nep-bec New Economics Papers
on Business Economics
Issue of 2009‒12‒11
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Investment Shocks and Business Cycles By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  2. Labor Supply Heterogeneity and Macroeconomic Co-movement By Stefano Eusepi; Bruce Preston
  3. Adjustment of Deferred Compensation Schemes, Fairness Concerns, and Hiring of Older Workers By Christian Pfeifer
  4. Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence By Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Serven, Luis
  5. What Does CEOs’ Personal Leverage Tell Us About Corporate Leverage? By Cronqvist, Henrik; Makhija, Anil K.; Yonker, Scott E.
  6. Excess Turnover and Employment Growth: Firm and Match Heterogeneity By Centeno, Mário; Machado, Carla; Novo, Álvaro A.
  7. The Internal Governance of Firms By Viral V. Acharya; Stewart C. Myers; Raghuram Rajan
  8. A New Keynesian analysis of industrial employment fluctuations. By Miguel Casares
  9. Collateral constraints and the amplification-persistence trade-off By Patrick-Antoine Pintus
  10. What Causes Business Cycles? Analysis of the Japanese Industrial Production Data By Hiroshi Iyetomi; Yasuhiro Nakayama; Hiroshi Yoshikawa; Hideaki Aoyama; Yoshi Fujiwara; Yuichi Ikeda; Wataru Souma
  11. Effective Working Hours and Wages: The Case of Downward Adjustment via Paid Absenteeism By Christian Pfeifer
  12. Cross-Country Differences in Productivity: The Role of Allocation and Selection By Bartelsman, Eric; Haltiwanger, John C.; Scarpetta, Stefano
  13. Bank safety under Basel II capital requirements By Vauhkonen, Jukka
  14. Creditor rights and corporate risk-taking By Viral V. Acharya; Yakov Amihud; Lubomir Litov
  15. How Much Consumption Insurance Beyond Self-Insurance? By Greg Kaplan; Giovanni L. Violante
  16. Offshoring and Firm Performance: Self-Selection, Effects on Performance, or Both? By Wagner, Joachim
  17. Employment comovements at the sectoral level over the business cycle. By Steven P. Cassou; Jesús Vázquez
  18. Risk-adjusted measures of value creation in financial institutions By Milne, Alistair; Onorato, Mario
  19. Leveraged financing, over investment, and boom-bust cycles By Patrick-Antoine Pintus; Yi Weng
  20. Perceived Unfairness in CEO Compensation and Work Morale By Cornelissen, Thomas; Himmler, Oliver; Koenig, Tobias
  21. The Effects of Oil Price Changes on the Industry-Level Production and Prices in the U.S. and Japan. By Ichiro Fukunaga; Naohisa Hirakata; Nao Sudo

  1. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: We study the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies, but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing.
    JEL: C11 E3 E32
    Date: 2009–12
  2. By: Stefano Eusepi; Bruce Preston
    Abstract: Standard real-business-cycle models must rely on total factor productivity (TFP) shocks to explain the observed co-movement between consumption, investment and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption, can generate co-movement in absence of TFP shocks. Intertemporal substitution of goods and leisure induces co-movement over the business cycle through heterogeneity in consumption behavior of employed and unemployed workers. The result is due to two model features that are introduced to capture important characteristics of US labor market data. First, individual consumption is affected by the number of hours worked with employed consuming more on average than unemployed. Second, changes in the employment rate, a central explanator of total hours variation, then affects aggregate consumption. Demand shocks --- such as shifts in the marginal efficiency of investment, government spending shocks and news shocks --- are shown to generate economic fluctuations consistent with observed business cycles.
    JEL: E13 E24 E32
    Date: 2009–12
  3. By: Christian Pfeifer (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: Hutchens (1986, Journal of Labor Economics 4(4), pp. 439-457) argues that deferred compensation schemes impose fixed-costs to firms and, therefore, they employ older workers but prefer to hire younger workers. This paper shows that deferred compensation can be a recruitment barrier even without these fixed-costs, because adjustments of wage-tenure profiles for older new entrants can lead to adverse incentive effects from a fairness perspective. A personnel data set and a linked employeremployee data set reveal that wage-tenure profiles of white-collar workers are indeed adjusted according to entry age but that firms still hire few older workers.
    Keywords: deferred compensation, entry age, fairness, internal labor markets, wages
    JEL: J14 J31 J33 M51 M52
    Date: 2009–11
  4. By: Basu, Susanto (Boston College); Pascali, Luigi (Boston College); Schiantarelli, Fabio (Boston College); Serven, Luis (World Bank)
    Abstract: We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reflect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.
    Keywords: productivity, welfare, reallocation, technology, TFP
    JEL: D24 D90 E20 O47
    Date: 2009–12
  5. By: Cronqvist, Henrik (Claremont McKenna College); Makhija, Anil K. (The Ohio State University); Yonker, Scott E. (The Ohio State University)
    Abstract: We find that firms behave remarkably similarly to how their CEOs behave personally when it comes to leverage choices. We start our analysis by compiling a comprehensive sample of home purchases and financings among S&P 1,500 CEOs. Debt financing in a CEO’s most recent home purchase is used as a revealed preference of the CEO’s personal attitude towards debt. We find a robust positive relation between personal and corporate leverage. We also find that firms tend to hire CEOs with a similar personal attitude towards debt as the previous CEO. When the new and previous CEOs have different personal preferences, corporate leverage changes in the direction of the new CEO’s personal leverage. These results support a model with endogenous matching of CEOs to firms. We also find that the positive relation between CEOs’ personal leverage and corporate leverage is stronger in firms with poor governance, suggesting that CEOs imprint their personal preferences on the firms they manage when they are able to do so. These results suggest that heterogeneity in CEOs’ personal attitudes towards debt partly explains differences in corporate capital structures, and suggest more generally that an analysis of CEOs’ personalities and personal traits may provide important information about the financial policies of the firms they manage.
    Keywords: Corporate leverage; personal leverage; CEO characteristics
    JEL: G32
    Date: 2009–08–15
  6. By: Centeno, Mário (Banco de Portugal); Machado, Carla (Autoridade Nacional de Comunicações (ANACOM)); Novo, Álvaro A. (Banco de Portugal)
    Abstract: Portuguese firms engage in intense reallocation, most employers simultaneously hire and separate from workers, resulting in a large heterogeneity of flows and excess turnover. Large and older firms have lower flows, but high excess turnover rates. In small firms, hires and separations move symmetrically during expansion and contraction periods, on the contrary, large firms adjust their employment levels by reducing entry and not by increasing separations. Most hires and separations are on fixed-term contracts and shrinking firms replace a larger share of their separations under fixed-term contracts, while expanding firms replace most of the separations under open-ended contracts. The comparison with the U.S. shows that while worker and job flows are lower in Portugal, the excess turnover is remarkably close in the two countries.
    Keywords: job flows, worker flows, excess turnover, fixed-term contracts, firm size
    JEL: J21 J23 J63
    Date: 2009–11
  7. By: Viral V. Acharya; Stewart C. Myers; Raghuram Rajan
    Abstract: We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. Internal governance works best when both top management and subordinates are important in generating cash flow. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control. Our paper can explain why firms with limited external oversight, and firms in countries with poor external governance, can have substantial value.
    JEL: G31 G34 G35
    Date: 2009–12
  8. By: Miguel Casares (Departamento de Economía-UPNA)
    Abstract: This paper describes a model with sticky prices, search frictions and hours-clearing wages that provides firm differentiation across several dimensions: price, output, wage, employment and hours per worker. The connection between pricing and hiring decisions results in firm-level employment fluctuations that depend upon sticky prices, search costs, demand elasticity and labor supply elasticity. The calibrated model is able to match average US industrial employment volatility when assuming a small industrial size, providing one possible answer to Shimer (2005a)´s puzzle.
    Keywords: search frictions, sticky prices, industrial employment
    JEL: E3 J2 J3 J4
    Date: 2009
  9. By: Patrick-Antoine Pintus (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: Kiyotaki and Moore (1997) have stressed that an amplification-persistence trade-off arises when collateral constraints on borrowing interact with lumpy investment. In this paper, I confirm by way of example that collateral constraints are not by themselves responsible for such a deceptive trade-off. More precisely, I show in a standard general-equilibrium two-agent model that the amplification and persistence of the impact of temporary shocks go hand in hand. Unlike Kiyotaki-Moore's, the economy features concave utility and production functions, an endogenous interest rate and neo-classical input accumulation
    Keywords: collateral constraints; amplification and persistence of aggregate shocks
    Date: 2009
  10. By: Hiroshi Iyetomi; Yasuhiro Nakayama; Hiroshi Yoshikawa; Hideaki Aoyama; Yoshi Fujiwara; Yuichi Ikeda; Wataru Souma
    Abstract: We explore what causes business cycles by analyzing the Japanese industrial production data. The methods are spectral analysis and factor analysis. Using the random matrix theory, we show that two largest eigenvalues are significant, and identify the first dominant factor as the aggregate demand, and the second factor as inventory adjustment. They cannot be reasonably interpreted as technological shocks. We demonstrate that in terms of two dominant factors, shipments lead production by four months. Furthermore, out-of-sample test demonstrates that the model stands the 2008-09 recession. Because a fall of output during 2008-09 was caused by an exogenous drop in exports, it provides another justification for identifying the first dominant factor as the aggregate demand. All the findings suggest that the major cause of business cycles is real demand shocks.
    Date: 2009–12
  11. By: Christian Pfeifer (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: This paper compares contractual with effective working hours and wages, respectively. Effective working hours are defined as contractual working hours minus absent working hours. This approach takes into account workers' downward adjustment of working time via paid absenteeism if working time constraints are present, which induce workers to accept contracts with larger than their optimal choice of working hours. A German personnel data set, which contains precise information on wages as well as working and absence hours, is used to assess the impact of such downward adjustment on wage inequality and wage differentials (gender, schooling, age).
    Keywords: absenteeism, earnings, inequality, wage differentials, working hours
    JEL: J22 J31
    Date: 2009–11
  12. By: Bartelsman, Eric (VU University Amsterdam); Haltiwanger, John C. (University of Maryland); Scarpetta, Stefano (OECD)
    Abstract: This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.
    Keywords: allocation of resources, productivity, firm heterogeneity, distortions
    JEL: L11 L16 L2 L25 O4 O57
    Date: 2009–11
  13. By: Vauhkonen, Jukka (Bank of Finland Research)
    Abstract: We consider the impact of mandatory information disclosure on bank safety in a spatial model of banking competition in which a bank’s probability of success depends on the quality of its risk measurement and management systems. Under Basel II capital requirements, this quality is either fully or partially disclosed to market participants by the Pillar 3 disclosures. We show that, under stringent Pillar 3 disclosure requirements, banks’ equilibrium probability of success and total welfare may be higher under a simple Basel II standardized approach than under the more sophisticated internal ratings-based (IRB) approach.
    Keywords: Basel II; capital requirements; information disclosure; market discipline; moral hazard
    JEL: D43 D82 G14 G21 G28
    Date: 2009–11–03
  14. By: Viral V. Acharya; Yakov Amihud; Lubomir Litov
    Abstract: We analyze the link between creditor rights and firms’ investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.
    JEL: G31 G32 G33 G34
    Date: 2009–12
  15. By: Greg Kaplan; Giovanni L. Violante
    Abstract: We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Blundell et al. (2008) (BPP hereafter). We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data. BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model’s counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits. In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate. Allowing for a plausible degree of “advance information” about future earnings does not reconcile the model-data gap. If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep. Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter.
    JEL: D31 D91 E21
    Date: 2009–12
  16. By: Wagner, Joachim (Leuphana University Lüneburg)
    Abstract: This paper uses unique new data for German manufacturing enterprises from matched regular surveys and a special purpose survey to investigate the causal effect of relocation of activities to a foreign country on various dimensions of firm performance. Enterprises that relocated activities abroad in the period 2001-03 for the first time are compared to firms that did not relocate activities abroad before 2006. The comparison is performed for both 2004 (to document differences between the two groups of firms after some of them started to relocate abroad) and for 2000 (when none of them did relocate abroad). It turns out that, compared to non-offshoring firms, firms that relocated activities were larger and more productive, and had a higher share of exports in total sales. All these differences existed in 2000, the year before some firms started to relocate, and this points to self-selection of "better" firms into offshoring. This finding is in line with results from recent theoretical models and with results from other countries. To investigate the causal effects of relocation across borders on firm performance, six different variants of a matching approach of firms that did and did not start to relocate abroad in 2001-03 were performed based on a propensity score estimated using firm characteristics in 2000 and the change in the performance variable between 1997 and 2000. The performance of both groups was compared for 2004-06 when some firms were relocating firms and the others were not. Broadly in line with hypotheses derived from the literature there is no evidence that offshoring has a negative causal impact on employment in offshoring firms. The effect is positive and large for productivity, and weak evidence for a positive effect on the wage per employee, the proxy variable for human capital intensity used, is found. Contrary to what is often argued, therefore, we find no evidence for a negative causal effect of offshoring on employment in Germany or on other core dimensions of firm performance.
    Keywords: offshoring, Germany, enterprise panel data
    JEL: F23
    Date: 2009–12
  17. By: Steven P. Cassou (Kansas State University); Jesús Vázquez (Universidad del País Vasco)
    Abstract: This paper extends the technique suggested by den Haan (2000) to investigate contemporaneous as well as lead and lag correlations among economic data for a range of forecast horizons. The technique provides a richer picture of the economic dynamics generating the data and allows one to investigate which variables lead or lag others and whether the lead or lag pattern is short term or long term in nature. The technique is applied to monthly sectoral level employment data for the U.S. and shows that among the ten industrial sectors followed by the U.S. Bureau of Labor Statistics, six tend to lead the other four. These six have high correlations indicating that the structural shocks generating the data movements are mostly in common. Among the four lagging industries, some lag by longer intervals than others and some have low correlations with the leading industries indicating that these industries are partially influenced by structural shocks beyond those generating the six leading industries.
    Keywords: Business cycle, sectoral employment comovement, leading and lagging
    JEL: E32 E37
    Date: 2009–12–03
  18. By: Milne, Alistair (Faculty of Finance, Cass Business School, City University, London and Bank of Finland Research); Onorato, Mario (Algorithmics Inc & Faculty of Finance, Cass Business School, City University, London)
    Abstract: Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.
    Keywords: asset pricing; banking; capital allocation; capital budgeting; capital management; corporate finance; downside risk; economic capital; performance measurement; RAROC; risk management; value creation; hurdle rate; value at risk
    JEL: G22 G31
    Date: 2009–11–02
  19. By: Patrick-Antoine Pintus (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Yi Weng (Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, Tsinghua University - Tsinghua University)
    Abstract: It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble).
    Keywords: Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply
    Date: 2009
  20. By: Cornelissen, Thomas; Himmler, Oliver; Koenig, Tobias
    Abstract: CEO compensation that is perceived to be excessive regularly causes agitation in the population. Using German data, we show that perceiving CEO pay to be unjust has economic repercussions in terms of lower work morale.
    Keywords: Fairness, Social Comparisons, Work Morale
    JEL: A13 D63 J22
    Date: 2009–12
  21. By: Ichiro Fukunaga (Director, Research and Statistics Department, Bank of Japan.); Naohisa Hirakata (Deputy Director, Research and Statistics Department, Bank of Japan.); Nao Sudo (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan.)
    Abstract: In this paper, we decompose oil price changes into their component parts following Kilian (2009) and estimate the dynamic effects of each component on industry-level production and prices in the U.S. and Japan using identified VAR models. The way oil price changes affect each industry depends on what kind of underlying shock drives oil price changes as well as on industry characteristics. Unexpected disruptions of oil supply act mainly as negative supply shocks for oil- intensive industries and act mainly as negative demand shocks for less oil- intensive industries. For most industries in the U.S., shocks to the global demand for all industrial commodities act mainly as positive demand shocks, and demand shocks that are specific to the global oil market act mainly as negative supply shocks. In Japan, the oil-specific demand shocks as well as the global demand shocks act mainly as positive demand shocks for many industries.
    Keywords: Oil price, Identified VAR, Industry-level data, Japan
    JEL: E30
    Date: 2009–10

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