nep-bec New Economics Papers
on Business Economics
Issue of 2010‒05‒15
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Dynamic relational contracts with credit constraints By Jonathan Thomas; Tim Worrall
  2. Corporate Liquidity Management and Future Investment Expenditures By Christopher F Baum; Mustafa Caglayan; Oleksandr Talavera
  3. Blockholder Dispersion and Firm Value By Sander J.J. Konijn; Roman Kraeussl; André Lucas
  4. Credit within the firm By L.Guiso; L.Pistaferri; F.Schivardi
  5. Relationship Finance, Market Finance and Endogenous Business Cycles By L.Deidda; B.Fattouh
  6. How do Consumption and Asset Returns React to Wealth Shocks? Evidence from the U.S. and the U.K” By Ricardo M. Sousa
  7. Business Cycle Synchronization in Europe: Evidence from the Scandinavian Currency Union By U. Michael Bergman; Lars Jonung
  8. The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis By Christopher F. Baum; Dorothea Schäfer; Oleksandr Talavera
  9. New evidence on implicit contracts from linked employer-employee data By Kilponen, Juha; Santavirta, Torsten
  10. Fair value accounting: villain or innocent victim?: exploring the links between fair value accounting, bank regulatory capital, and the recent financial crisis By Sanders Shaffer
  11. Using Firm-Level Data to Assess Gender Wage Discrimination in the Belgian Labour Market By D. BOROWCZYK MARTINS; V. VANDENBERGHE
  12. Fortune or virtue: time-variant volatilities versus parameter drifting By Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
  13. Organizational Culture and Corporate Governance in Russia : A Study of Managerial Turnover By Abe, Naohito; Iwasaki, Ichiro
  14. Productivity Changes and Intangible Assets: Evidencesfrom French Plants By Corinne Autant-Bernard; Jean-Pascal Guironnet; Nadine Massart
  15. Industry Dynamics and Entrepreneurship: An Equilibrium Model By Dennis Fok; Andre van Stel; Andrew Burke; Roy Thurik
  16. Exploding offers and buy-now discounts By Armstrong, Mark; Zhou, Jidong
  17. A structural model of contingent bank capital By George Pennacchi
  18. The Heterogeneous Effect of International Outsourcing on Firm Productivity By Fergal McCann
  19. On the Role of a Stock Market in the Bank Loan Market: a Study of France, Germany,and the Euro Area (1). By Robert E. Krainer
  20. Unionization and Sickness Absence from Work in the UK By Veliziotis M
  21. Is More Entrepreneurship better? By Philipp Koellinger; Christian Roessler
  22. What determines euro area bank CDS spreads ? By Jan Annaert; Marc De Ceuster; Patrick Van Roy; Cristina Vespro

  1. By: Jonathan Thomas; Tim Worrall
    Date: 2010
  2. By: Christopher F Baum (Boston College; DIW Berlin); Mustafa Caglayan (University of Sheffield); Oleksandr Talavera (School of Economics, University of East Anglia)
    Abstract: This paper empirically examines whether additional future fixed capital and R&D investment expenditures induce firms to accumulate cash reserves while considering the role of market imperfections. Implementing a dynamic framework on a panel of US, UK and German companies, we find that firms make larger additions to cash holdings when they plan additional future R&D rather than fixed capital investment expenditures. This behavior is particularly prevalent among small and non-dividend paying firms that are heavily involved in R&D activities. We also show that the cash flow sensitivity of cash is substantially higher for financially constrained firms than for their unconstrained counterparts in the US and the UK, but only marginally higher in Germany.
    Keywords: cash holdings, fixed investment, R&D investment, dynamic panel regressions
    JEL: G21 G32
    Date: 2010–04–21
  3. By: Sander J.J. Konijn (VU University Amsterdam); Roman Kraeussl (VU University Amsterdam); André Lucas (VU University Amsterdam)
    Abstract: This paper analyzes the impact of blockownership dispersion on firm value. Blockholdings by multiple blockholders is a widespread phenomenon in the U.S. market. It is not clear, however, whether dispersion among blockholder is preferable to having a more concentrated ownership structure. To test for the direction of the effect, we use a large dataset of U.S. firms that combines blockholder information, shareholder rights information, debt ratings, accounting information, and financial markets information. We find that a large fraction of aggregated block ownership negatively affects Tobin's Q. The negative impact is larger if blockowners are more dispersed, suggesting that a concentrated ownership structure is to be preferred on average. Results are robust to controlling for blockholder type as well as proxies for shareholder rights. Our empirical findings are also confirmed if we study the impact of ownership dispersion on firm debt ratings rather than Tobin's Q.
    Keywords: corporate governance; ownership structure; multiple blockholders; firm value
    JEL: G3 G32
    Date: 2009–12–14
  4. By: L.Guiso; L.Pistaferri; F.Schivardi
    Abstract: We exploit time variation in the degree of development of local credit markets and matched employer-employee data to assess the role of the firm as an internal credit market. In less developed local credit markets firms can offer a flatter wage-tenure profile than firms in more developed credit markets to lend implicitly to their workers or offer a steeper profile to implicitly borrow from their workers. We find that firms located in less financially developed markets offer wages that are lower at the beginning of tenure and grow faster than those offered by firms in more financially developed markets, helping firms finance their operations by raising funds from workers. Because we control for local market effects and only exploit time variation in the degree of local financial development induced by an exogenous liberalization, the effect we find is unlikely to reflect unobserved local factors that systematically affect wage tenure profiles. The size of implicit loans is larger for firms with more problematic access to bank credit and workers less likely to face credit constraints. The amount of credit generated by implicit lending within the firm is economically important and can be as large as 30% of bank lending. Consistent with credit market imperfections opening up trade opportunities within the firm, we find that the internal rate of return of implicit loans lies between the rate at which workers savings are remunerated in the market and the rate firms pay on their loans from banks.
    Keywords: Implicit contracts; financial frictions; tenure profile; wage setting
    JEL: G3 J3 L2
    Date: 2010
  5. By: L.Deidda; B.Fattouh
    Abstract: This paper develops an overlapping generation model with asymmetric information in the credit market such that the interplay between relationship finance supplied by investors who monitor investment decisions ex-ante and market finance supplied by investors who relay on public information can be the source of endogenous business fluctuations. Monitoring helps reducing the inefficiency caused by moral hazard. However, the incentives of entrepreneurs to demand relationship finance to induce monitoring –which is also non-contractible – are weaker the lower is the return to investment. If the return to investment is low enough, entrepreneurs demand too little relationship finance. This leads to an inefficiently low level of monitoring and of entrepreneurial effort. Under decreasing marginal returns to capital, the model generates a reversion mechanism that can induce macroeconomic instability. The economy can experience endogenous business cycles characterized by a pro-cyclical behavior of the relative importance of relationship finance. This is consistent with the pro-cyclical behavior of the indicator of relative importance of relationship finance, which we construct based on quarterly and annual data from the US Flow of Funds Accounts for the non-financial corporate business sector.
    Keywords: Moral hazard; Endogenous business cycles; relationship finance; market finance; Monitoring
    JEL: D82 E32 E44
    Date: 2010
  6. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: In this work, I analyze the response of consumption and asset returns to unexpected wealth variation. Using data at quarterly frequency for the U.S. and the U.K., I show that: (i) while housing wealth shocks have a very persistent effect on consumption, financial wealth shocks only have transitory effects; and (ii) similarly, unexpected variation in housing wealth delivers a reasonably persistent response of real returns while financial wealth shocks have just a temporary effect.
    Keywords: financial wealth, housing wealth, consumption, asset returns.
    JEL: E21 E44 D12
    Date: 2010
  7. By: U. Michael Bergman; Lars Jonung
    Abstract: This paper studies business cycle synchronization in the three Scandinavian countries Denmark, Norway and Sweden prior to, during and after the Scandinavian Currency Union 1873-1913. We find that the degree of synchronization tended to increase during the currency union, thus supporting earlier empirical evidence. Estimates of factor models suggest that common Scandinavian shocks are important for these three countries. At the same time we find evidence suggesting that the importance of these shocks does not depend on the monetary regime.
    Keywords: european union eu denmark sweden norway jonung bergman scandinavian currency union synchronisation of cycles co-movement of cycles monetary unions symnetry symmetry european business cycles
    JEL: E32 F41
    Date: 2010–02
  8. By: Christopher F. Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin); Oleksandr Talavera (School of Economics, University of East Anglia)
    Abstract: We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide the constrained firms with easier access to external financing.
    Keywords: financial constraints, financial system, cash flow sensitivity of cash
    JEL: G32 G30
    Date: 2010–04–21
  9. By: Kilponen, Juha (Bank of Finland Research and European Central Bank); Santavirta, Torsten (Aalto University School of Economics)
    Abstract: We improve the precision of the test of the implicit contract model that Beaudry and DiNardo proposed twenty years ago. Our data set allows us to define the precise industry and plant of a particular employment relationship, link local labour market characteristics and company characteristics to the individual level of wages, and control for composition effects. We find evidence in favour of the spot market model of wage setting in the whole sample, but there is significant variation across industries and educational levels. In particular, the spot market matters most for low-skill workers, while the implicit contract model with one-sided limited commitment applies better to high-skill workers.
    Keywords: wage cyclicality; limited commitment; match-specific fixed effects
    JEL: E32 J41 J64
    Date: 2010–04–28
  10. By: Sanders Shaffer
    Abstract: There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital.
    Keywords: Global financial crisis ; Bank capital ; Banks and banking - Accounting
    Date: 2010
  11. By: D. BOROWCZYK MARTINS (University of BristoL, Department of Economics); V. VANDENBERGHE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In this paper we explore a matched employer-employee data set to investigate the presence of gender wage discrimination in the Belgian private economy labour market. We identify and measure gender wage discrimination from firm-level data using a labour index decomposition pioneered by Hellerstein and Neumark (1995), which allows us to compare direct estimates of a gender productivity differential with those of a gender labour costs differential. We take advantage of the panel structure of the data set and identify gender wage discrimination from within-firm variation. Moreover, inspired by recent developments in the production function estimation literature, we address the problem of endogeneity in input choice using a structural production function estimator (Levinsohn and Petrin, 2003). Our results suggest that there is no gender wage discrimination inside private firms located in Belgium.
    Keywords: labour productivity; wages; gender discrimination; structural production function estimation; panel data
    JEL: J24 C52 D24
    Date: 2010–03–16
  12. By: Jesus Fernández-Villaverde; Pablo Guerrón-Quintana; Juan F. Rubio-Ramírez
    Abstract: This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to the authors is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, the authors build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and they estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, the authors show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Their main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.
    Keywords: Monetary policy ; Business cycles ; Board of Governors of the Federal Reserve System (U.S.) ; Econometric models
    Date: 2010
  13. By: Abe, Naohito; Iwasaki, Ichiro
    Abstract: In this paper, we investigate the possible impacts of ownership structure and corporate performance on managerial turnover using a unique dataset of Russian corporations. We argue that Russia is regarded as a country with a highly authoritarian and collectivism-oriented national culture and this peculiarity is the key to disentangling the puzzle of the statistically weaker relationship between firm performance and CEO renewal in Russian firms. Standing on this viewpoint, we deal with not only CEO dismissal, but also managerial turnover within a company as a whole. By conducting multinomial analysis that incorporates both factors, we found significant relationship between firm performance and CEO dismissal, while, consistent with most previous studies, a standard logit analysis of CEO turnover revealed no clear relationships. We also found that the presence of a dominant shareholder significantly increases the likelihood of turnover of whole management team, while foreign ownership tends to cause partial (CEO only) turnover. Our empirical result is consistent with the "cultural view" of management practice as put forward by House et al. (2004).
    Keywords: organizational culture, corporate governance, managerial turnover, Russia
    JEL: D21 G34 G35 P31 P34
    Date: 2010–04
  14. By: Corinne Autant-Bernard (Université de Lyon, Université Jean Monnet, F - 42023 Saint-Etienne, France, CNRS, GATE Lyon-St Etienne, UMR n° 5824, 69130 Ecully, France); Jean-Pascal Guironnet (GATE, Université de Lyon, Université Jean Monnet, F - 42023 Saint-Etienne, France, CNRS, GATE Lyon-St Etienne, UMR n° 5824, 69130 Ecully, France); Nadine Massart (GATE, Université de Lyon, Université Jean Monnet, F - 42023 Saint-Etienne, France, CNRS, GATE Lyon-St Etienne, UMR n° 5824, 69130 Ecully, France)
    Abstract: This paper investigates the effect of inter-firm and intra-firm spillovers on the productivity of firms, using French data. The Luenberger Productivity Indicator (LPI) is used to estimate the productivity and to break it down into several components (e.g. efficiency, biased technical progress, scale effects, etc.). Using this approach, negative productivity changes are found due to the unfavourable economic situation over 2000-2002. Intangible assets underlying productivity change are then investigated through a Maximum Likelihood Random Effect (MLRE) model. Spillover effects – influencing Total Factor Productivity (TFP) and its correspondent components, technological and efficiency changes – are found.
    Keywords: Productivity Change, Luenberger Indicator, Knowledge Externalities
    JEL: C31 C23 R11 R12
    Date: 2010
  15. By: Dennis Fok (Erasmus University Rotterdam); Andre van Stel (University of Amsterdam); Andrew Burke (Cranfield University, UK); Roy Thurik (Erasmus University Rotterdam)
    Abstract: This paper conducts the first general equilibrium analysis of the role of entry, exit and profits in industry dynamics. The benefit of our model is twofold. First, to discriminate between entrants’ role of performing the entrepreneurial function of creating disequilibrium and the conventional equilibrating role of moving the industry to a new equilibrium. Second, to discriminate between three aspects of industry dynamics: the effect of entry and exit on market equilibrium, duration of disequilibrium and patterns of adjustment. Using a rich data set of the retail industry, we construct a dynamic simultaneous equilibrium model of profits, entry and exit. We find that indeed entrants play an entrepreneurial function causing long periods of disequilibrium after which a new equilibrium is attained. Moreover, we find ample support for the statement that disequilibrium is the essence of economic progress.
    Keywords: entry; exit; profits; equilibrium; industrial dynamics; retailing
    JEL: B50 J01 L00 L1 L26
    Date: 2010–01–13
  16. By: Armstrong, Mark; Zhou, Jidong
    Abstract: We consider a market with sequential consumer search in which firms can distinguish potential customers visiting for the first time from returning visitors. We show that firms often have an incentive to make it costly for its visitors to return after investigating rivals, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid by first-time visitors lower than that for returning visitors). Prices often increase when return costs are artificially increased in this manner, and this harms consumers and market performance. If firms cannot commit to their buy-later price the outcome depends on whether there is an intrinsic cost of returning to a firm: if the intrinsic return cost is zero, it is often an equilibrium for firms not to offer any buy-now discount; if the return cost is positive, firms are forced to make exploding offers.
    Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; buy-now discounts; costly recall
    JEL: D18 D83 D43
    Date: 2010–05
  17. By: George Pennacchi
    Abstract: This paper develops a structural credit risk model of a bank that issues deposits, shareholders' equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank's assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank's deposits, contingent capital, and shareholders' equity is studied for various parameter values haracterizing the bank's risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank's asset value, as might occur during a financial crisis, has distinctive implications for valuing contingent capital. Credit spreads on contingent capital are higher the lower is the value of shareholders' equity at which conversion occurs and the larger is the conversion discount from the bond's par value. The effect of requiring a decline in a financial stock price index for conversion (dual price trigger) is to make contingent capital more similar to non-convertible subordinated debt. The paper also examines the bank's incentive to increase risk when it issues different forms of contingent capital as well as subordinated debt. In general, a bank that issues contingent capital has a moral hazard incentive to raise its assets' risk of jumps, particularly when the value of equity at the conversion threshold is low. However, moral hazard when issuing contingent capital tends to be less than when issuing subordinated debt. Because it reduces effective leverage and the pressure for government bailouts, contingent capital deserves serious consideration as part of a package of reforms that stabilize the financial system and eliminate "Too-Big-to-Fail."
    Keywords: Bank capital ; Risk ; Bank failures
    Date: 2010
  18. By: Fergal McCann
    Abstract: This paper analyses how international outsourcing affects plant productivity. The results point to a striking pattern: the status of being an outsourcer matters strongly for firms that are indigenous and not exporting, while for exporters and foreign affiliates, tfp increases are lower, insignificant and sometimes negative. On the other hand, higher intensity of outsourcing matters for both exporters and foreign affiliates. Similarly, in dynamic analysis, indigenous non-exporters are found to increase tfp for two periods after entering into international outsourcing, while indigenous exporters experience one more weakly significant period of growth. The message is clear: international outsourcing’s effect on tfp is most pronounced when it serves as a first exposure to international markets.
    Keywords: International outsourcing; heterogeneous firms; productivity; firm structure
    JEL: F23 L23
    Date: 2010–03
  19. By: Robert E. Krainer (University of Wisconsin Madison)
    Abstract: In this paper we compare a traditional demand oriented model to a non-traditional capital budgeting model of bank lending based on movements in the equity cost of capital for France, Germany, and the Euro area. Using non-nested hypothesis tests and omitted variables tests, we find that we reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions in France and the Euro area. For Germany the results are inconclusive. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions of banks.
    Keywords: Bank Loans, Stock Market, Non-nested Hypothesis Tests.
    JEL: E3 E5 G2
    Date: 2010
  20. By: Veliziotis M (Institute for Social and Economic Research)
    Abstract: Does union membership increase sickness absence from work and, if so, by how much? And which specific channels does this effect operate through? Using UK Labour Force Survey data for 2006-2008 we find that trade union membership is associated with a substantial increase in the probability of reporting sick and in the amount of average absence taken. This result can be largely attributed to the protection that unions offer to unionized employees. Supportive evidence is also found for a reduction in “presenteeism” (attending work when sick) among union members. The results are robust to different modelling and estimation approaches.
    Date: 2010–05–10
  21. By: Philipp Koellinger (Erasmus University Rotterdam); Christian Roessler (Brown University)
    Abstract: We develop a new perspective on the boundary of the firm that is consistent with the empirical observation that the share of entrepreneurs first decreases and then increases in the course of economic development. Existing theory based on transaction costs is difficult to relate to these well-established dynamics. Our approach focuses on changing incentives to specialize and adapt, in order to access complementarities that arise from diverse abilities and access to wealth. We discuss why the efficient number of entrepreneurs is bounded and changes in the course of economic development.
    Keywords: Entrepreneurship; theory of the firm; organizations; economic development
    JEL: L26 D20 J24 O10
    Date: 2009–11–19
  22. By: Jan Annaert (Universiteit Antwerpen); Marc De Ceuster (Universiteit Antwerpen); Patrick Van Roy (National Bank of Belgium, Financial Stability Department; Université Libre de Bruxelles); Cristina Vespro (National Bank of Belgium, Financial Stability Department)
    Abstract: This paper decomposes the explained part of the CDS spread changes of 31 listed euro area banks according to various risk drivers. The choice of the credit risk drivers is inspired by the Merton (1974) model. Individual CDS liquidity and other market and business variables are identified to complement the Merton model and are shown to play an important role in explaining credit spread changes. Our decomposition reveals, however, highly changing dynamics in the credit, liquidity, and business cycle and market wide components. This result is important since supervisors and monetary policy makers extract different signals from liquidity based CDS spread changes than from business cycle or credit risk based changes. For the recent financial crisis, we confirm that the steeply rising CDS spreads are due to increased credit risk. However, individual CDS liquidity and market wide liquidity premia played a dominant role. In the period before the start of the crisis, our model and its decomposition suggest that credit risk was not correctly priced, a finding which was correctly observed by e.g. the International Monetary Fund
    Keywords: credit default spreads, credit risk, financial crisis, financial sector, liquidity premia, structural model
    JEL: G12 G21
    Date: 2010–05

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