nep-bec New Economics Papers
on Business Economics
Issue of 2008‒01‒12
fourteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Stock-Based Compensation and CEO (Dis)Incentives By Efraim Benmelech; Eugene Kandel; Pietro Veronesi
  2. The Impact of Training on Productivity and Wages. Evidence from Belgian Firm Level Panel Data By Jozef Konings
  3. Business strategy and firm performance: the British corporate economy, 1949-1984 By Antcliff, V.; Higgins, David; Toms, Steven; Wilson, J.F.
  4. Downward wage rigidity for different workers and firms : an evaluation for Belgium using the IWFP procedure By Philip Du Caju; Catherine Fuss; Ladislav Wintr
  5. Trade, Production Sharing, and the International Transmission of Business Cycles By Ariel Burstein; Christopher Kurz; Linda Tesar
  6. Treating Equals Unequally - Incentives in Teams, Workers' Motivation and Production Technology By Sebastian Goerg; Sebastian Kube; Ro'i Zultan
  7. Distributive Justice and CEO Compensation By Guillermina Jasso; Eva M. Meyersson Milgrom
  8. Active firms in horizontal mergers and cartel stability By Emilie Dargaud
  9. Firms and flexibility By Bart Hobijn; Aysegül Sahin
  10. The Effects of Corporate Governance and Institutional Environments on Export Behaviour: Evidence from Chinese Listed Firms By Lu, Jiangyong; Xu, Bin; Liu, Xiaohui
  11. What determines productivity dynamics at the firm level? Evidence from Spain By Stucchi, Rodolfo
  12. Job Satisfaction and Quits By Louis Lévy-Garboua; Claude Montmarquette; Véronique Simonnet
  13. Can Earnings Manipulation Create Value? By Miglo, A.
  14. Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms By Philippe Aghion; Thibault Fally; Stefano Scarpetta

  1. By: Efraim Benmelech; Eugene Kandel; Pietro Veronesi
    Abstract: Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.
    JEL: D2 G34 J3
    Date: 2008–01
  2. By: Jozef Konings
    Abstract: This paper uses longitudinal data of more than 13,000 firms to analyze the effects of on-the-job training on firm level productivity and wages. Workers receiving training are on average more productive than workers not receiving training. This makes firms more productive. On-the-job training increases firm level measured productivity between 1 and 2%, compared to firms that do not provide training. The effect of training on wages is also positive, but much lower than the effect on productivity. Average wages increase only by 0.5%. Sectoral spillovers between firms that train workers are found, but only in firms active in the manufacturing sector. In non-manufacturing no spillovers seem to take place. The results are consistent with recent theories that explain on-the-job training, related to imperfect competition in the labor market, such as monopsony and union bargaining.
    Keywords: on-the-job-training, productivity, firm level data, monopsony
    JEL: J01 J24 J42 M53
    Date: 2008
  3. By: Antcliff, V.; Higgins, David; Toms, Steven; Wilson, J.F.
    Abstract: There has been considerable and ongoing debate about the performance of the British economy since 1945. Empirical studies have concentrated on aggregate or industry level indicators. Few have examined individual firms’ financial performance. This study takes a sample of c.3000 firms in 19 industries and identifies Britain’s best performing companies over a period of 35 years. Successful companies are defined as a) those that survive as independent entities, b) that outperform peer group average return to capital for that industry, and c) that outperform other firms in the economy according to return on capital relative to industry average. Results are presented as league tables of success and some tentative explanations offered concerning the common strategies of successful firms. A broader research agenda for British business history is suggested.
    Date: 2007
  4. By: Philip Du Caju (National Bank of Belgium, Research Department); Catherine Fuss (National Bank of Belgium, Research Department; Université Libre de Bruxelles); Ladislav Wintr (National Bank of Belgium, Research Department)
    Abstract: This paper evaluates the extent of downward nominal and real wage rigidity for different categories of workers and firms using the methodology recently developed by the International Wage Flexibility Project (Dickens and Goette, 2006). The analysis is based on an administrative data set on individual earnings, covering one-third of employees of the private sector in Belgium over the period 1990-2002. Our results show that Belgium is characterised by strong real wage rigidity and very low nominal wage rigidity, consistent with the Belgian wage formation system of full indexation. Real rigidity is stronger for white-collar workers than for blue-collar workers. Real rigidity decreases with age and wage level. Wage rigidity appears to be lower in firms experiencing downturns. Finally, smaller firms and firms with lower job quit rates appear to have more rigid wages. Our results are robust to alternative measures of rigidity
    Keywords: wage rigidity, matched employer-employee data.
    JEL: J31
    Date: 2007–12
  5. By: Ariel Burstein; Christopher Kurz; Linda Tesar
    Abstract: Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good.
    JEL: F4 F41
    Date: 2008–01
  6. By: Sebastian Goerg; Sebastian Kube; Ro'i Zultan
    Abstract: The importance of fair and equal treatment of workers is at the heart of the debate in organizational management. In this regard, we study how reward mechanisms and production technologies affect effort provision in teams. Our experimental results demonstrate that unequal rewards can potentially increase productivity by facilitating   coordination, and that the effect strongly interacts with the exact shape of the production function. Taken together, our data highlight the relevance of the production function for organization construction and suggest that equal treatment of equals is neither a necessary nor a   sufficient prerequisite for eliciting high performance in teams.
    Keywords: team incentives, equity, production function, social preferences, laboratory experiment, discriminating mechanism, mechanism design.
    JEL: C92 D23 D63 J31 J33 J41 M12 M52
    Date: 2007–12
  7. By: Guillermina Jasso (New York University and IZA); Eva M. Meyersson Milgrom (Stanford University)
    Abstract: This paper develops a framework for studying individuals’ ideas about what constitutes just compensation for chief executive officers (CEOs) and reports estimates of just CEO pay and the principles guiding ideas of justice. The sample consists of students pursuing a Master of Business Administration (MBA) degree in Sweden and the United States. The framework, based on justice theory and making use of Rossi’s factorial survey method, enables assessment of ideas of fairness in CEO compensation, including (1) the just CEO compensation, in the eyes of each observer; (2) the principles of microjustice - observers’ ideas about "who should get what" based on characteristics of CEOs and their firms; and (3) principles of macrojustice - ideas about the just level and dispersion in compensation across all CEOs. Our estimates yield the following main results: First, there is broad agreement on the median just CEO compensation but substantial inter-individual variation in the principles of microjustice and the other principles of macrojustice. Second, there is remarkable similarity in the distributions of the principles of microjustice and macrojustice across the MBA groups. Other important results include a pervasive gender attentiveness among MBA students and tolerance for large variability in CEO pay.
    Keywords: justice theory, fairness, CEO compensation, factorial survey method, MBA students, gender, inequality, Gini coefficient, Atkinson measure, Theil’s inequality measures
    JEL: D31 D6 D8 G30 I3 J16 J31 J33 M14 M52
    Date: 2007–12
  8. By: Emilie Dargaud (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this paper, we study the optimal number of active firms in a<br />coalition and in a merger. We consider two kinds of game : a merger game<br />and a coalition game, both in the context of price competition with horizontal<br />product differentiation. These are two-stage games. The first stage consists<br />of determining the number of active firms; the second stage is price competition<br />between active firms. Firms belonging to the same owner or to the<br />same coalition play cooperatively between themselves but face competition<br />between other firms.<br />We show that when there is no competitive pressure (i.e. no outside firm)<br />then only merged equilibria can occur in the merger case. In the coalition<br />case we obtain a similar result in which the number of active firms in the<br />second stage is less than the initial number of firms.<br />Moreover we show that if competitive pressure is high enough then the<br />initial number of firms in the industry is the same as the number of active<br />firms in the last stage for each kind of game.
    Keywords: Mergers ; Coalitions ; Product differentiation
    Date: 2007
  9. By: Bart Hobijn; Aysegül Sahin
    Abstract: We study the effects of labor market rigidities and frictions on firm-size distributions and dynamics. We introduce a model of endogenous entrepreneurship, labor market frictions, and firm-size dynamics with many types of rigidities, such as hiring and firing costs, search frictions with vacancy costs, unemployment benefits, firm entry costs, and a tax wedge between wages and labor costs. We use the model to analyze how each rigidity explains firm-size differentials between the United States and France. We find that when we include all rigidities and frictions except hiring costs and search frictions, the model accounts for much of the firm-size differentials between the United States and France. The addition of search frictions with vacancy costs generates implausibly large differentials in firm-size distributions.>
    Keywords: Labor market ; Corporations - Finance ; Business enterprises - Finance ; Employment ; Unemployment
    Date: 2007
  10. By: Lu, Jiangyong; Xu, Bin; Liu, Xiaohui
    Abstract: The impact of corporate governance on export decisions is an important yet under- explored research issue. This paper examines this issue with respect to Chinese listed firms. We adopt an analytical framework in which the effects of corporate governance on export decisions are associated with institutional environment. We test several hypotheses derived from this framework. The sample firm’s export propensity and export intensity are found to be positively impacted by CEO ownership share and independent director ratio, and negatively impacted by private/family control. The export-promoting effects of CEO ownership share and independent director ratio are found to be positively moderated by a well-established institutional environment.
    JEL: F0
    Date: 2007–12
  11. By: Stucchi, Rodolfo
    Abstract: The current literature on firm dynamics considers the mobility of firms within the productivity distribution to be determined by exogenous random shocks. This paper evaluates human capital and learning by doing as possible factors determining the mobility once the exogenous shocks have taken place. The main contribution of the paper is to provide evidence on the endogenous mobility of firms within the productivity distribution.
    Keywords: Productivity dynamics; Human Capital; Learning by Doing.
    JEL: C51 D24 L60
    Date: 2007–10–10
  12. By: Louis Lévy-Garboua (Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université du Québec à Montréal); Claude Montmarquette (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université du Québec à Montréal, Université de Montréal - Département de Sciences Economique - Université de Montréal); Véronique Simonnet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We test the wealth maximization theory of quitting behavior on the German Socioeconomic Panel (1985-2003). With the interpretation of job satisfaction as an expression of the experienced preference for the present job against available alternatives, the propensity to stay in the present job is simply related to the residual of a job satisfaction equation. We show that this residual is a better predictor of quits than the overall level of satisfaction. Furthermore, we validate a dynamic extension of the economic theory of quits for which uncertainty in the expectation of future events plays a decisive role.
    Keywords: Voluntary quit, job satisfaction, surprises, wealth maximization model
    Date: 2007–04
  13. By: Miglo, A.
    Abstract: Existing literature usually considers earnings manipulation to be a negative social phenomenon. We argue that earnings manipulation can be a part of the equilibrium relationships between firms' insiders and outsiders. We consider an optimal contract between an entrepreneur and an investor where the entrepreneur is subject to a double moral hazard problem (one being the choice of production effort and the other being intertemporal substitution, which consists of transferring cash flows between periods). Investment and production effort may be below socially optimal levels because the entrepreneur cannot entirely capture the results of his effort. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when the results of production are low. Ex-ante, this provides an incentive for the entrepreneur to increase his level of effort and invest efficiently.
    Date: 2008
  14. By: Philippe Aghion (Harvard University); Thibault Fally (Paris-Jourdan Sciences Economiques); Stefano Scarpetta (OECD and IZA)
    Abstract: Advanced market economies are characterized by a continuous process of creative destruction. Market forces and technological developments play a major role in shaping this process, but institutional and policy settings also influence firms’ decision to enter, to expand if successful and to exit if competition becomes unbearable. In this paper, we focus on the effects of financial development on the entry of new firms and the expansion of successful new businesses. Drawing from harmonized firm-level data for 16 industrialized and emerging economies, we find that access to finance matters most for the entry of small firms and in sectors that are more dependent upon external finance. This finding is robust to controlling for other potential entry barriers (labor market regulations and entry regulations). On the other hand, financial development has either no effect or a negative effect on entry by large firms. Access to finance also helps new firms expand if successful. Both private credit and stock market capitalization are important for promoting entry and post entry growth of firms. Altogether, these results suggest that, despite significant progress over the past decade, many countries, including those in Continental Europe, should improve their financial markets so as to get the most out of creative destruction, by encouraging the entry of new (especially small) firms and the post-entry growth of successful young businesses.
    Keywords: financial development, entry, post-entry growth, firm size, micro data
    JEL: D21 D92 L11 G32
    Date: 2007–12

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