nep-bec New Economics Papers
on Business Economics
Issue of 2008‒05‒10
seventeen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Does Monitoring Decrease Work Effort? By David Dickinson; Marie-Claire Villeval
  2. Technology adoption and herding behavior in complex social networks By Natalie Svarcova; Petr Svarc
  3. Optimal Resolutions of Financial Distress by Contract By Nicola Gennaioli; Stefano Rossi
  4. Women in the Boardroom and Their Impact on Governance and Performance By Renee B. Adams; Daniel Ferreira
  5. Never the Same After the First Time: The Satisfaction of the Second-Generation Self-Employed By Clark, Andrew E.; Colombier, Nathalie; Masclet, David
  6. Determinants of the Size and Structure of Corporate Boards: 1935-2000 By Kenneth Lehn; Sukesh Patro; Mengxin Zhao
  7. Banks as organizations By Engwall, Lars
  8. Managerial Ownership Dynamics and Firm Value By Rudiger Fahlenbrach; Rene M. Stulz
  9. A Dynamic Analysis of Growth via Acquisition By Worawat Margsiri; Antonio S. Melloy; Martin E. Ruckesz
  10. Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in an Emerging Market By Morten Bennedsen; Kasper Meisner Nielsen; Thomas Vester Nielsen
  11. Mixed Bundling and Mergers By Laurent Granier; Marion Podesta
  12. Employee Satisfaction, Firm Value and Firm Productivity By Roger Best
  13. Board Structure and Price Informativeness By Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
  14. The Dynamics of Firm Growth - a re-examination By Lööf, Hans
  15. Contractual Institutions, Financial Development and Vertical Integration: Theory and Evidence By Rocco Macchiavello
  16. Rapid International Expansion Strategy of Emerging Market Enterprises: The Interplay between Speed and Competitive Risks on International Performance By Sea-Jin Chang; Jay Hyuk Rhee
  17. Changes in the Concept of and Approaches to Work Satisfaction By Kaarel Haav

  1. By: David Dickinson (Department of Economics - Appalachian State University); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: Agency theory assumes that tighter monitoring by the principal should motivate agents to increase their effort, whereas the “crowding-out” literature suggests that the opposite may occur. These two assertions are not necessarily contradictory provided that the nature of the employment relationship is taken into account (Frey 1993). Results from controlled laboratory experiments show that many principals engage in costly monitoring, and most agents react to the disciplining effect of monitoring by increasing effort. However, we also find some evidence that effort is crowded out when monitoring is above a certain threshold. We identify that both interpersonal principal/agent links and concerns for the distribution of output payoff are important for the emergence of this crowding-out effect.
    Keywords: principal-agent theory ; monitoring ; crowding-out ; motivation ; real effort experiment
    Date: 2008
  2. By: Natalie Svarcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Svarc (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Using a simple computational model, we study consequences of herding behavior in population of agents connected in networks with different topologies: random networks, small-world networks and scale-free networks. Agents sequentially choose between two technologies using very simple rules based on the previous choice of their immediate neighbors. We show that different seeding of technologies can lead to very different results in the choice of majority of agents. We mainly focus on the situation where one technology is seeded randomly while the other is directed to targeted (highly connected) agents. We show that even if the initial seeding is positively biased toward the first technology (more agents start with the choice of the first technology) the dynamic of the model can result in the majority choosing the second technology under the targeted hub approach. Even if the change to majority choice is highly improbable targeted seeding can lead to more favorable results. The explanation is that targeting hubs enhances the diffusion of the firm’s own technology and halts or slows-down the adoption of the concurrent one. Comparison of the results for different network topologies also leads to the conclusion that the overall results are affected by the distribution of number of connections (degree) of individual agents, mainly by its variance.
    Keywords: technology adoption, simulation, networks, herding behavior
    JEL: D71 D74
    Date: 2008–05
  3. By: Nicola Gennaioli; Stefano Rossi
    Abstract: We study theoretically the possibility for the parties to efficiently resolve financial distress by contract as opposed to exclusively rely on state intervention. We characterize which financial contracts are optimal depending on investor protection against fraud, and how efficient is the resulting resolution of financial distress. We find that when investor protection is strong, issuing a convertible debt security to a large, secured creditor who has the exclusive right to reorganize or liquidate the firm yields the first best. Conversion of debt into equity upon default allows contracts to collateralize the whole firm to that creditor, not just certain physical assets, thereby inducing him to internalize the upside from efficient reorganization. Concentration of liquidation rights on such creditor avoids costly inter-creditor conflicts. When instead investor protection is weak, the only feasible debt structure has standard foreclosure rights, even if it induces over-liquidation. The normative implications are that lifting legal restrictions on floating charge financing, convertibles and concentration of liquidation rights, and increasing investor protection against fraud should improve the efficiency of resolutions of financial distress.
    Keywords: Corporate Bankruptcy, Creditor Protection, Financial Contracting
    JEL: G33 K22
    Date: 2007–10
  4. By: Renee B. Adams; Daniel Ferreira
    Abstract: Although some argue that tokenism drives the selection of female directors, we show that they have a significant impact on measures of board effectiveness. In a large panel of data on publicly-traded firms from 1996-2003, we find that (1) the likelihood that a female director has attendance problems is 0.29 lower than for a male director, (2) male directors have fewer attendance problems the greater the fraction of female directors on the board, (3) firms with more diverse boards provide their directors with more payperformance incentives, and (4) firms with more diverse boards have more board meetings. We also show that the positive relationship between corporate performance measures and gender diversity documented by previous studies is not robust to attempts to address the endogeneity of diversity. Instead, the average effect of gender diversity on both market valuation and operating performance appears to be negative. This negative effect is driven by companies with greater shareholder rights. In firms with weaker shareholder rights, gender diversity has positive effects. Our results suggest that diverse boards are tougher monitors. Nevertheless, mandating gender quotas in the boardroom may not increase board effectiveness on average, but may reduce it for well-governed firms where additional monitoring is counterproductive.
    Keywords: Board of Directors; Board Effectiveness; Gender; Diversity
    JEL: G30 G34 J16
    Date: 2007–09
  5. By: Clark, Andrew E. (PSE); Colombier, Nathalie (University of Rennes); Masclet, David (University of Rennes)
    Abstract: Previous empirical work has shown that the self-employed are generally more satisfied than salaried workers. This paper contributes to the existing literature in two ways. First, using French data from the ECHP and British data from the BHPS, we investigate the domains over which this differential operates. We show that, after controlling for occupation, self-employed workers are generally more satisfied with working conditions and pay, but less satisfied than employees with respect to job security. We then consider the differences between the first- and second-generation self-employed. The first-generation self-employed (those whose parents were not self-employed) are more satisfied overall than are the second-generation self-employed. We argue that this finding is consistent with the self-employed partly comparing their labor market outcomes with those of their parents, as well as parental transfers which loosen the self-employment participation constraint. This result is found in both pooled and panel analysis.
    Keywords: satisfaction, self-employment, parents, intergenerational comparisons
    JEL: J20 J21 J23 J24
    Date: 2008–04
  6. By: Kenneth Lehn; Sukesh Patro; Mengxin Zhao
    Abstract: We argue that the size and composition of corporate boards are determined by tradeoffs involving the information that directors bring to boards versus the coordination costs and free rider problems associated with their additions to boards. Our hypotheses lead to predictions that firm size and growth opportunities are important determinants of these board characteristics. Using a sample of 82 U.S. firms that survived over the period of 1935 through 2000, we find strong support for the hypotheses. The hypotheses also find support in the relation between changes in board size and firms’ merger and divestiture activity, and changes in the geographical diversification of firms. We find no robust relation between firm performance and either board size or composition after accounting for the determinants of these board characteristics.
    Keywords: Board size, board composition, mergers and acquisitions, firm size, growth opportunities, diversification, geographical diversification, firm performance, and endogeneity
    JEL: G32 G34
    Date: 2007–12
  7. By: Engwall, Lars (Department of Business Studies, Uppsala University)
    Abstract: In analyzing banks as organizations this paper employs a model which distinguishes between three main actor groups in an organization: providers, personnel and customers. They are linked together by technology through different kinds of actor interface. Through the analysis four organizational issues are identified: flow, technology, allocation and quality. In addition different organizational solutions to handle these issues are discussed.
    Keywords: banks; organizational theory; banker; bankväsen; organisationsteori
    Date: 2008–04–18
  8. By: Rudiger Fahlenbrach; Rene M. Stulz
    Abstract: From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well, but not more likely to increase their ownership when their firms have poor performance. Because investors learn about the total change in managerial ownership with a lag, changes in Tobin’s q in a period can be affected by changes in managerial ownership in the previous period. In an efficient market, it is unlikely that changes in managerial ownership in one period are caused by future changes in q. When controlling for past stock returns, we find that large increases in managerial ownership increase q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We argue that our evidence cannot be wholly explained by existing theories and propose a managerial discretion theory of ownership consistent with our evidence.
    Keywords: Firm valuation, director and officer ownership, ownership dynamics
    JEL: G30 G32
    Date: 2008–01
  9. By: Worawat Margsiri; Antonio S. Melloy; Martin E. Ruckesz
    Abstract: Firms have a choice: grow through internal investment, or grow through acquisition. While internal growth takes time, an acquisition provides cash .ows immediately, as the acquirer bene.ts from the investments of previous owners. The opportunity to grow internally a¤ects the price of an acquisition as it is a fall-back option for the acquirer should negotiations break down. Thus, internal growth opportunities speed up acquisitions when integration costs are signi.cant or synergies not too great. Because investors do not have full information about the time a .rm requires to grow internally, acquirers earn positive returns before announcement of an acquisition, and there are negative stock price reactions to acquisition announcements for a wide range of parameter values. This research provides novel predictions about how pre-announcement price run-up and negative announcement returns relate to high integration costs and low synergies from acquisition, without requiring learning about these variables. The model also predicts that buyer-initiated acquisitions result in more pronounced negative acquirer announcement returns than seller-initiated acquisitions.
    Keywords: Corporate Investment, Acquisitions
    JEL: G31 G34
    Date: 2008–03
  10. By: Morten Bennedsen; Kasper Meisner Nielsen; Thomas Vester Nielsen
    Abstract: We analyse controlling owners incentive to provide non-controlling owners with better protection against self-dealing through offering new shares with tag-along rights, - the private contracting alternative to equal price provision in takeover legislation. Our model identifies two counteracting effects: The benefit of offering tag-along rights is the anti-expropriation effect which makes it harder for new owners to finance a takeover through expropriation of minority owners. The cost is the rent transfer effect which implies that there is a wealth transfer from controlling owners to existing minority owners. Empirically we test the implications of the model using data on equity offerings in Brazil. Consistent with the theoretical predictions we find that offering tag-along rights increases market value of a firm and that companies offering shares with tag-along rights offer larger claims, have less disproportional ownership structure, have a smaller group of existing minority shareholders and are more likely to issue new shares. The paper, thus, find strong support for private contracting being an important alternative governance mechanism to legal protection of investors.
    Keywords: Private contracting, Corporate governance, Emerging markets, Tag-along rights
    JEL: G30 G32 G34 G38
    Date: 2007–11
  11. By: Laurent Granier; Marion Podesta
    Abstract: Does bundling trigger mergers? We observe mergers between firms belonging to independent industries. These mergers enable firms to bundle. Indeed, many telephone firms, internet access providers or cable TV operators merge. Thus, the merged firms can provide bundles. Therefore, the question is the following: can bundling strategies allowed by a two-market merger create an incentive to merge? We consider two horizontally differentiated markets. The correlation of reservation prices is the sole link between these two markets. In this framework, we show that bundling strategies create incentives to form multi-markets firms. Merger decisions are endogenous in our model.
    Keywords: Product Bundling, Endogenous Mergers, Multi-Market Contacts
    Date: 2008
  12. By: Roger Best (University of Central Missouri)
    Abstract: We examine whether self-reported employee satisfaction is associated with higher firm valuation and productivity. Using a sample of firms from Fortune magazine’s list of "100 Best Companies to Work For", companies in which employees report high levels of satisfaction, we find that these firms have valuations that are significantly greater than both their respective industry medians and matched firms. The firms in our sample also exhibit greater levels of productivity and efficiency. Thus, successful efforts in increasing employee satisfaction appear to enhance overall firm productivity, which is subsequently rewarded by investors through higher equity values.
    Keywords: Employee satisfaction, firm value, firm productivity
    JEL: G30 G12 J41
    Date: 2008–05
  13. By: Daniel Ferreira; Miguel A. Ferreira; Clara C. Raposo
    Abstract: We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model’s predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring.
    Keywords: Corporate boards, Independent directors, Price informativeness
    JEL: G32 G34
    Date: 2008–02
  14. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This article provides evidence that shed further light on the dynamic relationships between finance, physical investment, R&D, productivity and profit. Estimating relationships for 5,289 observations on Swedish manufacturing firms with 50 or more employees over the 1992-2000 periods, the following substantial empirical findings emerge. First, physical investments are sensitive to both internal financing (profit) and external financing (expressed as leverage, or the ratio of debt over equity and debt) while R&D is only weakly affected by the firm’s finance conditions. Second, no robust correlation between knowledge investments and ordinary investments can be established. Third, R&D has a strong effect on productivity and profit. The reverse relationship is fragile and typically insignificant. The causality between physical capital and productivity is bidirectional, while increased profit leads to more capital but not the vice versa.
    Keywords: Financial constraints; R&D; Investments; Productivity; Panel data
    JEL: O31 O32
    Date: 2008–04–28
  15. By: Rocco Macchiavello
    Abstract: This paper presents an industry equilibrium model of vertical integration under contractual imperfections with specific input suppliers and external investors. I assume that vertical integration economizes on the needs for contracts with specific input suppliers at the cost of higher fixed costs. I show that contractual frictions with external investors affect vertical integration through two opposing channels whose relative intensities depend on other determinants of firms size distribution in the industry. Using cross-country-industry data, I present novel evidence on the institutional determinants of international differences in vertical integration which is consistent with the predictions of the theoretical model. In particular, I show that countries with more developed financial systems are relatively more vertically integrated in industries that employ a high share of workers in large firms.
    Keywords: Vertical Integration, Credit Constraints, Contract Enforcement, Developing Countries, Industry Equilibrium
    JEL: D23 L11 L22 O14
    Date: 2008
  16. By: Sea-Jin Chang; Jay Hyuk Rhee
    Abstract: Firms that internationalize relatively late may pursue rapid internationalization by entering multiple markets simultaneously to reach global scale faster and to capture early mover advantages. These trends run counter to the theory of incremental internationalization. With data on Korean firms’ early international expansion experiences, we found evidence that a rapid international expansion strategy enhances firm performance in industries where globalization pressures are high, by firms with less lead-time of their home-country rivals, and in countries where they could be early movers.
    Keywords: incremental internationalization, rapid international expansion strategy, emerging markets, foreign subsidiary survival, foreign direct investment
    Date: 2007–11
  17. By: Kaarel Haav (International University Audentes)
    Abstract: TThe paper reviews the main changes in the concept of work satisfaction in organization theory and management practice in the last century. It particularly focuses on developments in Estonia. The author contrasts dualist and integrated concepts of employees and organizations. Most of the empirical studies focus on hedonistic individuals and ignore the social construction of identities (Shamir 1991). In such psychological framework, the dilemmas of attitude-behaviour and satisfaction-performance can not be solved. Although the role of integrated approaches is increasing (especially in theories on organizational culture and identity), the psychological paradigm still dominates, especially in the practice of traditional hierarchical organizations. The paper describes a theoretical and an empirical typology of work satisfaction, based on social (organizational) and psychological (motivational) dimensions. They were developed in Estonia in the 1970s. These typologies reveal the role of satisfaction in regulation of work activities. The author relies on social and psychological dimensions of leadership and designs a new typology of leadership styles.
    Keywords: work motivation and activity, typology of satisfaction, psychological and sociological approaches, work and organizational design, employee participation
    JEL: M14
    Date: 2008

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