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on Business Economics |
| By: | Pengfei Wang; Yi Wen |
| Abstract: | We develop a general-equilibrium model of inventories with explicit micro-foundations by embedding the production-cost-smoothing motive (e.g., Eichenbaum, AER 1989) into an otherwise standard DSGE model. We show that firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The optimal inventory target of a firm is derived explicitly. The model is broadly consistent with many of the observed stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-sales ratio. In addition, the model yields novel predictions for the role of inventories in macroeconomic stability: Inventories may not only greatly amplify but also propagate the business cycle. That is, the incentive to accumulate inventories under the cost-smoothing motive can give rise to hump-shaped output dynamics and significantly higher volatility of GDP. Such predictions are in sharp contrast to the implications of the recent general-equilibrium inventory literature (e.g., Khan and Thomas, 2007; and Wen, 2008), which shows that inventory investment induced by traditional mechanisms (e.g., the stockout-avoidance motive and the (S,s) rule) does not increase the variance of aggregate output. |
| Keywords: | Equilibrium (Economics) ; Business cycles ; Inventories |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-10&r=bec |
| By: | Eklund, Johan (Ratio Institute and JIBS, CESIS); Palmberg, Johanna (JIBS, CESIS); Wiberg, Daniel (JIBS, CESIS) |
| Abstract: | In this paper the relation between ownership structure, board composition and firm performance is explored. A panel of Swedish listed firms is used to investigate how board composition affects firm performance. Board heterogeneity is measured as board size, age and gender diversity. The results show that Swedish board of directors have become more diversified in terms of gender. Also, fewer firms have the CEO on the board which can be interpreted as a sign of increased independency. The regression analysis shows that gender diversity has a small but negative effect on investment performance, and the same holds for CEO being on the board. The analysis also show that board size has a significant negative effect on investment performance. When incorporating all the explanatory variables into one equation however, the negative effect of larger boards dilutes the effect of gender diversity and having the CEO on the board. |
| Keywords: | Corporate governance; board composition; investments performance; marginal q |
| JEL: | G30 L20 L21 L22 L25 |
| Date: | 2009–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0172&r=bec |
| By: | Lieven Baert; Rudi Vander Vennet |
| Abstract: | We investigate whether or not banks play a positive role in the ownership structure of European listed firms. We distinguish between banks and other institutional investors as shareholders and examine empirically the relationship between financial institution ownership and the performance of the firms in which they hold equity. Our main finding is that after controlling for the capital structure decision of the firms and the ownership decision of financial institutions in a simultaneous equations model, we find that there is a negative relationship between financial institution ownership and the market value of firms, measured as the Tobin's Q. This is in contradiction with the monitoring hypothesis. |
| Keywords: | Financial institution ownership, Firm value, Capital structure |
| JEL: | G32 G20 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin2020&r=bec |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | We study the sources of the Great Moderation by estimating a variety of medium-scale dynamic stochastic general equilibrium (DSGE) models that incorporate regime switches in shock variances and the inflation target. The best-fit model—the one with two regimes in shock variances—gives quantitatively different dynamics compared 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 considerably fewer nominal rigidities than the literature suggests. incompl s |
| Keywords: | regime-switching DSGE, shock variances, inflation target, nominal rigidities, intertemporal capital accumulation shocks, model comparison CL HG2567 A4A5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2009-03&r=bec |
| By: | Hui Chen; Jianjun Miao; Neng Wang |
| Abstract: | Entrepreneurs face significant non-diversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial finance to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. The optimal capital structure is determined by a generalized tradeoff model where leverage via risky non-recourse debt provides significant diversification benefits. More risk-averse entrepreneurs default earlier, but also choose higher leverage, even though leverage makes his equity more risky. Non-diversified entrepreneurs demand both systematic and idiosyncratic risk premium. Cash-out option and external equity further improve diversification and raise the entrepreneur’s valuation of the firm. Finally, entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt. |
| JEL: | E2 G11 G31 G32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14848&r=bec |
| By: | Patrick Bolton; Hui Chen; Neng Wang |
| Abstract: | This paper proposes a simple homogeneous dynamic model of investment and corporate risk management for a financially constrained firm. Following Froot, Scharfstein, and Stein (1993), we define a corporation’s risk management as the coordination of investment and financing decisions. In our model, corporate risk management involves internal liquidity management, financial hedging, and investment. We determine a firm’s optimal cash, investment, asset sales, credit line, external equity finance, and payout policies as functions of the following key parameters: 1) the firm’s earnings growth and cash-flow risk; 2) the external cost of financing; 3) the firm’s liquidation value; 4) the opportunity cost of holding cash; 5) investment adjustment and asset sales costs; and 6) the return and covariance characteristics of hedging assets the firm can invest in. The optimal cash inventory policy takes the form of a double-barrier policy where i) cash is paid out to shareholders only when the cash-capital ratio hits an endogenous upper barrier, and ii) external funds are raised only when the firm has depleted its cash. In between the two barriers, the firm adjusts its capital expenditures, asset sales, and hedging policies. Several new insights emerge from our analysis. For example, we find an inverse relation between marginal Tobin’s q and investment when the firm draws on its credit line. We also find that financially constrained firms may have a lower equity beta in equilibrium because these firms tend to hold higher precautionary cash inventories. |
| JEL: | E22 G12 G32 G35 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14845&r=bec |
| By: | Xiaoji Lin; Santiago Bazdrech; Frederico Belo |
| Abstract: | We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market and momentum as well as other known predictors of stock returns. The predictability shows up in both Fama-MacBeth cross sectional regressions and in portfolio sorts and it is robust to the exclusion of micro cap firms from the sample. We propose a production-based asset pricing model with adjustment costs in labor and capital that replicates the main empirical findings well. Labor adjustment costs makes hiring decisions forward looking in nature and thus informative about the firms’ expectations about future cash-flows and risk-adjusted discount rates. The model implies that the investment rate and the hiring rate predicts stock returns because these variables proxy for the firm’s time-varying conditional beta. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp628&r=bec |
| By: | Oscar Mitnik (Department of Economics, University of Miami); Qiang Kang (Department of Finance, University of Miami) |
| Abstract: | There is a debate on whether executive pay reflects rent extraction due to “managerial power†or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define “lucky†grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the “outrage†constraint due to the episode of financial distress. |
| Keywords: | CEO compensation, CEO turnover, financial distress, lucky grants, bias-corrected matching estimators |
| JEL: | G30 J33 M52 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:0906&r=bec |
| By: | Takanori Tanaka (Graduate School of Economics, Osaka University) |
| Abstract: | This paper investigates whether managerial entrenchment of controlling shareholders affects corporate bond financing. Using data on Japanese manufacturing firms, we find that firms with controlling shareholders issue less straight corporate bonds than other firms. The results show that managerial entrenchment of controlling shareholders has an influential impact on corporate bond financing. |
| Keywords: | Managerial entrenchment; Large corporate shareholders; Corporate bonds |
| JEL: | G32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0910&r=bec |
| By: | Gábor Pellényi; Tamás Borkó |
| Abstract: | We examine the impact of bank competition and institutional factors on net firm entry in a sample of European manufacturing industries over the 1995-2006 period. Taking into account industry differences in the need for external finance, we find that bank competition helps firm entry. In addition, better institutions - especially legal structure and property rights - also have a positive impact, particularly through a better functioning financial system. |
| Keywords: | market structure, banks, market entry, manufacturing, financial development |
| JEL: | D4 G21 L11 L60 O16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin5010&r=bec |
| By: | HOSONO Kaoru |
| Abstract: | Using a dynamic general equilibrium model of firm dynamics that incorporates financial intermediation costs, we quantify the degree to which the deterioration in the health of banks during the Japanese banking crisis had an impact on aggregate productivity through firm dynamics. We find that the deterioration of bank health accounts for about 20 percent to 30 percent of the actual decline in the de-trended TFP during the crisis period (1996-2002). Our results suggest that differential impacts of financial intermediation costs between more and less productive firms or between entrants and incumbents are essential to quantitatively assess the aggregate consequences of financial crises. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09012&r=bec |
| By: | Pouliakas, Konstantinos; Theodossiou, Ioannis |
| Abstract: | The increasing use of incentive pay schemes in recent years has raised concerns about their potential detrimental effect on intrinsic job satisfaction (JS), job security and employee morale. This study explores the impact of pay incentives on the overall job satisfaction of workers in the UK and their satisfaction with various facets of jobs. Using data from eight waves (1998-2005) of the British Household Panel Survey (BHPS) and a uniquely-designed well-being dataset (EPICURUS), a significant positive impact on job satisfaction is only found for those receiving fixed-period bonuses. These conclusions are robust to unobserved heterogeneity, and are shown to depend on a number of job-quality characteristics that have not been controlled for in previous studies. |
| Keywords: | performance-related-pay; job satisfaction; job security; intrinsic satisfaction; sorting; |
| JEL: | J33 J28 |
| Date: | 2009–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14244&r=bec |
| By: | Matthias Göcke (University of Giessen, Licher Str. 62, D - 39394 Gießen, Germany) |
| Abstract: | Efficiency wage effects of profit sharing are combined with option values related to stochastic future profit variations. These option effects occur if the workers’ profit share is fixed by long-term contracts. The Pareto-improving optimal level of the sharing ratio is calculated for two different scenarios. First, if the firm can unilaterally decide, the expected present value of net profits is maximised. Second, if the sharing ratio is based on bilateral Nash bargaining. Since a larger variation of revenues implies a higher redistribution of future profits, the inclusion of expected variations results in a lower worker’s profit ratio in both scenarios. |
| JEL: | D81 J33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200919&r=bec |
| By: | Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper investigates the combined impact of a first-mover advantage and of firms' limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as aStackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms' equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of thefollower. It also increases the distance between the firms' respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads. |
| Keywords: | Real options; Preemption; First-mover advantage; Mobility |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00371847_v1&r=bec |
| By: | Sunil Gupta; Carl F. Mela; Jose M. Vidal-Sanz |
| Abstract: | We study the problem of a firm that faces asymmetric information about the productivity of its potential workers. In our framework, a worker’s productivity is either assigned by nature at birth, or determined by an unobservable initial action of the worker that has persistent effects over time. We provide a characterization of the optimal dynamic compensation scheme that attracts only high productivity workers: consumption –regardless of time period– is ranked according to likelihood ratios of output histories, and the inverse of the marginal utility of consumption satisfies the martingale property derived in Rogerson (1985). However, in the case of i.i.d. output and square root utility we show that, contrary to the features of the optimal contract for a repeated moral hazard problem, the level and the variance of consumption are negatively correlated, due to the influence of early luck into future compensation. Moreover, in this example long-term inequality is lower under persistent private information |
| Keywords: | Customer lifetime value, CRM, Dynamic programming, GMM Estimation |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb092903&r=bec |
| By: | Thomas J. Holmes; Julia Thornton Snider |
| Abstract: | We develop a theory of outsourcing in which there is market power in one factor market (labor) and no market power in a second factor market (capital). There are two intermediate goods: one labor-intensive and the other capital-intensive. We show there is always outsourcing in the market allocation when a friction limiting outsourcing is not too big. The key factor underlying the result is that labor demand is more elastic, the greater the labor share. Integrated plants pay higher wages than the specialist producers of labor-intensive intermediates. We derive conditions under which there are multiple equilibria that vary in the degree of outsourcing. Across these equilibria, wages are lower the greater the degree of outsourcing. Wages fall when outsourcing increases in response to a decline in the outsourcing friction. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:669&r=bec |
| By: | Degryse, H.A.; Goeij, P. C. de; Kappert, P. (Tilburg University, Center for Economic Research) |
| Abstract: | We investigate small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. We find that the capital structure decision of Dutch SMEs is consistent with the pecking order theory: SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. Furthermore, we document that profits reduce in particular short term debt, whereas growth increases long term debt. This implies that when internal funds are depleted, long term debt is next in the pecking order. We also find evidence for the maturity matching principle in SME capital structure: long term assets are financed with long term debt, while short term assets are financed with short tem debt. This implies that the maturity structure of debt is an instrument for lenders to deal with problems of asymmetric information. Finally, we find that SME capital structure varies across industries but firm characteristics are more important than industry characteristics. |
| Keywords: | Capital Structure;SMEs;pecking order theory;trade-off theory |
| JEL: | G32 G30 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200921&r=bec |