling large shareholders to (imperfectly) commit to the general interest of shareholders. The following main results are obtained. I) Controlling shareholders willing to apply such an institution are those with a level of private benefits either very low or very high: the former employ the institutional constraint as a signalling device, the latter as a commitment device. Those with an intermediate level of private benefits are not interested. II) A higher ownership concentration reduces the large shareholder’s incentive to commit. III) Self-regulation dominates regulation.
    Keywords: large shareholders, private benefits, (self-)regulation
    JEL: G34 G38
    Date: 2007–06
  23. By: Toan Nguyen (Room 1, Engineering Building No. 4, Yoshida Honmachi, Sakyo-ku, Kyoto,Japan)
    Abstract: We investigate the determinants of business cycle synchronization in East Asia by testing the robustness of the potential candidates, using the technique of Extreme Bound Analysis in an OLS regression framework with Newey-West correction for heteroskedasticity and autocorrelation. We find that trade openness and intra-industry trade are major channels of business cycle synchronization. Although the similarity of monetary policies is statistically correlated with degree synchronization, we are unsure whether the former causes the latter or vise versa. The findings are probably good news to the proponents of the prospective currency union. If the trend of increasing openness and bilateral intra-industry trade continues in East Asia, it is expected that the costs of forming a currency union would diminish as business cycles become more synchronized.
    Keywords: Business Cycle Synchronization; East Asia; Extreme Bound Analysis; Currency Union
    Date: 2007–10
  24. By: Burgers, J.H.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Managing through projects has become important for generating new knowledge to cope with technological and market discontinuities. This paper examines how the fit between the creation of technological and market knowledge and important project management characteristics, i.e. project autonomy and completion criteria, influences the success of new business development (NBD) projects. In-depth longitudinal case research on NBD-projects commercialised during the period 1993-2003 in the consumer electronics industry highlights that project management characteristics focusing only on the creation of technological knowledge contributed to the failure of those NBD-projects that required new market knowledge as well. The findings indicate that senior management support and engaging in an alliance with partners possessing complementary market knowledge can offset this misalignment of the organisation of NBD-projects.
    Keywords: project management;new business development;exploitation-exploration;knowledge;new product development;strategic alliances;sales force;
    Date: 2007–10–30

This nep-bec issue is ©2007 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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