nep-bec New Economics Papers
on Business Economics
Issue of 2010‒03‒13
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Correlated Disturbances and U.S. Business Cycles By Vasco Cúrdia; Ricardo Reis
  2. How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation By Paul Beaudry; David A. Green; Benjamin M. Sand
  3. On the negative relation between investment-cash flow sensitivities and cash-cash flow. By D'Espallier, Bert; López-Iturriaga, Félix
  4. Large Risks, Limited Liability, and Dynamic Moral Hazard. By Biais, Bruno; Mariotti, Thomas; Rochet, Jean-Charles; Villeneuve, Stéphane
  5. Financial amplification mechanisms and the Federal Reserve's supply of liquidity during the crisis By Asani Sarkar; Jeffrey Shrader
  6. Matching Firms, Managers, and Incentives By Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
  7. A Reexamination of Tunneling and Business Groups:New Data and New Methods By Jordan Siegel; Prithwiraj Choudhury
  8. Does Private Equity change the performance of a European firm in which it invests? By Oleg Badunenko; Christopher F. Baum; Dorothea Schäfer
  9. The not-so-great moderation? Evidence on changing volatility from Australian regions By David Shepherd; Robert Dixon
  10. The Role of Headquarters in Multinational Profit Shifting Strategies By Matthias Dischinger; Nadine Riedel
  11. Capital Accumulation, Vintage, and Productivity:The Japanese Experience from 1980 to 2007 By Taiji Hagiwara; Yoichi Matsubayashi
  12. Performance-Related Pay, Unions and Productivity in Italy: evidence from quantile regressions By Mirella Damiani; Andrea Ricci
  13. The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining By David Gill; John Thanassoulis
  14. Advertising and price effectiveness over the business cycle. By Gijsenberg, Maarten; van Heerde, Harald J.; Dekimpe, Marnik; Steenkamp, Jan-Benedict E.M.
  15. The distribution of path-dependent options with applications to profit sharing. By Shang, Zhaoning; Van Weert, Koen; Dhaene, Jan; Goovaerts, Marc
  16. Plant Size, Nationality, and Ownership Change By Baldwin, John R.; Wang, Yanling
  17. Family Ownership and Returns on Investment – Founders, Heirs, and External Managers By Eklund, Johan E.; Palmberg, Johanna; Wiberg, Daniel
  18. Reciprocity in Teams: a Behavioral Explanation for Unpaid Overtime By Natalia
  19. Why do within firm-product export prices differ across markets? By Holger Görg; Jonas Kauschke; László Halpern; Balász Muraközy
  20. Optimal capital allocation principles. By Dhaene, Jan; Tsanakas, Andreas; Valdez, Emiliano; Vanduffel, Steven
  21. Technological activities and their impact on the financial performance of the firm: Exploitation and exploration within and between firms. By Belderbos, Rene; Faems, Dries; Leten, Bart; Van Looy, Bart
  22. Does professional knowledge management improve innovation performance at the firm level?. By Czarnitzki, Dirk; Wastyn, Annelies

  1. By: Vasco Cúrdia; Ricardo Reis
    Abstract: The dynamic stochastic general equilibrium (DSGE) models that are used to study business cycles typically assume that exogenous disturbances are independent autoregressions of order one. This paper relaxes this tight and arbitrary restriction, by allowing for disturbances that have a rich contemporaneous and dynamic correlation structure. Our first contribution is a new Bayesian econometric method that uses conjugate conditionals to make the estimation of DSGE models with correlated disturbances feasible and quick. Our second contribution is a re-examination of U.S. business cycles. We find that allowing for correlated disturbances resolves some conflicts between estimates from DSGE models and those from vector autoregressions, and that a key missing ingredient in the models is countercyclical fiscal policy. According to our estimates, government spending and technology disturbances play a larger role in the business cycle than previously ascribed, while changes in markups are less important.
    JEL: E1 E3
    Date: 2010–02
  2. By: Paul Beaudry; David A. Green; Benjamin M. Sand
    Abstract: In search and bargaining models, the effect of higher wages on employment is determined by the elasticity of the job creation curve. In this paper, we use U.S. data over the 1970-2007 period to explore whether labor market outcomes abide by the restrictions implied by such models and to evaluate the elasticity of the job creation curve. The main difference between a job creation curve and a standard demand curve is that the former represents a relationship between wages and employment rates, while the latter represents a relationship between wages and employment levels. Although this distinction is quite simple, it has substantive implications for the identification of the effect of higher wages on employment. The main finding of the paper is that U.S. labor market outcomes observed at the city-industry level appear to conform well to the restrictions implied by search and bargaining theory and, using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3. We interpret this relatively low elasticity as reflecting a low propensity for individuals to become more entrepreneurial and create more jobs when labor costs are lower and variable profits are higher.
    JEL: E24 J21 J23 J3
    Date: 2010–02
  3. By: D'Espallier, Bert; López-Iturriaga, Félix
    Abstract: We predict and find empirical support for a negative relation between the firm’s investment-cash flow sensitivity and cash-cash flow sensitivity, two measures suggested to capture the concept of financing constraints. This negative relation on the firm-level stems from the fact that both investments and the cash account are uses of funds competing for limited available cash flows. Additionally, we find that the investment-cash flow sensitivity is a better predictor for the firm’s constraint-status than the cash-cash flow sensitivity for a longitudinal sample of 1,233 U.S.-based listed firms using an evaluative framework based upon ex-post evaluation of the firmvarying sensitivities.
    Keywords: financing constraints; investment-cash flow sensitivities; cash-cash flow sensitivities; firm-varying sensitivities;
    Date: 2009–09
  4. By: Biais, Bruno; Mariotti, Thomas; Rochet, Jean-Charles; Villeneuve, Stéphane
    JEL: C61 D82 D86 D92
    Date: 2010–01
  5. By: Asani Sarkar; Jeffrey Shrader
    Abstract: The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in light of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between financial constraints and asset prices. By comparison, the Fed's later-stage crisis programs take into account adverse-selection amplifications that operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new empirical evidence that increases in the Federal Reserve's liquidity supply reduce interest rates during periods of high liquidity risk. Our analysis has implications for the impact on market prices of a potential withdrawal of liquidity supply by the Fed.
    Keywords: Assets (Accounting) ; Bank assets ; Interest rates ; Bank liquidity ; Financial crises ; Federal Reserve System
    Date: 2010
  6. By: Oriana Bandiera (London School of Economics); Luigi Guiso (European University Institute); Andrea Prat (London School of Economics); Raffaella Sadun (Harvard Business School, Strategy Unit; London School of Economics - Centre for Economic Performance)
    Abstract: We provide evidence on the match between firms, managers, and incentives using a new survey that contains information on managers’ risk preferences and human capital, on their compensation schemes, and on the firms they work for. The data is consistent with the equilibrium correlations predicted by a model where firms with di¤erent owner-ship structure and managers with different risk aversion and talent match endogenously through incentive contracts. The model predicts and the data support that, compared to widely-held firms, family firms use contracts that are less sensitive to performance; these contracts attract less talented and more risk averse managers; these managers work less hard, earn less, and display lower job satisfaction.
    Date: 2010–02
  7. By: Jordan Siegel (Harvard Business School, Strategy Unit); Prithwiraj Choudhury (Harvard Business School)
    Abstract: The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies, and we think the conventional wisdom about the economically important topics of tunneling and business groups will need to be significantly questioned and reformulated in light of new findings, data, and methodology presented here. We propose the idea that firms' corporate governance and firms' strategic business activities within an industry are interlinked, and that only by conducting a simultaneous economic analysis of business strategy and corporate governance can scholars fully discern the quality of a firm's governance. We advance this idea by taking a fresh look at one of the most rigorous extant methodologies for detecting "tunneling," or efforts by firms' controlling owner-managers to take money for themselves at the expense of minority shareholders. We show that efforts to discern which firms have superior or deficient corporate governance in the important emerging economy of India turn critically on whether one does a simultaneous economic analysis of business strategy and corporate governance. We find in contrast to prior views that Indian business groups are not, on average, engaging in tunneling, but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Moreover, unlike many past conceptions of business groups from financial economics, sociology, and strategy, we find evidence for a knowledge-based "recombinative capabilities" view of business groups-that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value. Moreover, our finding that Indian business groups have grown larger and more diversified since liberalization and since broad-based corporate governance reforms were implemented, goes expressly against the prediction of prior schools of thought about business groups.
    Date: 2010–02
  8. By: Oleg Badunenko (DIW Berlin); Christopher F. Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin)
    Abstract: The paper investigates whether or not the presence of Private Equity (PE) investors in European companies influences their performance. Previous studies documented unambiguous merit of a buyout during 1980s and 1990s in US and UK markets for listed firms. This study analyzes such influence in both listed and unlisted European firms during 2002-2007. Our major finding is that the return on assets does not meaningfully differ between firms with and without PE backing. We also show that the duration of PE investment does not have a significant effect on firm's performance.
    Keywords: Private equity financing, corporate finance
    JEL: M14 G24 G34
    Date: 2010–03–01
  9. By: David Shepherd; Robert Dixon
    Abstract: In this paper we examine Australian data on national and regional employment numbers, focusing in particular on whether there have been common national and regional changes in the volatility of employment. A subsidiary objective is to assess whether the results derived from traditional growth rate models are sustained when alternative filtering methods are used. In particular, we compare the results of the growth rate models with those obtained from Hodrick-Prescott models. Using frequency filtering methods in conjunction with autoregressive modeling, we show that there is considerable diversity in the regional pattern of change and that it would be wrong to suppose that results derived from the aggregate employment series are generally applicable across the regions. The results suggest that the so-called great moderation may have been less extensive than aggregate macro studies suggest.
    Keywords: Regional employment, State business cycle, Structural change, Volatility
    JEL: R12 C22 E32
    Date: 2010
  10. By: Matthias Dischinger (University of Munich); Nadine Riedel (Oxford University Centre for Business Taxation, CESifo Munich)
    Abstract: This paper stresses the special role of multinational headquarters in corporate profit shifting strategies. Using a large panel of European firms, we show that multinational enterprises (MNEs) are reluctant to shift profits away from their headquarters even if these are located in high-tax countries. Thus, shifting activities in response to corporate tax rate differentials between parents and subsidiaries are found to be significantly larger if the parent observes a lower corporate tax rate than its subsidiary and profit is thus shifted towards the headquarters firm. This result is in line with recent empirical evidence suggesting that MNEs bias the location of profits and highly profitable assets in favor of the headquarters location (for agency cost reasons among others).
    Keywords: Multinational Firm, Profit Shifting, Headquarters Location
    JEL: H25 H26 C33
    Date: 2010
  11. By: Taiji Hagiwara (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: In this paper we quantitatively examine the relationships between capital accumulation and vintage, as well as productivity of industries in Japan between 1980 and 2007. We based this analysis on a detailed measurement of capital stock as reported in financial data of firms listed on the Tokyo Stock Exchange and several secondary markets, like Mothers, We measured the vintage index and total factor productivity and carried out preliminary work required during empirical analysis. Subsequently, we conducted different kinds of estimations. Based on the empirical analyses, we confirmed that vintage had an effect on productivity in all industries studied. This effect was notable in the material, general machinery and transport equipment industries. In addition, by observing chronological changes of the vintage effect, we confirmed that vintage exerted a significant influence during the period of economic expansion,.particularly during the economic upturn which started in 2000, where strong vintage effects were generally observed in all the industries. It was clear that the rejuvenation of capital equipments during that period resulted out of the existence of a strong productivity effect. On the other hand, during the bubble period of late 1980s, vintage exerted no observable effects on productivity despite vivacious increases in investment.This shows that investment during this period was not necessarily productive and was likely to produce just a temporary boom. In light of this, we reconfirmed that the relationship between vintage and productivity changed in subtle ways in response to the phases of economic cycles.
    Keywords: Capital Accumulation, Vintage, Business Cycle
    JEL: F32 F41
    Date: 2010–03
  12. By: Mirella Damiani; Andrea Ricci
    Abstract: Purpose – This study analyses the effects on productivity of Performance-Related Payments (PRP) and unions, and examines to what extent heterogeneity between firms characterises these influences. Design - For the Italian economy, the study presents firm-level quantile regressions for Total Factor Productivity (TFP) and controls for various observed characteristics of firms, worker composition and labour relations. Findings - The paper shows the significant effect of PRP and unions on the whole economy and on firms operating in the manufacturing industries. In these industries, the uniform incentive effects of PRP but the increasing impact of unions are estimated along the productivity distribution. Conversely, the role of management - significant in all sectors- is more efficacious in prospering large firms operating in services. Research limitations – The adoption of PRP schemes and the presence of unions maybe endogenous to firms’ productivity, and our estimates do not prove causal links but simply suggest correlations. Practical implications - The limited incentive effects of PRP schemes in services contribute towards explaining the slowdown in Italian productivity, whereas the role of unions is quite uniform among sectors. Originality- The paper addresses the hitherto poorly developed issue of firm heterogeneity and TFP, and offers the first Italian study of PRP and unions, which covers all dimensional classes of firms and non-agricultural sectors of the Italian economy.
    Keywords: Performance – related pay, productivity.
    JEL: J33 D24
    Date: 2010–01–01
  13. By: David Gill; John Thanassoulis
    Abstract: In many markets firms set posted prices which are potentially negotiable. We analyze the optimal marketing mix of pricing and bargaining when price takers buy at posted prices but bargainers attempt to negotiate discounts. The optimal bargaining strategy involves the firms offering bargainers randomly-sized discounts. Competing firms keep posted prices high to weaken the bargainers’ outside option, thus forgoing the chance to increase profits from price takers by undercutting their rival. A range of posted price equilibria are possible, and the higher price in the range inrceases when the proportion of bargainers goes up or the bargainers become less skilled. We consider how firms and competition authorities might encourage more consumers to bargain and determine the conditions under which each would choose to do so. Finally, we study the firms’ strategic decision about how much bargaining discretion sales staff should be allowed. Both firms allowing full bargaining flexibility is always an equilibrium - but not always the most profitable one. If there are enough bargainers, both firms committing to only matching the rival’s posted price is also an equilibrium: price matching moderates competition, thus raising profits.
    Keywords: Posted prices, List prices, Bargaining, Negotiation, Haggling, Discounts, Outside option, Price takers, Competition policy, Price matching
    JEL: C78 D43 L13
    Date: 2010
  14. By: Gijsenberg, Maarten; van Heerde, Harald J.; Dekimpe, Marnik; Steenkamp, Jan-Benedict E.M.
    Abstract: In this study, the authors conduct a systematic investigation on the evolution in the effectiveness of two important marketing mix instruments, advertising and price, over the business cycle. Analyses are based on 163 branded products in 37 mature CPG categories in the UK, and this for a period of 15 years. The data are a combination of (i) monthly national sales data, (ii) monthly advertising data, (iii) data on the general economic conditions, and (iv) consumer survey data. Consumers are shown to be more price sensitive during contractions. In addition, spending patterns will be less consistent, implying smaller brand loyalty. Advertising elasticities, however, do not seem to be affected by economic downturns. Product involvement was shown to be an influential moderator of the final effect of advertising, price and carry-over effects on sales. Finally, although short run effectiveness of price differs between expansions and contractions, the long run effectiveness of both advertising and price is not altered by differences in the general economic conditions.
    Keywords: advertising; price; effectiveness; business cycle; time-series econometrics; Bayesian inference;
    Date: 2009–03
  15. By: Shang, Zhaoning; Van Weert, Koen; Dhaene, Jan; Goovaerts, Marc
    Date: 2009–05
  16. By: Baldwin, John R.; Wang, Yanling
    Abstract: This paper asks whether synergies or managerial discipline operates in different ways across small versus large plants to affect the likelihood of mergers. Our findings indicate that those characteristics which provide the type of synergies upon which ownership changes rely are important factors leading to plant-ownership changes across most size classes. The magnitudes, however, are different across plant-size classes, with synergies generally being more important in larger plants. Foreign plants in all size classes are more likely to be taken over. The effective rates of control change differ much more in the small than in the larger size classes. Compared to domestic plants, multinational plants in the smaller size classes contain relatively more of the type of intangible capital that makes them attractive vehicles for the transmission of new knowledge via takeover.
    Keywords: Business performance and ownership, Business adaptation and adjustment, Business cycles, Business ownership, Entry, exit, mergers and growth
    Date: 2010–02–25
  17. By: Eklund, Johan E. (The Ratio Institute); Palmberg, Johanna (Jönköping International Business School (JIBS)); Wiberg, Daniel (Jönköping International Business School (JIBS))
    Abstract: This paper investigates how family ownership, control, and management affect firms’ investment performance. We use the identity of Chief Executive Officer (CEO) and Chairman of the Board (COB) to establish under what management the firm is: founder, descendant, or external management. The results show that founder management has no effect on investment performance in family firms, whereas descendant management has a negative impact on returns on investment. Having an externally hired manager significantly improves investment performance. The results also indicate that the separation of voting right from cash flow right has a negative impact on investment performance in both family and non-family firms, but the negative effect is larger in family firms.
    Keywords: Ownership; Control; Management; Family Firms; Returns on Investments
    JEL: C23 G30 K22 L25
    Date: 2010–03–02
  18. By: Natalia (University of Padua)
    Abstract: Relying on the relevance of other-regarding preferences in workplaces, the paper provides a behavioral explanation for the puzzle of unpaid overtime. It characterizes the optimal compensation schemes offered by the employer which induce overtime by exploiting workers’ horizontal reciprocity under both symmetric and asymmetric information about workers’ action. Finally, the paper shows that reciprocity furnishes a rationale for the composition of teams of reciprocal workers when the production technology induces negative externality among the employees’ efforts.
    Keywords: Overtime, Horizontal Reciprocity, Negative Reciprocity.
    Date: 2010–02
  19. By: Holger Görg; Jonas Kauschke; László Halpern; Balász Muraközy
    Abstract: In this paper we analyze the relationship between gravity variables and f.o.b. export unit values using Hungarian firm-product-destination data. By taking firm-product level selection into account we show that export unit values increase with distance even for particular firm-product level selection and constant markups. The differences are important quantitatively; price differences in Hungarian exports between Germany and the US are about 30%. We also show that unit values are positively related to GDP/capita and that there is a weak negative relationship between unit values and market size. We propose two possible explanations: first, firms may export different quality versions of the same product to different markets. Secondly, directly exporting firms may capture part of the markups on transport cots in their f.o.b. prices
    Keywords: export, price, selection, Hungary
    JEL: D40 F12
    Date: 2010–02
  20. By: Dhaene, Jan; Tsanakas, Andreas; Valdez, Emiliano; Vanduffel, Steven
    Abstract: This paper develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimisation argument, requiring that the weighted sum of measures for the deviations of the business unit’s losses from their respective allocated capitals be minimised. This enables the association of alternative allocation rules to specific decision criteria and thus provides the risk manager with flexibility to meet specific target objectives. The underlying general framework reproduces many capital allocation methods that have appeared in the literature and allows for several possible extensions. An application to an insurance market with policyholder protection is additionally provided as an illustration.
    Date: 2009–01–23
  21. By: Belderbos, Rene; Faems, Dries; Leten, Bart; Van Looy, Bart
    Abstract: This article analyzes the financial performance consequences of technology strategies categorized along two dimensions: (1) explorative versus exploitative and (2) solitary versus collaborative. The financial performance implications of firms’ positioning along these two dimensions has important managerial implications, but has received only limited attention in prior studies. Drawing on organizational learning theory and technology alliances literature, a set of hypotheses on the performance implications of firms’ technology strategies are derived. These hypotheses are tested empirically on a panel dataset (1996-2003) of 168 R&D-intensive firms based in Japan, the US and Europe and situated in five different industries (chemicals, pharmaceuticals, ICT, electronics, non-electrical machinery). Patent data are used to construct indicators of explorative versus exploitative technological activities (activities in new or existing technology domains) and collaborative versus solitary technological activities (joint versus single patent ownership). The financial performance of firms is measured via a market value indicator: Tobin’s Q index. The analyses confirm the existence of an inverted U-shape relationship between the share of explorative technological activities and financial performance. In addition, it is observed that most sample firms do not reach the optimal level of explorative technological activities. These findings point to the relevance of creating a balance between exploitation and exploration in the context of technological activities. Moreover, they suggest that, for the majority of R&D intensive firms, reaching such a balance between exploration and exploitation implies investing additional efforts and resources in exploring new knowledge domains. The analyses also show that firms, engaging more intensively in collaboration, perform relatively stronger in explorative activities. At the same time, a negative relationship between the share of collaborative technological activities and a firm’s market value is observed. Contrary to our expectations, it is collaboration in explorative technological activities, rather than collaboration in exploitative technological activities, that leads to a reduction in firm value. These findings question the relevance of open business models for technological activities. In particular, they suggest that the potential advantages of collaboration for (explorative) technological activities (i.e. access to complementary knowledge from other partners, sharing of technological costs and risks) might not compensate for the potential disadvantages, such as the incurred increase in coordination costs and the need to share innovation rewards across innovation partners.
    Date: 2009–11
  22. By: Czarnitzki, Dirk; Wastyn, Annelies
    Abstract: The concept of knowledge has gained in interest since industrialized economics have induced a shift in importance from labor, capital and natural resources towards intellectual resources. This study investigates how the management of knowledge influences the innovation performance of a firm. While former studies mainly focused on knowledge management cycles, we distinguish different types of knowledge management techniques. It turns out that there is a difference between three knowledge management techniques and their influence on product and process innovation. The ability to source external knowledge positively affects the firm’s introduction of new products and products new to the market. For obtaining cost reductions it is effective to stimulate employees to share knowledge. The availability of a codified knowledge management policy also positively affects the cost reduction possibilities of a firm. These results indicate that it is important for a firm to carefully select the tools of knowledge management in function of the kind of technical innovation it wants to proceed.
    Keywords: Knowledge management; innovation performance;
    Date: 2009–11

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