nep-bec New Economics Papers
on Business Economics
Issue of 2010‒11‒20
fourteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Firm leverage, household leverage and the business cycle By Solomon, Bernard Daniel
  2. Shareholders and employees: rent transfer and rent sharing in corporate takeovers By Kuvandikov, Azimjon
  3. Reporting of Internal Control Deficiencies, Restatements, and Management Forecasts By Katsuhiko Muramiya; Tomomi Takada
  4. Moral Hazard and Ambiguity By Philipp Weinschenk
  5. Applying shape and phase restrictions in generalized dynamic categorical models of the business cycle By Don Harding
  6. Bankruptcy risk model and empirical tests By Boris Podobnik; Davor Horvatic; Alexander M. Petersen; Branko Uro\v{s}evi\'c; H. Eugene Stanley
  7. Understanding Systemic Risk: The Trade-Offs between Capital, Short-Term Funding and Liquid Asset Holdings By Céline Gauthier; Zhongfang He; Moez Souissi
  8. Multimarket Contact in Vertically Related Markets By Talat S. Genc; Sencer Ecer
  9. Information and Investment: Evidence from Plant-Level Data By Xavier Giroud
  10. Prices and volumes of options: A simple theory of risk sharing when markets are incomplete By Le Grand, F.; Ragot, X.
  11. Do Product Market Regulations in Upstream Sectors Curb Productivity Growth? Panel Data Evidence for OECD Countries By Renaud Bourlès; Gilbert Cette; Jimmy Lopez; Jacques Mairesse; Giuseppe Nicoletti
  12. Cause and effect relationship between post-merger operating performance changes and workforce adjustments By Kuvandikov, Azimjon
  13. Interpreting markups in Spanish manufacturing: The exponential model By Corchón, Luis C.; Moreno, L.
  14. Employee ownership as a signal of management quality By Nicolas Aubert; André Lapied; Patrick Rousseau

  1. By: Solomon, Bernard Daniel
    Abstract: This paper develops a macroeconomic model of the interaction between consumer debt and firm debt over the business cycle. I incorporate interest rate spreads generated by firm and household loan default risk into a real business cycle model. I estimate the model on US aggregate data. This allows me to analyse the quantitative importance of possible feedback effects between the debt levels of firms and households, and the relative contributions of financial and supply shocks to economic fluctuations. While firm level credit market frictions significantly amplify the response of investment to shocks, they do not amplify output responses. In general equilibrium, higher external financing spreads for households contribute to lower external financing spreads for firms, contrary to traditional Keynesian predictions. Furthermore, total factor productivity shocks remain an important source of business cycles in my model. They are responsible for 71 - 74% of the variance of output and 56 - 69% of the variance of consumption in the model. Financial shocks are important in explaining interest rate spreads and leverage ratios, but they account for less than 11% of the fluctuations in output. My results suggest that other factors, beyond credit market frictions on their own, are necessary to justify an important role for financial shocks in aggregate output fluctuations.
    Keywords: Financial frictions; external finance premium; DSGE models; Bayesian estimation; business cycles
    JEL: E43 E32 E44 E21 C11
    Date: 2010–10–30
  2. By: Kuvandikov, Azimjon
    Abstract: The introduction of the ideology of maximising shareholder value and the rise of institutional investors in LMEs contributed to the development of an active MCC, which threatens managers with replacement if they do not act in the best interests of shareholders. However, some authors argue that restructuring for shareholder value through the MCC may negatively affect labour (Froud et al., 2000; Lazonick and O'Sullivan, 2000). It is suggested that such corporate governance practices may discourage employees from investing in firm-specific human capital and may pressurise managers into taking short-term profit-maximising actions instead of investing in long-term sustainable projects (Blair, 1995).
    Date: 2010–08
  3. By: Katsuhiko Muramiya (Research Institute for Economics and Business Administration, Kobe University); Tomomi Takada (Graduate School of Business Administration, Kobe University)
    Abstract: We examine the relationship between accuracy in management forecasts and the effectiveness of internal controls by using the unique setting in Japan, where disclosing management forecasts is effectively mandated. Feng et al. (2009) posit and find that managers of firms reporting internal control weaknesses under the Sarbanes–Oxley Act (SOX) report less accurate earnings forecasts compared with other firms in the U.S., where management forecasts are disclosed voluntarily. In line with this notion, our results show that firms disclosing internal control deficiencies and those restating financial highlights report less accurate management forecasts in the Japanese market, where the disclosure of management forecasts are effectively mandated. Furthermore, we find that manager’s optimistic biases cause such inaccurate management forecasts. Our results indicate that the effectiveness of internal controls has a significant impact on internal reports, which are used in forming forecasts; therefore, internal control weaknesses induce less accurate management forecasts.
    Date: 2010–11
  4. By: Philipp Weinschenk (Max Planck Institute for Research on Collective Goods)
    Abstract: We consider a principal-agent model with moral hazard where the agent’s knowledge about the performance measure is ambiguous and he is averse towards ambiguity. We show that the principal may optimally provide no incentives or contract only on a subset of all informative performance measures. That is, the Informativeness Principle does not hold in our model. These results stand in stark contrast to the ones of the orthodox theory, but are empirically of high relevance.
    Keywords: financial crisis, Basel Accord, banking regulation, capital requirements, modelbased approach, systemic risk
    JEL: D82 M12 M52
    Date: 2010–09
  5. By: Don Harding (LaTrobe)
    Abstract: To match the NBER business cycle features it is necessary to employ Generalised dynamic categorical (GDC) models that impose certain phase restrictions and permit multiple indexes. Theory suggests additional shape restrictions in the form of monotonicity and boundedness of certain transition probabilities. Maximum likelihood and constraint weighted bootstrap estimators are developed to impose these restrictions. In the application these estimators generate improved estimates of how the probability of recession varies with the yield spread.
    Keywords: Generalized dynamic categorical model, Business cycle; binary variable, Markov process, probit model, yield curve
    JEL: C22 C53 E32 E37
    Date: 2010–07–28
  6. By: Boris Podobnik; Davor Horvatic; Alexander M. Petersen; Branko Uro\v{s}evi\'c; H. Eugene Stanley
    Abstract: We analyze the size dependence and temporal stability of firm bankruptcy risk in the US economy by applying Zipf scaling techniques. We focus on a single risk factor-the debt-to-asset ratio R-in order to study the stability of the Zipf distribution of R over time. We find that the Zipf exponent increases during market crashes, implying that firms go bankrupt with larger values of R. Based on the Zipf analysis, we employ Bayes's theorem and relate the conditional probability that a bankrupt firm has a ratio R with the conditional probability of bankruptcy for a firm with a given R value. For 2,737 bankrupt firms, we demonstrate size dependence in assets change during the bankruptcy proceedings. Prepetition firm assets and petition firm assets follow Zipf distributions but with different exponents, meaning that firms with smaller assets adjust their assets more than firms with larger assets during the bankruptcy process. We compare bankrupt firms with nonbankrupt firms by analyzing the assets and liabilities of two large subsets of the US economy: 2,545 Nasdaq members and 1,680 New York Stock Exchange (NYSE) members. We find that both assets and liabilities follow a Pareto distribution. The finding is not a trivial consequence of the Zipf scaling relationship of firm size quantified by employees-although the market capitalization of Nasdaq stocks follows a Pareto distribution, the same distribution does not describe NYSE stocks. We propose a coupled Simon model that simultaneously evolves both assets and debt with the possibility of bankruptcy, and we also consider the possibility of firm mergers.
    Date: 2010–11
  7. By: Céline Gauthier; Zhongfang He; Moez Souissi
    Abstract: We offer a multi-period systemic risk assessment framework with which to assess recent liquidity and capital regulatory requirement proposals in a holistic way. Following Morris and Shin (2009), we introduce funding liquidity risk as an endogenous outcome of the interaction between market liquidity risk, solvency risk, and the funding structure of banks. To assess the overall impact of different mix of capital and liquidity, we simulate the framework under a severe but plausible macro scenario for different balance-sheet structures. Of particular interest, we find that (1) capital has a decreasing marginal effect on systemic risk, (2) increasing capital alone is much less effective in reducing liquidity risk than solvency risk, (3) high liquid asset holdings reduce the marginal effect of increasing short term liability on systemic risk, and (4) changing liquid asset holdings has little effect on systemic risk when short term liability is sufficiently low.
    Keywords: Financial stability; Financial system regulation and policies
    JEL: G21 C15 C81 E44
    Date: 2010
  8. By: Talat S. Genc (Department of Economics,University of Guelph); Sencer Ecer (Department of Economics, Istanbul Technical University)
    Abstract: We analyze collusion in two comparable market structures. In the first market structure only one firm is vertically integrated; there is one more independent firm in the upstream industry and another independent firm in the downstream industry. In the second market structure, there are only two vertically integrated firms that can trade among themselves in the intermediate good market. The second market structure mimics markets like the California gasoline market where firms vertically integrated through refinery, and retail markets. We rank these two market structures in terms of ease of collusion and show that while under some circumstances collusion is not possible in the market with one vertically integrated firm, collusion is possible in the market structure with two vertically integrated firms. We conclude that vertical (multimarket) contact facilitates collusion and vertical mergers suspected to lead to subsequent vertical mergers in an industry should receive higher antitrust scrutiny relative to single isolated vertical mergers.
    Keywords: Multimarket; collusion; vertical integration; gasoline markets
    JEL: D43 L11 L94
    Date: 2010
  9. By: Xavier Giroud
    Abstract: A reduction in travel time between headquarters and plants makes it easier for headquarters to monitor plants and gather “soft” information - i.e., information that cannot be transmitted through non-personal means. Using a differences-in-differences methodology, I find that the introduction of new airline routes that reduce the travel time between headquarters and plants leads to an increase in plant-level investment of 8% to 9%. This increase in investment is accompanied by an increase in plants’ total factor productivity of 1.3% to 1.4%. Consistent with the argument that the reduction in travel time makes it easier for headquarters to monitor plants and gather soft information, I find that my results are stronger: i) for plants whose headquarters are more time constrained; ii) for plants operating in soft-information industries; iii) during the earlier years of my sample period; iv) for plants where the information uncertainty is likely to be greater, such as smaller plants, .peripheral plants operating in industries that are not the firm’s main industry, and plants operating in industries with more volatile sales or wages.
    Date: 2010–10
  10. By: Le Grand, F.; Ragot, X.
    Abstract: We present a simple theory of business-cycle movements of option prices and volumes. This theory relies on time-varying heterogeneity between agents in their demand for insurance against aggregate risk. Formally, we build an infinite-horizon model where agents face an aggregate risk, but also different levels of idiosyncratic risk. We manage to characterize analytically a general equilibrium in which positive quantities of derivatives are traded. This allows us to explain the informational content of derivative volumes over the business cycle. We also carry out welfare analysis with respect to the introduction of options, which appears not to be Pareto-improving.
    Keywords: Option Pricing, Open Interest, Incomplete Markets.
    JEL: G1 G10 E44
    Date: 2010
  11. By: Renaud Bourlès; Gilbert Cette; Jimmy Lopez; Jacques Mairesse; Giuseppe Nicoletti
    Abstract: Based on an endogenous growth model, we show that intermediate goods markets imperfections can curb incentives to improve productivity downstream. We confirm such prediction by estimating a model of multifactor productivity growth in which the effects of upstream competition vary with distance to frontier on a panel of 15 OECD countries and 20 sectors over 1985-2007. Competitive pressures are proxied with sectoral product market regulation data. We find evidence that anticompetitive upstream regulations have curbed MFP growth over the past 15 years, more strongly so for observations that are close to the productivity frontier.
    JEL: C23 L16 L5 O43 O57
    Date: 2010–11
  12. By: Kuvandikov, Azimjon
    Abstract: Prior empirical research provides substantial evidence showing that mergers and acquisitions lead to operating performance decline (Ghosh, 2001). At the same time such transactions involve workforce reductions, as reported in the public media. However, systematic empirical evidence on the association between operating performance and workforce adjustments is inconclusive. On the one hand workforce reductions may be undertaken to improve efficiency and firm profitability (Cascio et al., 1997) or to arrest further performance deterioration. On the other, post-takeover layoffs may be undertaken to create shareholder value and to regain premiums paid to targets. Consequently, it is suggested that such layoffs destroy the human capital of acquired firms and thereby negatively affect firm performance post-merger (Krishnan et al., 2007). Thus, the answers to (1) whether post-takeover performance decline leads to workforce reductions and (2) whether such layoffs positively or negatively affect firm performance are unknown. This chapter aims to provide new empirical evidence on these two questions. Empirical evidence on these questions would clarify whether post-merger labour management decisions are made to further enhance efficiency and firm profitability.
    Date: 2010–08
  13. By: Corchón, Luis C.; Moreno, L.
    Abstract: In this paper we attempt to rationalize markups in a sample of Spanish manufacturing by assuming a representative consumer, profit-maximizing firms and constant returns to scale. We find that the standard forms of demand (CES and linear) do not provide a good explanation of markups. In contrast, a model where the representative consumer has an exponential utilty function yields results that match data more closely.
    Keywords: Markups; Exponential utility function
    JEL: L13 L60
    Date: 2010–11–02
  14. By: Nicolas Aubert (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II); André Lapied (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Patrick Rousseau (CERGAM - Université Paul Cézanne - Aix-Marseille III)
    Abstract: The employees' decision to become shareholder of the company they work for can be a consequence of employers' matching contribution in company stock. From a behavioral perspective, employees would regard these contributions as an implicit investment advice made by their employer. This paper adopts another viewpoint. Since employee ownership can be used as an entrenchment mechanism, we suggest that employer's matching policy can be considered as an imperfect signal of management quality. This paper suggests that employee ownership can be used by managers to compensate their management skills to the market. It recommends that employee ownership policy should not be influenced by the managers.
    Keywords: Employee ownership ; corporate governance ; management entrenchment
    Date: 2010

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