nep-bec New Economics Papers
on Business Economics
Issue of 2008‒01‒26
twelve papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. The relevance of size, gender and ownership for performance-related pay schemes By Jan de Kok; A. Roepers
  2. Target's corporate governance and bank merger payoffs By Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
  3. Extending the managerial power theory of executive pay: A cross national test By Otten, Jordan J.A.; Heugens, Pursey P.M.A.R
  4. Double-Sided Moral Hazard, Efficiency Wages and Litigation By Oliver Gürtler; Matthias Kräkel
  5. Corporate governance, industry dynamics and firms performance on the stock market By Jackie Krafft; Yiping Qu; Jacques Laurent Ravix
  6. The Impact of Financial Constaints on Firm Survival and Growth By Patrick Musso; Stefano Schiavo
  7. Employment Growth of New Firms By Elisabeth Garnsey; Petra Gibcus; Erik Stam; Jennifer Telussa
  8. Higher Wages in Exporting Firms: Self-selection, Export Effect, or Both? First Evidence from German Linked Employer-Employee Data By Thorsten Schank; Claus Schnabel; Joachim Wagner
  9. Nonlinear Impacts of International Business Cycles on the UK — a Bayesian Smooth Transition VAR By Deborah Gefang; Rodney Strachan
  10. First-time home buyers and residential investment volatility By Jonas D. M. Fisher; Martin Gervais
  11. What can we learn from privately held firms about executive compensation? By Rebel A. Cole; Hamid Mehran
  12. The Default Risk of Firms Examined with Smooth Support Vector Machines By Wolfgang Härdle; Yuh-Jye Lee; Dorothea Schäfer; Yi-Ren Yeh

  1. By: Jan de Kok; A. Roepers
    Abstract: With performance-related pay, the reward for an employee is partly dependent upon its own performance and/or on the performance of the organisation. In the Netherlands, performance-related pay is being implemented in SMEs an increasing scale. Currently, about 25% of Dutch SMEs make use of some kind of performance-related pay scheme, which may include profit sharing, bonuses, gratuities and stock options.  The aim of this study is to increase our understanding of the usage of performance-related pay schemes in Dutch small and medium-sized enterprises. In particular, we examine whether firm size, ownership structure, and gender of the entrepreneur and employees predict the presence of performance-related pay schemes. The results show that larger SMEs are more likely to use performance-related pay than smaller SMEs (as can be expected). We also find strong support for the presence of a gender effect. The results indicate that for male entrepreneurs, the use of performance-related pay is independent of the gender composition of the work force. For female entrepreneurs, we find that the usage of performance-related pay increases with the share of male employees. This relationship is such, that for firms where more than 70% of the workforce is male, female entrepreneurs are more likely to apply performance-related pay then male entrepreneurs. A possible explanation is that female entrepreneurs are more inclined to take the preferences of their employees into account when they determine the compensation scheme of their enterprise. Finally, the ownership structure also seems to matter. The results suggest that we should differentiate between (at least) three different ownership structures: single-owned and managed firms, family firms (firms with multiple owners that have family ties between them), and multiple-owned non-family firms. Once we do so, we find that single-owned and managed firms are just as likely to use performance-related pay schemes as family firms. Both types of firms use performance-related pay significantly less often than multiple-owned non-family firms.  
    Date: 2007–12–21
  2. By: Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
    Abstract: Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders’ interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.
    Date: 2007
  3. By: Otten, Jordan J.A.; Heugens, Pursey P.M.A.R
    Abstract: Contextual factors are typically neglected in both theorizing and empirical tests on executive pay. The fast majority of empirical investigations use data from U.S. based firms. Theoretical implications are typically developed, understood and tested on the basis of the U.S. context. However, the U.S. case is not the world wide standard. Pay in other countries is on average considerably lower and have a different pay mix. The puzzle that from the typical use of agency theory can’t be explained is the variance of pay practices that exist not only within countries but also across countries. This paper extends scholars renewed attention to managerial power theory on executive pay. It sets out how and why institutional theory must be included in explanations of executive pay. On the basis of a sample of executive pay packages from 17 different countries we test the theoretical extensions. Results indicate that institutions interact with firm level determinants of executive pay. Explanations for executive pay should therefore account for the variance of pay practices within and across countries. Highlighting that the institutional embeddedness of pay practices play an important role in finding conclusive explanations of current pay practices.
    Keywords: Executive compensation; corporate governance; managerial discretion; power; agency theory; institutional theory
    JEL: B52 G34 G28 M52 M10
    Date: 2007–12
  4. By: Oliver Gürtler (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany,,); Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany,,)
    Abstract: We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.
    Keywords: double-sided moral hazard; efficiency wage; litigation; contest; settlement
    JEL: D86 J33 K41
  5. By: Jackie Krafft (GREDEG - Groupe de recherche en Droit Economie Gestion - Université de Nice Sophia-Antipolis); Yiping Qu (GREDEG - Groupe de recherche en Droit Economie Gestion - Université de Nice Sophia-Antipolis); Jacques Laurent Ravix (GREDEG - Groupe de recherche en Droit Economie Gestion - Université de Nice Sophia-Antipolis)
    Abstract: This paper intends to relate more closely corporate governance, industry dynamics and firms performance. In that perspective, it focuses on the impact of applying the normative, best practice model of corporate governance on industry dynamics and related stock market performances. At a theoretical level, it presents an integrated framework based on the connection between corporate governance and industry dynamics issues. But the core of the paper is to advance that the combination of corporate governance and industry dynamics also requires important investigations into empirical aspects. At a case study level, our major finding is that the adoption of the best practice model of corporate governance in the telecoms equipment supplier industry contributed to create large ups and downs in the industry dynamics. At a more general level, combining CGQ with DATASTREAM data sets, we show the variegated impact of the normative model on industry dynamics and firms stock market performances, and confirm the observed phenomenon of ups and downs amplifications formerly emphasized.
    Date: 2008–01–10
  6. By: Patrick Musso (University of Nice-Sophia Antipolis); Stefano Schiavo (Observatoire Français des Conjonctures Économiques)
    Abstract: We propose a new approach for identifying and measuring the degree of financial constraint faced by firms and use it to investigate the effect of financial constraints on firm survival and development. Using panel data on French manufacturing firms over the 1996-2004 period, we find that (i) financial constraints significantly increase the probability of exiting the market, (ii) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and employment, (iii) financial constraints are positively related with productivity growth in the short-run. We interpret this last result as the sign that constrained firms need to cut costs in order to generate the resources they cannot raise on financial markets.
    Keywords: Financial constraints; Firm growth; Firm survival
    JEL: E44 G32 L25
    Date: 2007
  7. By: Elisabeth Garnsey; Petra Gibcus; Erik Stam; Jennifer Telussa
    Abstract: This paper provides an overview of empirical studies on employment growth in new firms and offers a systematic analysis of new empirical data to address the methodological issues identified. Using a longitudinal database of 354 firms over their first ten years, we examine factors associated with new firm growth in terms of R&D, inter-firm alliancing, new product development, and exporting; these are activities that have been identified as denoting dynamic capabilities. The empirical evidence gives some evidence for the positive association between dynamic capabilities and new firm growth. Inter-firm alliancing is the only indicator of dynamic capabilities that has a positive effect on new firm growth. No moderating effect on dynamic capabilities and growth could be seen to be exerted by the level of human capital and/or firm resources. Environmental dynamism – assumed to be highly relevant in the dynamic capability approach – is not revealed to be a moderating factor affecting the relationship between dynamic capabilities and new firm growth.
    Date: 2007–12–20
  8. By: Thorsten Schank (Chair of Labour and Regional Economics, Friedrich-Alexander-University Erlangen-Nuremberg); Claus Schnabel (Chair of Labour and Regional Economics, Friedrich-Alexander-University Erlangen-Nuremberg); Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: ABSTRACT: While it is a stylized fact that exporting firms pay higher wages than non-exporting firms, the direction of the link between exporting and wages is less clear. Using a rich set of German linked employer-employee panel data we follow over time plants that start to export. We show that the exporter wage premium does already exist in the years before firms start to export, and that it does not increase in the following years. Higher wages in exporting firms are thus due to self-selection of more productive, better paying firms into export markets; they are not caused by export activities.
    Keywords: exports; wages; exporter wage premium; Germany
    JEL: F10 D21 J31
    Date: 2008–01
  9. By: Deborah Gefang; Rodney Strachan
    Abstract: Employing a Bayesian approach, we investigate the impact of international business cycles on the UK economy in the context of a smooth transition VAR. We find that British business cycle is asymmetrically influenced by the US, France and Germany. Overall, positive and negative shocks generating in the US or France affect the UK in the same directions of the shock. Yet, a shock emanating from Germany always exerts negative accumulative effects on the UK. More strikingly, a positive shock arising from Germany negatively affects UK output growth more than a negative shock from Germany of the same size. These results suggest that the appropriate UK economic policy depends upon the origin, size and direction of the external shocks.
    Keywords: International business cycle; Bayesian; smooth transition vector autoregression model
    JEL: C11 C32 C52 E32 F42
    Date: 2008–01
  10. By: Jonas D. M. Fisher; Martin Gervais
    Abstract: Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the “Great Moderation” in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.
    Date: 2007
  11. By: Rebel A. Cole; Hamid Mehran
    Abstract: We study the Green and Lin (2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary, and consumption needs may be correlated across traders. We show that each feature is capable of generating an equilibrium in which some (but not all) traders “run” on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Our results also provide some insight into elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, our findings highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of traders who have yet to contact the intermediary.
    Keywords: Executives - Salaries ; Chief executive officers ; Corporations - Finance ; Corporate governance
    Date: 2008
  12. By: Wolfgang Härdle; Yuh-Jye Lee; Dorothea Schäfer; Yi-Ren Yeh
    Abstract: In the era of Basel II a powerful tool for bankruptcy prognosis is vital for banks. The tool must be precise but also easily adaptable to the bank's objections regarding the relation of false acceptances (Type I error) and false rejections (Type II error). We explore the suitability of Smooth Support Vector Machines (SSVM), and investigate how important factors such as selection of appropriate accounting ratios (predictors), length of training period and structure of the training sample influence the precision of prediction. Furthermore we showthat oversampling can be employed to gear the tradeoff between error types. Finally, we illustrate graphically how different variants of SSVM can be used jointly to support the decision task of loan officers.
    Keywords: Insolvency Prognosis, SVMs, Statistical Learning Theory, Non-parametric Classification
    JEL: G30 C14 G33 C45
    Date: 2007

This nep-bec issue is ©2008 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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