nep-bec New Economics Papers
on Business Economics
Issue of 2010‒09‒03
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices By Saroj Bhattarai; Raphael Schoenle
  2. Inventories in ToTEM By Oleksiy Kryvtsov; Yang Zhang
  3. Debt Financing and Financial Flexibility Evidence from Pro-active Leverage Increases By David J. Denis; Stephen B. Mckeon
  4. Great Expectations: Past Wages and Unemployment Durations By René Böheim; Gerard Thomas Horvath; Rudolf Winter-Ebmer
  5. Corporate Governance and the Cost of Debt of Large European Firms By Schauten, M.B.J.; Dijk, D.J.C. van
  6. Corporate Social Responsibility in Large Family and Founder Firms By Block, J.H.; Wagner, M.
  7. Business cycles in the equilibrium model of labor market search and self-insurance By Makoto Nakajima
  8. Bundling Among Rivals: A Case of Pharmaceutical Cocktails By Claudio Lucarelli; Sean Nicholson; Minjae Song
  9. The Exporter Productivity Premium along the Productivity Distribution: First Evidence from a Quantile Regression Approach for Fixed Effects Panel Data Models By David Powell; Joachim Wagner
  10. Large Shareholder Diversification And Corporate Risk- Taking By Mara Faccio; Maria-Teresa Marchica; Roberto Mura
  11. Distortionary taxation, international business cycles and real wage: explaining some puzzling facts By Francois Langot; Coralia Quintero-Rojas
  12. The Impact of Corporate Rebranding on the Firm’s Market Value By Maria Rosa Borges; Ana Sofia Branca
  13. Liquidity Management and Corporate Investment During a Financial Crisis By Murillo Campello; Erasmo Giambona; John R. Graham; Campbell R. Harvey
  14. No Derivative Shareholder Suits in Europe – A Model of Percentage Limits and Collusion By Kristoffel Grechenig; Michael Sekyra
  15. The Impact of Firm Entry Regulation on Long-living Entrants By Susanne Prantl
  16. Capital Regulation after the Crisis: Business as Usual? By Martin Hellwig
  17. ICT and Productivity Growth in the 1990's: Panel Data Evidence on Europe By Christian M. Dahl; Hans Christian Kongsted; Anders Sørensen
  18. Endogeneity and Exogeneity in Sales Response Functions By Wolfgang Polasek
  19. Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields By Joseph Tham; Ignacio Velez Pareja
  20. Material Adverse Change Clauses and Acquisition Dynamics By David J. Denis; Antonio J. Macias

  1. By: Saroj Bhattarai (Pennsylvania State University); Raphael Schoenle (Brandeis University)
    Abstract: In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can match our findings. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchro- nization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multi-product firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend in ation, the model matches the empiricalfindings.
    Keywords: Multi-product firms; Number of Goods; State-dependent pricing; U.S. Producer prices
    JEL: E30 E31 L11
    Date: 2010–07
  2. By: Oleksiy Kryvtsov; Yang Zhang
    Abstract: ToTEM – the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy – is extended to include inventories. In the model, firms accumulate inventories of finished goods for their role in facilitating the demand for goods. The model is successful in matching procyclical and volatile inventory investment behaviour. The authors show that the convex cost of stock adjustment is key to the model’s ability to match the inventory data quantitatively.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: E31 E32
    Date: 2010
  3. By: David J. Denis; Stephen B. Mckeon
    Abstract: Firms that intentionally increase leverage through substantial debt issuances do so primarily as a response to operating needs rather than a desire to make a large equity payout. Subsequent debt reductions are neither rapid, nor the result of pro-active attempts to rebalance the firm’s capital structure towards a long-run target. Instead, the evolution of the firm’s leverage ratio depends primarily on whether or not the firm produces a financial surplus. In fact, firms that generate subsequent deficits tend to cover these deficits predominantly with more debt even though they exhibit leverage ratios that are well above estimated target levels. While many of our findings are difficult to reconcile with traditional capital structure models, they are broadly consistent with a capital structure theory in which financial flexibility, in the form of unused debt capacity, plays an important role in capital structure choices.
    Date: 2010–07
  4. By: René Böheim; Gerard Thomas Horvath (Johannes Kepler University of Linz / Department of Economics); Rudolf Winter-Ebmer
    Abstract: Decomposing wages into worker and firm wage components, we find that firm-fixed components (firm rents) are sizeable parts of workers' wages. If workers can only imperfectly observe the extent of firm rents in their wages, they might be mislead about the overall wage distribution. Such misperceptions may lead to unjustified high reservation wages, resulting in overly long unemployment durations. We examine the infuence of previous wages on unemployment durations for workers after exogenous lay-offs and, using Austrian administrative data, we find that younger workers are, in fact, unemployed longer if they profited from high firm rents in the past. We interpret our findings as evidence for overconfidence generated by imperfectly observed productivity.
    Keywords: Unemployment, Job Search, Overconfidence
    JEL: J3 J6
    Date: 2010–08
  5. By: Schauten, M.B.J.; Dijk, D.J.C. van
    Abstract: This paper examines the relation between the quality of corporate governance and the cost of debt for large European firms (FTSEurofirst 300 Index). We use Deminor scores for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. As a proxy for the cost of debt we use the yield and yield spread of 542 bonds issued in the years 2001-2009. After adjusting for issuer characteristics, issue characteristics and market characteristics, we find a negative relation between disclosure and the cost of debt. We uncover that this relation is in fact nonlinear and crucially depends on the quality of shareholder rights. If the quality of shareholder rights is high, the effect of disclosure on the cost of debt is insignificant. However, if the quality of shareholder rights is low, the negative effect of disclosure is statistically and economically significant. This novel interaction effect between shareholders rights and disclosure on the cost of debt is explained by our `share rights or disclose' hypothesis. According to this hypothesis, agency conflicts between the management and the providers of capital are negatively related with the quality of shareholder rights. We argue that firms with higher shareholder rights exhibit lower information risk.
    Keywords: corporate governance;cost of debt;disclosure;shareholder rights
    Date: 2010–06–02
  6. By: Block, J.H.; Wagner, M.
    Abstract: Based on arguments about long-term orientation and corporate reputation, we argue that family and founder firms differ from other firms with regard to corporate social responsibility. Using Bayesian analysis, we then show that family and founder ownership are associated with a lower level of corporate social responsibility concerns, whereas ownership by institutional investors is associated with a higher level of corporate social responsibility concerns and a lower level of corporate social responsibility initiatives. We conclude that it makes sense to distinguish between family, founder and institutional investors and their roles as owners or managers when analyzing the effects of corporate governance on corporate social responsibility.
    Keywords: family firms;corporate social responsibility;founder firms;family ownership;family management;long-term orientation
    Date: 2010–06–26
  7. By: Makoto Nakajima
    Abstract: The author introduces risk-averse preferences, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard Mortensen-Pissarides model of search and matching and explore the model's cyclical properties. There are four main findings. First and foremost, the baseline model can generate the observed large volatility of unemployment and vacancies with a realistic replacement ratio of the unemployment insurance benefits of 64 percent. Second, labor-leisure choice plays a crucial role in generating the large volatilities; additional utility from leisure when unemployed makes the value of unemployment close to the value of employment, which is crucial in generating a strong amplification, even with the moderate replacement ratio. Besides, it contributes to the amplification through an adjustment in the intensive margin of labor supply. Third, the borrowing constraint or uninsured individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies: Most workers are well insured only with self-insurance. Fourth, the model better replicates the business cycle properties of the U.S. economy, thanks to the co-existence of adjustments in the intensive and extensive margins of labor supply and the stronger amplification.
    Keywords: Employment (Economic theory) ; Business cycles
    Date: 2010
  8. By: Claudio Lucarelli; Sean Nicholson; Minjae Song
    Abstract: We empirically analyze the welfare effects of cross-firm bundling in the pharmaceutical industry. Physicians often treat patients with "cocktail" regimens that combine two or more drugs. Firms cannot price discriminate because each drug is produced by a different firm and a physician creates the bundle in her office from the component drugs. We show that a less competitive equilibrium arises with cocktail products because firms can internalize partially the externality their pricing decisions impose on competitors. The incremental profits from creating a bundle are sometimes as large as the incremental profits from a merger of the same two firms.
    JEL: I11 L1 L11
    Date: 2010–08
  9. By: David Powell (RAND Corporation); Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: An emerging literature on international activities of heterogeneous firms documents that exporting firms are more productive than firms that only sell on the national market. This positive exporter productivity premium shows up in a large number of empirical studies after controlling for observed and unobserved firm characteristics in regression models including firm fixed effects. These studies test for a difference in productivity between exporters and non-exporters at the conditional mean of the productivity distribution. However, if firms are heterogeneous, it is possible that the size of the premium varies over the productivity distribution. In this paper we apply a newly developed estimator for fixed-effects quantile regression models to estimate the exporter productivity premium at quantiles of the productivity distribution for manufacturing enterprises in Germany, one of the leading actors in the world market for goods. We show that the premium decreases over the quantiles – a dimension of firm heterogeneity that cannot be detected through mean regression.
    Keywords: Exporter productivity premium, quantile regression, fixed effects
    JEL: F14 C21 C23
    Date: 2010–08
  10. By: Mara Faccio; Maria-Teresa Marchica; Roberto Mura
    Abstract: Using new data for the universe of firms covered in Amadeus, we reconstruct the portfolios of shareholders who hold equity stakes in private and publicly-traded European firms. We find great heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, we document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by non-diversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. Our results have important implications at the policy level because they identify one channel through which policy changes aimed at improving capital market development can improve economic welfare.
    Keywords: Risk-taking choices; Large shareholders; Portfolio diversification
    JEL: G11 G15 G31
    Date: 2010–07
  11. By: Francois Langot (GAINS-TEPP (Université du Maine)); Coralia Quintero-Rojas (Department of Economics and Finance, Universidad de Guanajuato)
    Abstract: In this paper, we show that fluctuations in distortive taxes can account for most puzzling features of the U.S. economy. Namely, the observed real wage rigidity, the international correlation of investment and labor inputs, and the so-called quantity puzzle (according to which cross-country correlation of outputs is higher than the one of consumptions). This is done in a two-country search and matching model with fairly standard separable preferences, extended to include a tax/benefit system.
    Keywords: Distortive taxes, real wage rigidity, international business cycles, search, matching
    JEL: E32 E62 H24 J41
    Date: 2010–08
  12. By: Maria Rosa Borges; Ana Sofia Branca
    Abstract: Rebranding corresponds to the creation of a new name, term, symbol, design or a combination of them for an established brand with the intention of developing a differentiated position in the mind of stakeholders and competitors. Increased competition has led firms to an avenue of differentiation, and rebranding has been approached by firms in order to differentiate themselves and to promote the corporate image. Corporate rebranding, although commonly referred in the press, has received little attention from academia. This paper tends to contribute to fill this gap in the academic literature, by analysing the impact that corporate image through rebranding has on the firms’ stock market value, using event study methodologies. We focus on firms listed on the Lisbon Stock Market in the period 2000 – February 2009. We do not find evidence of a positive impact of corporate rebranding on firm value, in Portuguese firms. In fact, our results suggest that these events may have a negative impact on firm value, even though our empirical evidence is weak, in supporting this conclusion.
    Keywords: corporate image; rebranding; market value; event study
    JEL: G14 M31
    Date: 2010–07
  13. By: Murillo Campello; Erasmo Giambona; John R. Graham; Campbell R. Harvey
    Abstract: This paper uses a unique dataset to study how firms managed liquidity during the financial crisis. Our analysis provides new insights on the interactions between internal liquidity, external funds, and real corporate decisions, such as investment and employment. We first describe how companies used credit lines during the crisis (access, size of facilities, and drawdown activity), the conditions under which these facilities were granted (fees, markups, maturity, and collateral), and whether managers had difficulties in renewing or initiating lines. We also describe the dynamics of credit line violations and the outcome of subsequent renegotiations. We show how companies substitute between credit lines and internal liquidity (cash and profits) when facing a severe credit shortage. Looking at real-side decisions, we find that credit lines are associated with greater spending when companies are not cash-strapped. Firms with limited access to credit lines, on the other hand, appear to choose between saving and investing during the crisis. Our evidence indicates that credit lines eased the impact of the financial crisis on corporate spending.
    JEL: E32 G31 G32
    Date: 2010–08
  14. By: Kristoffel Grechenig (Max Planck Institute for Research on Collective Goods, Bonn); Michael Sekyra (Vienna University of Technology, Austria)
    Abstract: We address one of the cardinal puzzles of European corporate law: the lack of derivate share-holder suits. We explain this phenomenon on the basis of percentage limits which require share-holders to hold a minimum amount of shares in order to bring a lawsuit. We show that, under this legal regime, managers will collude with large shareholders by means of settlements or bribes that impose a negative externality on small shareholders. Contrary to conventional agency models, we find that large shareholders do not monitor the management; as a consequence, there is no free riding opportunity for small shareholders.
    Keywords: Collusion, Derivative Shareholder Suits, Percentage Limits, Monitoring, Free Riding
    JEL: K22 K42 G30
    Date: 2010–05
  15. By: Susanne Prantl (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: What is the impact of firm entry regulation on sustained entry into self-employment? How does firm entry regulation influence the performance of long-living entrants? In this paper, I address these questions by exploiting a natural experiment in firm entry regulation. After German reunification, East and West Germany faced different economic conditions, but fell under the same law that imposes a substantial mandatory standard on entrepreneurs who want to start a legally independent firm in one of the regulated occupations. The empirical results suggest that the entry regulation suppresses long-living entrants, not only entrants in general or transient, short-lived entrants. This effect on the number of long-living entrants is not accompanied by a counteracting effect on the performance of long-living entrants, as measured by firm size several years after entry.
    Keywords: Firm entry regulation, sustained entry, self-employment, firm size
    JEL: K20 L25 L26 L50 M13 P52
    Date: 2010–07
  16. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper discusses the reform of capital regulation of banks in the wake of the financial crisis of 2007/2009. Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
    Keywords: financial crisis, Basel Accord, banking regulation, capital requirements, modelbased approach, systemic risk
    JEL: G21 G28
    Date: 2010–08
  17. By: Christian M. Dahl (University of Southern Denmark, CEBR and CREATES); Hans Christian Kongsted (University of Copenhagen, CAM and CEBR); Anders Sørensen (Copenhagen Business School and CEBR)
    Abstract: What has been the quantitative effect on productivity growth of information and communication technology (ICT) in Europe after 1995? Based on a multi-country sectoral panel data set, we provide econometric evidence of positive and signi?cant productivity effects of ICT in Europe, mainly due to advances in total factor productivity. The impact of ICT in Europe has happened against a negative macro economic shock not related to ICT. This is in contrast to the established evidence for the US. Our main results challenge the consensus in the growth-accounting literature that there has been no acceleration of productivity growth in Europe, mainly due to a dismal performance of ICT-using sectors.
    Keywords: Labor productivity, total factor productivity, information and communications technology, panel data methods.
    JEL: E32 C23 O47
    Date: 2010–08–25
  18. By: Wolfgang Polasek (Institute for Advanced Studies (IHS), Austria; The Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: Endogeneity and exogeneity are topics that are mainly discussed in macroeconomics. We show that sales response functions (SRF) are exposed to the same problem if we assume that the control variables in a SRF refl ect behavioral reactions of the supply side. The supply side actions are covering a flexible marketing component which could interact with the sales responses if sales managers decide to react fast according to new market situations. A recent article of Kao et al. (2005) suggested to use a class of production functions under constraints to estimate the sales responses that are subject to marketing strategies. In this paper we demonstrate this approach with a simple SRF(1) model that contains one endogenous variable. Such models can be extended by further exogenous variables leading to SRF-X models. The new modeling approach leads to a multivariate equation system and will be demonstrated using data from a pharma-marketing survey in German regions.
    Keywords: Sales response functions, stochastic derivative constraints, simultaneous estimation, MCMC, pharma-marketing, model choice
    Date: 2010–01
  19. By: Joseph Tham; Ignacio Velez Pareja
    Abstract: We present the derivation of cost of capital under the assumption of risky tax shields discounted with the cost of levered equity. We show that the formulation is consistent and is derived from basic financial principles. This formulation is valid for finite cash flows and non growing perpetuities. In addition, it can be calculated without the circularity between value and discount rate.
    Date: 2010–08–22
  20. By: David J. Denis; Antonio J. Macias
    Abstract: Material-Adverse-Change clauses (MACs) are present in over 90% of acquisition agreements. These clauses are the outcome of extensive negotiation and exhibit substantial cross-sectional variation in the number and types of events that are excluded from being ‘material adverse events’ (MAEs). MAEs are the underlying cause of more than 50% of acquisition terminations and 60% of acquisition renegotiations. Moreover, these renegotiations lead to substantial changes in the price offered to target shareholders (13-15%). We find that acquisitions with fewer MAE exclusions are characterized by wider arbitrage spreads (i.e., the difference between the price offered to target shareholders and the current market price of the target’s shares) during the acquisition period and are associated with higher offer premiums. We conclude that material adverse change clauses have an economically important impact on the dynamics of corporate acquisitions and stock prices during the acquisition period.
    Keywords: Acquisitions, Contractual mechanisms, Material-Adverse-Change clause (MACs), Material-Adverse Event (MAE) exclusions, merger agreement, risk allocation, flexibility
    JEL: G34 G32 G14 K12 L14 D86
    Date: 2010–04

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