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on Business Economics |
| By: | Martin Boileau; Nathalie Moyen |
| Abstract: | Cash holdings as a proportion of total assets of U.S. corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash holdings. The first is linked to the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is linked to the liquidity motive requiring firms to meet their current liquidity needs. We find that the mechanism embedded in the liquidity motive best explains how the increased idiosyncratic risk nearly doubled cash holdings. As for the precautionary motive, its importance has decreased over time to the point generating very little precautionary savings. |
| Keywords: | Dynamic Capital Structure, cash holdings, precautionary savings, corporate liquidity |
| JEL: | G31 G32 G35 E21 E22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0953&r=bec |
| By: | Luigi Guiso; Luigi Pistaferri; Fabiano Schivardi |
| Abstract: | We exploit time variation in the degree of development of local credit markets and matched workers-firm data with workers histories to assess the role of the firm as an internal loans market. By tilting the workers wage-tenure profile around their tenure-productivity profile, the firm can generate borrowing flows from workers to the firm (when the earnings profile is steeper than the productivity profile) or vice versa from the firm to the workers (when the earnings profile is fatter), thus compensating for the imperfect functioning of the loans market. We find that firms located in less financially developed areas offer wages that are lower at the beginning of tenure and higher at the end than those offered by firms in more financially developed markets, which helps firms finance their operations by raising funds from workers. This effect does not reflect unobserved local factors that systematically affect wage tenure profiles, since we control for local market effects and only exploit variation time variation in the degree of local financial development induced by effects of exogenous liberalization. The credit generated by implicit lending within the firm is economically important and can be as large as 30% of bank lending. Implicit contracts help more those firms that have a problematic access to the loans market and funds come more from workers with a stronger willingness to lend. Consistent with credit market imperfections opening a trade opportunity within the firm we find that the internal rate of return of implicit loans lies between the rate at which workers savings are remunerated and the rate firms pay on their loans from banks. |
| Keywords: | Implicit contracts, financial frictions, tenure profile, wage setting |
| JEL: | J3 L2 G3 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-097&r=bec |
| By: | Emmanuel De Veirman; Andrew Levin (Reserve Bank of New Zealand) |
| Abstract: | This paper develops a new technique for estimating earnings and employment volatility at the firm level, and applies it to Japanese firms. Unlike earlier studies for the United States, we estimate instantaneous volatility for every year, rather than a rolling ten-year average of volatility. In addition, our technique allows us to estimate the firm-specific component of firm volatility separately, by controlling for variation in firms’ earnings and employment growth induced by aggregate and sectoral factors. We find that firm-specific sales volatility was substantially higher before the 1990 stock market crash than in the following fifteen years. The conditional variance of earnings and employment growth stayed relatively constant until the late 1990s, but increased substantially from 1999 onwards. |
| JEL: | C33 D21 E23 E24 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2009/20&r=bec |
| By: | Ricardo Correa; Gustavo A. Suarez |
| Abstract: | This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-46&r=bec |
| By: | Luigi Zingales (University of Chicago Booth School of Business); Oliver Hart (Harvard University & NBER) |
| Abstract: | We design a new, implementable capital requirement for large financial institutions (LFIs) that are too big to fail. Our mechanism mimics the operation of margin accounts. To ensure that LFIs do not default on either their deposits or their derivative contracts, we require that they maintain an equity cushion sufficiently great that their own credit default swap price stays below a threshold level, and a cushion of long term bonds sufficiently large that, even if the equity is wiped out, the systemically relevant obligations are safe. If the CDS price goes above the threshold, the LFI regulator forces the LFI to issue equity until the CDS price moves back down. If this does not happen within a predetermined period of time, the regulator intervenes. We show that this mechanism ensures that LFIs are always solvent, while preserving some of the disciplinary effects of debt. |
| Keywords: | Banks, Capital Requirement, Too Big to Fail |
| JEL: | G21 G28 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.124&r=bec |
| By: | Maria Bas; Juan Carluccio |
| Abstract: | Do variations in labor market institutions across countries affect the cross-borderorganization of the firm? Using firm-level data on multinationals located in France, we showthat firms are more likely to outsource the production of intermediate inputs to externalsuppliers when importing from countries with empowered unions. Moreover, this effect isstronger for firms operating in capital-intensive industries. We propose a theoreticalmechanism that rationalizes these findings. The fragmentation of the value chain weakens theunion's bargaining position, by limiting the amount of revenues that are subject to unionextraction. The outsourcing strategy reduces the share of surplus that is appropriated by theunion, which enhances the firm's incentives to invest. Since investment creates relativelymore value in capital-intensive industries, increases in union power are more likely to beconducive to outsourcing in those industries. Overall, our findings suggest that multinationalfirms use their organizational structure strategically when sourcing intermediate inputs fromunionized markets. |
| Keywords: | wage bargaining, trade unions, sourcing, multinational firms |
| JEL: | F10 J52 L22 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0963&r=bec |
| By: | Xavier Boutin (CREST(LEI) and European Commission); Giacinta Cestone (Queen Mary University of London, CSEF, and ECGI); Chiara Fumagalli (Università Bocconi, CSEF, and CEPR); Giovanni Pica (Università di Salerno and CSEF); Nicolas Serrano-Velarde (European University Institute) |
| Abstract: | We provide evidence suggesting that incumbents' access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, our paper presents three major findings. First, the amount of cash holdings owned by incumbent-affiliated groups is negatively related to entry in a market. Second, the impact on entry of group deep pockets is more important in markets where access to external funding is likely to be more difficult. Third, the “entry deterring effect" of group deep pockets is more pronounced when groups have more active internal capital markets. Our findings suggest that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect. |
| Keywords: | Business Groups, Cash Holdings, Internal Capital Markets, Deep-Pockets, Market Entry |
| JEL: | G32 G38 L41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2009.108&r=bec |
| By: | Chirco, Alessandra; Colombo , Caterina; Scrimitore, Marcella |
| Abstract: | In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic. |
| Keywords: | Strategic delegation; relative performance; oligopoly; isoelastic demand |
| JEL: | L13 L21 D43 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19540&r=bec |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | We estimate a New-Neoclassical Synthesis model of the business cycle with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the postwar period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that the shock correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008. |
| Keywords: | Business cycles ; Saving and investment ; Recessions |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:411&r=bec |
| By: | Kirti Sharda |
| Abstract: | Despite the importance of outsourcing firms and the highly competitive nature of the outsourcing industry, there has been minimal examination of outsourcing firm strategy. This paper investigates the strategic focus of 60 outsourcing firms using empirical data collected through survey and semi-structured interviews from 226 top management team respondents. Factor and cluster analysis reveal three outsourcing firm archetypes based on their strategic orientation, namely, superachievers, quality advocates and defenders. The dominance of these archetypes also varies across business activities offered by sample firms. By delineating dimensions underlying outsourcing form strategy and by identifying archetypes of strategic orientation, the paper provides an understanding of key differentiators of outsourcing firm performance. |
| Date: | 2009–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2009-12-03&r=bec |
| By: | John T. Addison; Lutz Bellman; Alex Bryson; André Pahnke; Paulino Teixeira |
| Abstract: | Industrial relations are in flux in many nations, perhaps most notably in Germany and Britain. That said, comparatively little is known in any detail of the changing pattern of the institutions of collective bargaining and worker representation in Germany and still less in both countries about firm transitions between these institutions over time. The present paper maps changes in the importance of the key institutions, 1998-2004, and explores the correlates of two-way transitions, using successive waves of the German IAB Establishment Panel and both cross-sectional and panel components of the British Workplace Employment Relations Survey. We identify the workplace correlates of the demise of collective bargaining in Britain and the erosion of sectoral bargaining in Germany, and identify the respective roles of behavioral and compositional change. |
| Keywords: | union recognition, union coverage, sectoral and firm-level collective bargaining, works councils, joint consultative committees, changes in collective bargaining/worker representation states, bargaining transitions and their determinants |
| JEL: | J50 J53 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0954&r=bec |
| By: | Martins, Pedro S. (Queen Mary, University of London); Opromolla, Luca David (Banco de Portugal) |
| Abstract: | The analysis of the effects of firm-level international trade on wages has so far focused on the role of exports, which are also typically treated as a composite good. However, we show in this paper that firm-level imports can actually be a wage determinant as important as exports. Furthermore, we also find significant differences in the relationship between trade and wages across types of products. In particular, firms that increase their exports (imports) of high- (intermediate-) technology products tend to increase their salaries. Our analysis is based on unique data from Portugal, obtained by merging a matched firm-worker panel and a matched firm-transaction panel. Our data set follows the population of manufacturing firms and all their workers from 1995 to 2005 and allows for several control variables, including job-spell fixed effects. |
| Keywords: | transaction data, globalisation and labour, wage differentials |
| JEL: | F16 J31 F15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4646&r=bec |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints. |
| Keywords: | Credit ; Macroeconomics - Econometric models |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-28&r=bec |
| By: | Iga Magda; David Marsden; Simone Moriconi |
| Abstract: | Using a large matched employer-employee dataset, the authors investigate the relationship between collectiveagreements, wages and restructuring in transition in three former centrally planned economies (Czech Republic,Hungary and Poland). They adopt a natural experiment approach and capture the restructuring process triggeredby the launch of transition by means of cohort effects among firms founded before or at different stages of thisprocess which enable them to control for the heterogeneity of firms in different cohorts. They find that the wagepremium associated with different levels of collective agreements depends on restructuring and its timing in thetransition. In early-middle transition firms, industry level agreements protect low skilled wages; whereas in latetransition ones, firm level agreements increase medium and especially high skilled wages. Some cross countrydifferences emerge in the structure of the wage premium as a result of country specific features of restructuring. |
| Keywords: | Collective agreements, wages, transition economy, restructuring |
| JEL: | J31 J51 P2 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0959&r=bec |
| By: | Kirti Sharda; Leena Chatterjee |
| Abstract: | There is an increasing recognition of outsourcing firms as new organizational forms with unique systems and practices. This paper uses a configurational approach to integrate learnings from outsourcing literature, organization and management theory, strategic management and strategic human resource management in order to understand similarities and differences between outsourcing firms and their performance. It formulates a conceptual framework that proposes that certain combinations of work designs, strategic orientations, client relationships and contexts could lead to better organizational performance within a sample of outsourcing firms. |
| Date: | 2009–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2009-12-02&r=bec |
| By: | Nicholas Bloom (Department of Economics, Stanford University); Raffaella Sadun (Harvard Business School, Strategy Unit); John Van Reenen (Department of Economics, London School of Economics) |
| Abstract: | There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. To address the empirical lacuna we have developed a research program to measure the internal organization of firms - including their decentralization decisions - across a large range of industries and countries. In this paper we investigate whether greater product market competition increases decentralization. For example, tougher competition may make local manager's information more valuable, as delays to decisions become more costly. Since globalization and liberalization have increased the competitiveness of product markets, one explanation for the trend towards decentralization could be increased competition. Of course there are a range of other factors that may also be at play, including human capital, information and communication technology, culture and industrial composition. To tackle these issues we collected detailed information on the internal organization of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country . We analyze data on almost 4,000 firms across twelve countries in Europe, North America and Asia. We find that competition does indeed seem to foster greater decentralization. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:10-052&r=bec |
| By: | Alcala, Francisco; Hernandez, Pedro J. |
| Abstract: | Recent international trade literature emphasizes two features in characterizing the current patterns of trade: efficiency heterogeneity at the firm level and quality differentiation. This paper explores human capital and wage differences across firms in that context. We build a partial equilibrium model predicting that firms selling in more-remote markets employ higher human capital and pay higher wages to employees within each education group. The channel linking these variables is firms’ endogenous choice of quality. Predictions are tested using Spanish employer-employee matched data that classify firms according to four main destination markets: local, national, European Union, and rest of the World. Employees’ average education is increasing in the remoteness of firm’s main output market. Market–destination wage premia are large, increasing in the remoteness of the market, and increasing in individual education. These results suggest that increasing globalization may play a significant role in raising wage inequality within and across education groups. |
| Keywords: | vertical differentiation; exporters; Alchian-Allen effect; wage inequality; unobservable skills |
| JEL: | F16 J31 J24 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19403&r=bec |
| By: | Fabienne Llense (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper puts forward an explanation of the rapid increase in golden handshake provision in Europe over the last ten years, based on both enhanced investor protection and attractive tax codes for severance pay. This article takes up a framework in which asymmetric information about the quality of the match between CEO and firm explains the use of golden handshakes for CEOs. It shows how corporate governance and taxation can modify the magnitude and the use of golden handshakes and thus CEO turnover rates. The second-best optimal taxation rate depends on the kind of private benefits accorded to the CEO. I show that golden handshakes should be taxed in the same way as CEO incomes. However, nonpecuniary private benefits strengten the agency cost and require some transfers for firms providing parachute-type contracts. In effect, this means partial exemption. An improvement in the quality of corporate governance should lead to smaller golden handshakes, higher turnover-performance sensitivity and the disappearance of advantageous tax codes for termination pay. |
| Keywords: | CEOs turnover ; corporate governance ; golden handshakes ; optimal taxation ; severance pay. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00441911_v1&r=bec |
| By: | Erling Barth; Alex Bryson; Harald Dale-Olsen |
| Abstract: | We explore the effects of management innovations on worker well-being using private sectorlinked employer-employee data for Britain. We find management innovations are associated withlower worker well-being and lower job satisfaction, an effect which becomes more pronouncedwhen we account for the endogeneity of innovation. This is the case for three different countmeasures of innovation - a global measure of innovation and measures for labour innovationsand capital innovations. The effects are ameliorated when workers are covered by a collectivebargaining agreement. |
| Keywords: | innovation, well-being, job satisfaction, trade unions |
| JEL: | J28 J51 J81 L23 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0953&r=bec |
| By: | Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Tåg, Joacim (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Private equity owned firms have more leverage, more intense compensation contracts, and higher productivity than comparable firms. We develop a theory of buyouts in oligopolistic markets that explains these facts. Private equity firms are more aggressive in inducing restructuring compared to incumbents since they maximize a trade sale price. The equilibrium trade sale price increases in restructuring not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived. |
| Keywords: | Acquisitions; Buyouts; Buy-to-sell; Buy-to-keep; Leveraged buyouts; Private equity; Take-overs; Temporary ownership |
| JEL: | G24 G32 G34 L10 L20 |
| Date: | 2010–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0817&r=bec |
| By: | Allen B Frankel |
| Abstract: | The quality of newly originated subprime mortgages had been visibly deteriorating for some time before the window for such loans was shut in 2007. Nevertheless, a bankruptcy court's directed ex post examination of New Century Financial, one of the largest originators of subprime mortgages, discovered no change, over time, in how that firm went about its business. This paper employs the court examiner's findings in a critical review of the procedures used by various agents involved in the origination and securitisation of subprime mortgages. A contribution of this paper is its elaboration of the choices and incentives faced by the various types of institutions involved in those linked processes of origination and securitisation. It highlights the limited roles played by the originators of subprime loans in screening borrowers and in bearing losses on defective loans that had been sold to securitisers of pooled loan packages (ie, mortgage-backed securities). It also illustrates the willingness of the management of those institutions that became key players in that market to put their reputations with fixed-income investor clients in jeopardy. What is perplexing is that such risk exposures were accepted by investing firms that had the wherewithal and knowledge to appreciate the overall paucity of due diligence in the loan origination processes. This observation, in turn, points to the conclusion that the subprime episode is a case in which reputational capital, a presumptively effective motivator of market discipline, was not an effective incentive device. |
| Keywords: | mortgage originators, reputational capital, securitisation |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:294&r=bec |
| By: | Kunze, Astrid (Norwegian School of Economics and Business Administration); Troske, Kenneth (University of Kentucky) |
| Abstract: | We investigate whether women search longer for a job than men and whether these differences change over the life cycle. Our empirical analysis exploits German register data on highly attached displaced workers. We apply duration models to analyze gender differences in job search taking into account observed and unobserved worker heterogeneity and censoring. Simple survival functions show that displaced women take longer to find a new job than comparable men. Disaggregation by age groups reveals that these differences are driven by differential behavior of prime age women. There is no significant difference in job search duration among the very young and older workers. These differential outcomes remain even after we control for differences in human capital, and when time dependence and unobserved heterogeneity are incorporated into the model. |
| Keywords: | gender differences, job search, displaced workers, wage differences, discrimination |
| JEL: | J31 J63 J64 J71 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4656&r=bec |
| By: | Eugen Kovac; Viatcheslav Vinogradov; Krešimir Žigiæ |
| Abstract: | We build a dynamic oligopoly model with endogenous entry in which a particular firm (leader) invests in an innovation process, facing the subsequent entry of other firms (followers). We identify conditions that make it optimal for the leader in the initial oligopoly situation to undertake pre-emptive R&D investment (strategic predation) eventually resulting in the elimination of all followers. Compared to a static model, the dynamic one provides new insights into the leader’s intertemporal investment choice, its optimal decision making, and the dynamics of the market structure over time. We also contrast the leader’s investment decisions with those of the social planner. |
| Keywords: | Dynamic oligopoly, endogenous entry, persistence of monopoly, strategic predation, accommodation. |
| JEL: | L12 L13 L41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp401&r=bec |
| By: | Wendelin Schnedler |
| Abstract: | Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The trade-off is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding. |
| Keywords: | bonus, premium, incentives, income effect, moral hazard |
| JEL: | H00 H11 H20 H30 H71 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:09/226&r=bec |
| By: | Laszlo Goerke; Markus Pannenberg |
| Abstract: | Severance pay is a vital part of employment protection legislation (EPL). We investigate the incidence and level of severance pay for dismissed employees. Our theoretical model predicts that not only the law and its interpretation by labour courts but also the costs of a suit have an impact. Using West German panel data for 1991-2006, we find that the employees\' costs resulting from a suit and the legal determinants of such transfers affect the incidence of severance payments. In contrast, their level only varies with legal regulations. Our results imply that the strictness of EPL in Germany varies with extra-legal factors like employees\' financial constraints. |
| Keywords: | employment protection legislation, labour law, severance pay, survey data |
| JEL: | J K C C |
| Date: | 2009–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:87&r=bec |