nep-bec New Economics Papers
on Business Economics
Issue of 2009‒02‒07
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. An Intra-Firm Perspective on Wage Profiles and Employment of Older Workers with Special Reference to Human Capital and Deferred Compensation By Pfeifer, Christian
  2. Firms' relative sensitivity to aggregate shocks and the dynamics of gross job flows By Eugenio P. Pinto
  3. Sources of the Great Moderation: shocks, friction, or monetary policy? By Zheng Liu; Daniel F. Waggoner; Tao Zha
  4. Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q* By Enrique G. Mendoza
  5. Corporate Financial and Investment Policies When Future Financing Is Not Frictionless By Almeida, Heitor; Campello, Murillo; Weisbach, Michael S.
  6. Financing obstacles and growth - an analysis for euro area non-financial corporations By Chiara Coluzzi; Annalisa Ferrando; Carmen Martinez-Carrascal
  7. Persistence of outstanding performance and shareholder value among diversified firms: The impact of past performance, efficient internal capital market, and relatedness of business segments By Marinelli, Federico
  8. Imitators and Optimizers in Cournot Oligopoly By Schipper, Burkhard
  9. Cross-Border Information Transfers: Evidence from Profit Warnings Issued by European Firms By Paulo Alves; Peter Pope; Steven Young
  10. Long-Run Impacts of Unions on Firms: New Evidence from Financial Markets, 1961-1999 By David Lee; Alexandre Mas
  11. Risk-adjusted forecasts of oil prices By Patrizio Pagano; Massimiliano Pisani
  12. Identifying the elasticity of substitution with biased technical change By Miguel A. León-Ledesma; Peter McAdam; Alpo Willman
  13. Financial Leverage and Corporate Taxation : Evidence from German Corporate Tax Return Data By Nadja Dwenger; Viktor Steiner
  14. Understanding Commercial Real Estate: Just How Different from Housing Is It? By Joseph Gyourko
  15. Relational Accounts: An Answer for Women to the Compensation Negotiation Dilemma By Bowles, Hannah Riley; Babcock, Linda
  16. Distress in the financial sector and economic activity By Mark A. Carlson; Thomas B. King; Kurt F. Lewis
  17. Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry By Kline, Patrick
  18. Optimal Resource Extraction Contracts under Threat of Expropriation By Engel, Eduardo; Fischer, Ronald
  19. Optimal stopping under ambiguity By Frank Riedel

  1. By: Pfeifer, Christian
    Abstract: Human capital and deferred compensation might explain why firms employ but do not hire older workers. Adjustments of wage-tenure profiles for older new entrants are explored in the context of deferred compensation. From an equity theory perspective, such adjustments might lead to adverse incentive effects so that firms prefer to hire rather homogenous workers in terms of entry age. A personnel data set is analyzed which reveals that at least for white-collar workers entry age has a positive effect on entry wages and wage-tenure profiles are adjusted according to entry age.
    Keywords: deferred compensation, human capital, internal labor markets, older workers, wages
    JEL: J14 J24 J31 J33 M51 M52
    Date: 2009–02
  2. By: Eugenio P. Pinto
    Abstract: We propose a measure for the importance of aggregate shocks for fluctuations in job flows at the firm level. Using data for the Portuguese economy, we find that large and old firms exhibit higher relative sensitivity to aggregate shocks and have a disproportional influence over the dynamics of aggregate job reallocation. In the overall economy, since large and old firms reallocate jobs less procyclically than small and young firms, job reallocation is less procyclical than if firm size and age classes were equally sensitive to aggregate shocks. A similar result applies in the manufacturing and the transportation and public utilities sectors. However, in the services and retail trade sectors the reallocation patterns are more similar across firm size and age, likely reflecting the expansion of existing and the creation of new industries. We conclude that large and old firms seem relatively more important to assess the state of the business cycle.
    Date: 2009
  3. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale DSGE models that incorporate regime switches in shock variances and in the inflation target. The best-fit model, the one with two regimes in shock variances, gives quantitatively different dynamics in comparison with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate much less nominal rigidities than those suggested in the literature.
    Keywords: Econometric models ; Business cycles
    Date: 2009
  4. By: Enrique G. Mendoza
    Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
    Date: 2008
  5. By: Almeida, Heitor (U of Illinois); Campello, Murillo (U of Illinois); Weisbach, Michael S. (Ohio State U)
    Abstract: We study a model in which future financing constraints lead firms to have a preference for investments with shorter payback periods, investments with less risk, and investments that utilize more pledgeable assets. The model also shows how investment distortions towards more liquid, safer assets vary with the marginal cost of external financing and with firm internal cash flows. Our theory helps reconcile and interpret a number of patterns reported in the empirical literature, in areas such as risk-taking behavior, capital structure choices, hedging strategies, and cash management policies. For example, contrary to Jensen and Meckling (1976), we show that firms may reduce rather than increase risk when leverage increases exogenously. Furthermore, firms in economies with less developed financial markets will not only take different quantities of investment, but will also take different kinds of investment (safer, short-term projects that are potentially less profitable). We also point out to several predictions that have not been empirically examined. For example, our model predicts that investment safety and liquidity are complementary: constrained firms are specially likely to decrease the risk of their most liquid investments.
    Date: 2008–09
  6. By: Chiara Coluzzi (University of Rome “Tor Vergata”, Via Columbia 2, I-00133 Roma, Italy.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carmen Martinez-Carrascal (Banco de España, Alcalá 50, E-28014 Madrid, Spain.)
    Abstract: This paper investigates whether financial obstacles, and, more generally, financial pressure faced by firms, significantly affect firm growth. For this purpose, we use an unbalanced panel of about 1,000,000 observations for around 155,000 non-financial corporations in five euro area countries. In addition to the balance sheet information in this panel, we also rely on firm-level survey data. In this way we are able to work out a direct measure of the firms’ probability of facing financing obstacles. Our results indicate that, though based on few variables, this measure appears to be relevant in explaining firm growth in four out of the five countries considered. Other firm-level variables related to the financial pressure faced by firms, such as cash flow (debt burden) are found to exert a positive (negative) impact on firm growth, while the results for leverage are less clear-cut. JEL Classification: C23, E22, G32, L11, L25.
    Keywords: Financing Constraints, Firm Growth, Panel Data.
    Date: 2009–01
  7. By: Marinelli, Federico (IESE Business School)
    Abstract: The research domain that attempts to study the relationship between diversification and performance has not yet reached definitive and interpretable findings, and recent studies challenge the existence of a "diversification discount" and explain it partially by a data artefact. None of these studies centred their research on the question: does there exist a specific performance pattern among diversified firms? This research aims to identify persistence in performance heterogeneity by measuring the shareholder value creation of diversified firms using alternative indicators other than the excess value methodology. It also aims to measure the impact on the performance according to the degree of efficiency of the internal capital market and the degree of relatedness among business segments. A sample of 164 diversified firms with turnover higher than 1$ billion during the period 1999-2006 is examined. Because of the presence of the firm's specific effect and the length of the time series, the persistence performance is tested through the instrumental variables (IV) system generalized method of moments (GMM) dynamic panel data and the persistence of shareholder value creation and destruction is estimated according to different estimators from top tercile and lower tercile portfolios of diversified firms. Some diversified firms persistently create value as well as beat the market index while others persistently underperform. Finally, if the efficiency of the internal capital market gives certain explanatory power of the performance pattern, but limited compared to the past performance, important insights might be drawn from the findings that diversified firms with segments in many unrelated industries perform better than others in few industries or with a high number of segments; hence the inverted-U curvilinear relationship between diversification and performance is here not confirmed.
    Keywords: diversification; performance persistence; internal capital market; relatedness obusiness segments;
    Date: 2008–07–15
  8. By: Schipper, Burkhard (U of California, Davis)
    Abstract: We analyze a symmetric n-firm Cournot oligopoly with a heterogeneous population of optimizers and imitators. Imitators mimic the output decision of the most successful firms of the previous round a la Vega-Redondo (1997). Optimizers play a myopic best response to the opponents' previous output. Firms are allowed to make mistakes and deviate from their decision rules with a small probability. Applying stochastic stability analysis, we find that the long run distribution converges to a recurrent set of states in which imitators are better off than are optimizers. This finding appears to be robust even when optimizers are more sophisticated. It suggests that imitators drive optimizers out of the market contradicting a fundamental conjecture by Friedman (1953).
    JEL: C72
    Date: 2008–02
  9. By: Paulo Alves (Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto) and Lancaster University); Peter Pope (Lancaster University); Steven Young (Lancaster University)
    Abstract: This paper reports evidence on cross-border accounting information transfers associated with profit warning announcements. Using a sample of firms from 29 European countries, we find that negative earnings surprises disclosed by firms in one country affect investors’ perceptions of comparable nonannouncing firms in other countries. The form and magnitude of cross-border effects is consistent with domestic transfers. Tests explaining variation in cross-border information transfers provide some (albeit rather limited) evidence that effects vary according to a range of firm-, industry- and country-level characteristics.
    Keywords: Information transfers; Profit warnings
    Date: 2009–01
  10. By: David Lee; Alexandre Mas
    Abstract: We estimate the effect of new unionization on firms' equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm equivalent to a cost of at least $40,500 per unionized worker. At the same time, point estimates from a regression-discontinuity design -- comparing the stock market impact of close union election wins to close losses -- are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings. Using the magnitudes from the analysis, we calibrate a structural "median voter" model of endogenous union determination in order to conduct counterfactual policy simulations of policies that would marginally increase the ease of unionization.
    JEL: J01 J08 J5 J51
    Date: 2009–02
  11. By: Patrizio Pagano (Bank of Italy, via Nazionale 91, I - 00184 Rome, Italy.); Massimiliano Pisani (Bank of Italy, via Nazionale 91, I - 00184 Rome, Italy.)
    Abstract: This paper documents the existence of a significant forecast error on crude oil futures. We interpret it as a risk premium, which, in part, could have been explained by means of a real-time US business cycle indicator, such as the degree of capacity utilization in manufacturing. This result is robust to the specification of the estimating equation and to the considered business cycle indicator. An out-of-the-sample prediction exercise reveals that futures adjusted to take into account this time-varying component produce significantly better forecasts than those of unadjusted futures, of futures adjusted for the average forecast error and of the random walk, particularly at horizons of more than 6 months. JEL Classification: E37, E44, G13, Q4.
    Keywords: Oil, Forecasting, Futures.
    Date: 2009–01
  12. By: Miguel A. León-Ledesma (Department of Economics, Keynes College, University of Kent, Canterbury, Kent CT2 7NP, United Kingdom.); Peter McAdam (Corresponding author: Research Department, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.); Alpo Willman (Research Department, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, especially when merged with "normalization". Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and the variability underlying past empirical studies. JEL Classification: C22, E23, O30, 051.
    Keywords: Constant Elasticity of Substitution, Factor-Augmenting Technical Change, Normalization, Factor Income share, Identification, Monte Carlo.
    Date: 2009–01
  13. By: Nadja Dwenger; Viktor Steiner
    Keywords: financial leverage, financial structure, debt ratio, corporate income taxation, corporate tax return data
    JEL: G32 G38 H25 H32
    Date: 2009
  14. By: Joseph Gyourko
    Abstract: Recent sharp declines in owner-occupied housing prices naturally raise the question of whether something similar will happen to income-producing properties. It already has based on the nearly 60% decline in the share prices of publicly-traded, commercial property firms from their peak in early 2007. The core model of spatial equilibrium in urban economics suggests this should not be a surprise, as it shows that both real estate sectors are driven by common fundamentals, which should make them perform similarly. On the other hand, stronger limits to arbitrage in housing suggest wider swings in prices unrelated to fundamentals are feasible in that property sector. The data find many more similarities than differences across the two real estate sectors. The simple correlation between appreciation rates on owner-occupied housing and commercial real estate is nearly 40%. Both sectors also exhibit similar time series patterns in their price appreciation, with there being persistence across individual years and mean reversion over longer periods. Commercial real estate capital structure looks to be quite weak due to high leverage combined with strong mean reversion in prices. The aggregate loan-to-value ratio on income-producing properties is about 75%. Estimated mean reversion in price appreciation of at least 25% over relatively short horizons suggests that normal change from the recent peak will leave little or no equity on average to cushion against any future negative shocks.
    JEL: R0 R21 R31
    Date: 2009–02
  15. By: Bowles, Hannah Riley (Harvard U); Babcock, Linda (Carnegie Mellon U)
    Abstract: Women face a compensation negotiation dilemma in which they have to weigh the economic benefits of asking for higher pay with the social risks of defying prescriptive sex stereotypes (Bowles, Babcock, & Lai, 2007). In four experiments, we show that enhancing the legitimacy of women's compensation requests does not eliminate the social risk of asking, and that eliminating the social risk of asking is not sufficient to legitimize their requests. We identify strategies for overcoming the compensation negotiation dilemma using "relational accounts" that simultaneously explain why the negotiating behavior is appropriate under the circumstances and affirm concern for organizational relationships.
    Date: 2008–11
  16. By: Mark A. Carlson; Thomas B. King; Kurt F. Lewis
    Abstract: This paper explores the relationship between the health of the financial sector and the rest of the economy. We develop an indicator of financial sector health using a distance-to-default measure based on a Merton-style option pricing model. Our measure spans over three decades and appears to capture periods when financial sector institutions were strong and when they were weak. We then use vector autoregressions to assess whether our indicator of financial-sector health affects the real economy, in particular non-residential investment. The results indicate that our measure has a considerable impact. Moreover, we find that this financial channel amplifies changes in investment resulting from shocks to non-financial firm profitability.
    Date: 2009
  17. By: Kline, Patrick (Yale U)
    Abstract: This paper examines the response of employment and wages in the US oil and gas field services industry to changes in the price of crude petroleum using a time series of quarterly data spanning the period 1972-2002. I find that labor quickly reallocates across sectors in response to price shocks but that substantial wage premia are necessary to induce such reallocation. The timing of these premia is at odds with the predictions of standard models-wage premia emerge quite slowly, peaking only as labor adjustment ends and then slowly dissipating. After considering alternative explanations, I argue that a dynamic market clearing model with sluggish movements in industry wide labor demand is capable of rationalizing these findings. I proceed to structurally estimate the parameters of the model by minimum distance and find that simulated impulse responses match key features of the estimated dynamics. I also provide auxiliary evidence corroborating the implied dynamics of some important unobserved variables. I conclude with a discussion of the strengths and weaknesses of the model and implications for future research.
    JEL: J20
    Date: 2008–03
  18. By: Engel, Eduardo (Yale U); Fischer, Ronald (U of Chile)
    Abstract: The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation, which generates a social cost that increases with the expropriated value. In this environment, the planner's optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended to incorporate government subsidies, unenforceable investment effort and political moral hazard, and the general thrust of the results described above is preserved.
    JEL: H21
    Date: 2008–01
  19. By: Frank Riedel (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We consider optimal stopping problems for ambiguity averse decision makers with multiple priors. In general, backward induction fails. If, however, the class of priors is time–consistent, we establish a generalization of the classical theory of optimal stopping. To this end, we develop first steps of a martingale theory for multiple priors. We define minimax (super)martingales, provide a Doob–Meyer decomposition, and characterize minimax martingales. This allows us to extend the standard backward induction procedure to ambiguous, time– consistent preferences. The value function is the smallest process that is a minimax supermartingale and dominates the payoff process. It is optimal to stop when the current payoff is equal to the value function. Moving on, we study the infinite horizon case. We show that the value process satisfies the same backward recursion (Bellman equation) as in the finite horizon case. The finite horizon solutions converge to the infinite horizon solution. Finally, we characterize completely the set of time–consistent multiple priors in the binomial tree. We solve two classes of examples: the so–called independent and indistinguishable case (the parking problem) and the case of American Options (Cox–Ross–Rubinstein model).
    Keywords: optimal stopping, ambiguity, uncertainty aversion
    JEL: D81 C61 G11
    Date: 2007–03

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