nep-bec New Economics Papers
on Business Economics
Issue of 2010‒12‒18
twenty-two papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Do Agency relations Mediate the Interactions between Firms' Financial Policies and Business Cycles? By Charles-Henri Reuter
  2. Unions, Dynamism, and Economic Performance By Hirsch, Barry T.
  3. The Sources of Wage Variation: An Analysis Using Matched Employer-Employee Data By Sónia Torres; Pedro Portugal; John T. Addison; Paulo Guimarães
  4. The Hidden Side of Temporary Employment: Fixed-term Contracts as a Screening Device By Pedro Portugal; José Varejão
  5. Unions, Dissatisfied Workers and Sorting By John S Heywood; Colin Green
  6. Access to Capital and Capital Structure of the Firm By Anastasiya Shamshur
  7. Betting Against Beta By Andrea Frazzini; Lasse H. Pedersen
  8. The great diversification and its undoing By Vasco Carvalho; Xavier Gabaix
  9. The determinants of growth for SMEs. A longitudinal study from French manufacturing firms By Nadine Levratto; Luc Tessier; Messaoud Zouikri
  10. The Return on Private Investment in Public Equity By Cécile Carpentier; Jean-François L'Her; Jean-Marc Suret
  11. Wage and price joint dynamics at the firm level: an empirical analysis By Horny, G.; Sevestre, P.
  12. Convexity of Bertrand oligopoly TU-games with differentiated products By Aymeric Lardon
  13. House prices, sales, and time on the market : a search-theoretic framework By Antonia Díaz; Belén Jerez
  14. A Portfolio Approach to Venture Capital Financing By Pascal François; Georges Hübner
  15. Cyclical Upgrading of Labor and Employment Differences across Skill Groups By Andri Chassamboulli
  16. Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work? By Jan Willem van den End
  17. The Contribution of Human Capital to China’s Economic Growth By John Whalley; Xiliang Zhao
  18. Endogenous Product Differentiation, Market Size and Prices By Ferguson, Shon
  19. Local Versus Aggregate Lending Channels: The Effects Of Securitization On Corporate Credit Supply In Spain By Gabriel Jiménez; Atif R. Mian; José-Luis Peydró; Jesús Saurina
  20. Lessons learned from the financial crisis for financial stability and banking supervision By Alessio De Vincenzo; Maria Alessandra Freni; Andrea Generale; Sergio Nicoletti Altimari; Mario Quagliariello
  21. The impact of labor market entry conditions on initial job assignment, human capital accumulation, and wages By Beatrice Brunner; Andreas Kuhn
  22. The Instability of Joint Ventures: Learning from Others or Learning to Work with Others By José Mata; Pedro Portugal

  1. By: Charles-Henri Reuter (LSF, Statec, ESCP Europe, CEROS)
    Abstract: We investigate the interactions between firms’ financial policies and expected business cycles, in listed firms, in Europe, and over 20 years. We show that these interactions are mediated by ownership structures. Firms with strongly concentrated ownership, or under control, lead contra-cyclical policies, while firms with dispersed ownership lead somewhat pro-cyclical policies, supporting the traditional expectation that business cycles are of little direct relevance for financial policies. Our theoretical considerations unfold from the idea that ownership dispersion implies a different mix in agency relations in the firm. It entails specificities in agency costs, opportunity benefits of managerial discretion, it fosters differing needs for disciplining through debt, different needs for signaling, and potentially different market timing behaviors by managers and incumbent shareholders. As a result different objectives and constraints foster different policies: firms with dispersed ownership conduct lean (i.e. procyclical) policies, while firms with concentrated ownership or under control favor some financial smoothing (i.e. contra-cyclical policies). We derive from these two propositions specific hypotheses about public debt issuance, private debt management, investment, dividend and cash-holding policies, as well as resulting changes in financial leverage. Evidence is mostly supportive of our hypothesizing and propositions. Our proceedings are largely exploratory and our potential contribution extends to a number adjacent research questions including, among others, the analysis of performance effects of ownership concentration, the relative assessment of governance mechanisms, or still the investigation, in capital structure studies, of specific managerial behaviors and managerspecific information. Overall our emphasis on the potential relevance of business cycles for firm’s financial policies comes timely following the recent financial turmoil.
    Keywords: Agency theory, International capital structure, Business cycles, Ownership dispersion. Entrenchment, Managerial discretion, Institutional context.
    Date: 2010
  2. By: Hirsch, Barry T. (Georgia State University)
    Abstract: This paper explores the relationship between economic performance and US unionism, focusing first on what we do and do not know based on empirical research handicapped by limited data on establishment and firm level collective bargaining coverage. Evidence on the relationship of unions with wages, productivity, profitability, investment, debt, employment growth, and business failures are all relevant in assessing the future of unions and public policy with respect to unions. A reasonably coherent story emerges from the empirical literature, albeit one that rests heavily on evidence that is dated and (arguably) unable to identify truly causal effects. The paper’s principal thesis is that union decline has been tied fundamentally to competitive forces and economic dynamism. Implications of these findings for labor law policy and the future of worker voice institutions is discussed briefly in a final section.
    Keywords: unions, economic performance, competition, dynamism
    JEL: J50 J20 J30
    Date: 2010–11
  3. By: Sónia Torres; Pedro Portugal; John T. Addison; Paulo Guimarães
    Abstract: This paper estimates a wage equation that includes worker- and firm fixed effects simultaneously, using a longitudinal matched employer-employee dataset covering virtually all Portuguese employees over a little more than two-decades. The exercise is performed under optimal conditions by using (a) data covering the whole population of employees and (b) adequate econometric methods and algorithms. The variation in log real hourly wages is then decomposed into six different components related to worker and firm characteristics (either observed or unobserved) and a residual component. It is found that worker heterogeneity is the most important source of wage variation (46.2 percent), due in roughly equal parts to the unobserved component (24.2 percent) and the observed component (22 percent). Firm effects are less important overall (29.6%), although firms’ observed characteristics do play an important role (14.8) in explaining wage differentials.
    JEL: J2 J41
    Date: 2010
  4. By: Pedro Portugal; José Varejão
    Abstract: In this article we look at how one specific form of temporary employment - employment with fixed-term contracts - fits into employers’ hiring policies. We find that human capital variables, measured at the levels of the worker and the workplace, are important determinants of the employers’ decisions to hire with temporary contracts and to promote temporary workers to permanent positions. Those employers that hire more with temporary contracts are also those that are more likely to offer a permanent position to their newlyhired temporary employees. Our results indicate that fixed-term contracts are a mechanism for screening workers for permanent positions.
    JEL: J23 J41
    Date: 2010
  5. By: John S Heywood; Colin Green
    Abstract: A persistent and sizeable literature argues that the reported job dissatisfaction of union members is spurious. It reflects either the sorting of workers across union status or the sorting of union recognition across jobs. We cast doubt on this argument presenting the first estimates that use panel data to hold constant both worker and job match fixed effects. The estimates demonstrate that covered union members report greater dissatisfaction even when accounting for sorting in both dimensions. Moreover, covered union members are less likely to quit holding job satisfaction constant and their quit behaviour is far less responsive to job satisfaction. The paradox of the discontented union member remains intact.
    Keywords: Union Membership, Union Coverage, Job Satisfaction, Sorting, Fixed Effects
    Date: 2010
  6. By: Anastasiya Shamshur
    Abstract: The paper examines the importance of financial constraints for firm capital structure decisions in transitions economies during 1996-2006 using endogenous switching regression with unknown sample separation approach. The evidence suggests that differences in financing constraints have a significant effect on a firm's capital structure. Constrained and unconstrained firms differ in capital structure determinants. Specifically, tangibility appears to be an extremely important leverage determinant for constrained firms, while macroeconomic factors (GDP and expected inflation) affect the leverage level of unconstrained firms, suggesting that those firms adjust their capital structure in response to changes in macroeconomic conditions. Moreover, financially unconstrained firms adjust their capital structures faster to the target level, which is consistent with the previous literature.
    Keywords: capital structure; financing decisions; credit constraints; Eastern Europe;
    JEL: G32 C23
    Date: 2010–12
  7. By: Andrea Frazzini; Lasse H. Pedersen
    Abstract: We present a model in which some investors are prohibited from using leverage and other investors’ leverage is limited by margin requirements. The former investors bid up high-beta assets while the latter agents trade to profit from this, but must de-lever when they hit their margin constraints. We test the model’s predictions within U.S. equities, across 20 global equity markets, for Treasury bonds, corporate bonds, and futures. Consistent with the model, we find in each asset class that a betting-against-beta (BAB) factor which is long a leveraged portfolio of low-beta assets and short a portfolio of high-beta assets produces significant risk-adjusted returns. When funding constraints tighten, betas are compressed towards one, and the return of the BAB factor is low.
    JEL: E43 G1 G12 G14
    Date: 2010–12
  8. By: Vasco Carvalho; Xavier Gabaix
    Abstract: We investigate the hypothesis that macroeconomic fluctuations are primitively the results of many microeconomic shocks, and show that it has significant explanatory power for the evolution of macroeconomic volatility. We define “fundamental” volatility as the volatility that would arise from an economy made entirely of idiosyncratic microeconomic shocks, occurring primitively at the level of sectors or firms. In its empirical construction, motivated by a simple model, the sales share of different sectors vary over time (in a way we directly measure), while the volatility of those sectors remains constant. We find that fundamental volatility accounts for the swings in macroeconomic volatility in the US and the other major world economies in the past half century. It accounts for the “great moderation” and its undoing. Controlling for our measure of fundamental volatility, there is no break in output volatility. The initial great moderation is due to a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is due to the increase of the size of the financial sector. We provide a model to think quantitatively about the large comovement generated by idiosyncratic shocks. As the origin of aggregate shocks can be traced to identifiable microeconomic shocks, we may better understand the origins of aggregate fluctuations.
    JEL: E32 E37
    Date: 2010–01
  9. By: Nadine Levratto; Luc Tessier; Messaoud Zouikri
    Abstract: This paper investigates the structural and strategic determinants of firm growth using a unique data set for French firms employing between 10 and 250 employees in 1997 and active over the period 1997-2007. Starting from the idea that firm growth is not only a random process but that some regularities may be emphasized, we consider a growth model that combines different elements presented as determinant in the firm’s growth path. Results based on two families of multinomial logit model do not confirm the conclusions about the exclusive role played by the previous size. In addition, thanks to the references to legal structure, market share and localization, one observes these variables shape strongly the individual growth path. However environment and structural elements are not the only elements to focus on in order to provide an explanation of the employment growth rate at the firm level. Strategic factors matter too. In particular we demonstrate the crucial role of labor costs and financial structure as explanatory variables of firm growth.
    Keywords: Firm growth, SMEs, Gibrat’s law, French manufacturing, multinomial logistic regression
    JEL: L25 C1
    Date: 2010
  10. By: Cécile Carpentier; Jean-François L'Her; Jean-Marc Suret
    Abstract: We examine the long-run performance following traditional private placements by Canadian public firms, to provide an explanation for the common observation that such placements are generally followed by abnormally low returns. We investigate 3,291 Canadian private investments in public equity from 1993 to 2003, and we observe a significant long-run post-issue underperformance using a classic Fama-French Three Factor Pricing Model. Adding an investment risk factor, as in Lyandres, Sun and Zhang (2008), to the calendar-time regressions sharply reduces the abnormal performance. We then take into account the discount and show that the long-run return of private equity investors differs from the shareholders’ return and is normal on average. In a third step, we split the sample according to the glamour value dimension and according to the firms’ investment activity. Only glamour firms with high investment activity are found to underperform in the long run. The underperformance appears to be driven by a subset of firms. Private investors obtain positive returns following private placements, if they invest in value and low investment firms. This supports the hypothesis that private investors correctly assess investment projects of value firms, while they tend to systematically overestimate investment projects of glamour firms that issue equity. <P>Nous étudions la performance boursière postérieure aux placements privés des sociétés ouvertes au Canada, pour tenter de déterminer l’origine des rendements anormalement faibles qui suivent ce type d’opération de financement. Nous analysons 3291 placements privés effectués entre 1993 et 2003. A l’aide du modèle à facteurs de Fama et French, nous observons une contre-performance statistiquement significative que réduit l’ajout du facteur d’investissement, proposé par Lyandres, Sun and Zhang (2008). Nous tenons compte ensuite de l’escompte pour estimer le rendement du point de vue des investisseurs privés. Ceux-ci réalisent, en moyenne, des rendements supérieurs à ceux des autres actionnaires. Ces rendements sont normaux compte tenu du niveau de risque. Dans une troisième étape, nous divisons l’échantillon en fonction des caractéristiques des émetteurs. Les seuls titres qui génèrent des rendements fortement négatifs sont ceux d’entreprises de croissance dont l’activité d’investissement est importante. Les investisseurs privés réalisent des rendements positifs lorsqu’ils choisissent des titres de valeur d’entreprises qui investissent peu mais ils surévaluent systématiquement les projets d’investissement des titres de croissance.
    Keywords: Private placements, private investors , Placements privés, investisseurs privés
    Date: 2010–12–01
  11. By: Horny, G.; Sevestre, P.
    Abstract: This article provides evidence about the interrelationships between wages and prices at the microeconomic level. We rely on the right-to manage model to specify and estimate a multivariate model explaining the timing and magnitude of wage changes at the firm level. The modeling of price changes relies on a state-dependent model. The data we use is a quarterly panel of about 1800 firms from the French manufacturing industry, observed over the years 1998 to 2005. We find the occurrence of wage changes to be essentially time dependent, though weakly related to the state of the economy. However, the magnitude of wage changes strongly depends on macroeconomic variables, namely inflation and unemployment, and to a lesser extent on the evolution of the firm product price and on its productivity gains. Changes in the firm product price are mostly driven by the evolution of its costs and more specifically by that of its intermediate inputs. The wage cost, as well as the production and the industry level inflation, have a weaker influence.
    Keywords: wages, price stickiness, dynamic model, factor loadings.
    JEL: E31 C23 C25
    Date: 2010
  12. By: Aymeric Lardon (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this article we consider Bertrand oligopoly TU-games with differentiated products. We assume that the demand system is Shubik's (1980) and that firms operate at a constant and identical marginal and average cost. First, we show that the alpha and beta- characteristic functions (Aumann 1959) lead to the same class of Bertrand oligopoly TU-games and we prove that the convexity property holds for this class of games. Then, following Chander and Tulkens (1997) we consider the gamma-characteristic function where firms react to a deviating coalition by choosing individual best reply strategies. For this class of games, we show that the Equal Division Solution belongs to the core and we provide a sufficient condition under which such games are convex.
    Keywords: Bertrand oligopoly TU-games; Core; Convexity; Equal Division Solution
    Date: 2010
  13. By: Antonia Díaz; Belén Jerez
    Abstract: We build a search model of the housing market which captures the illiquidity of housing assets. In this model, households experience idiosyncratic shocks over time which affect how much they value their residence (e.g. the location of their job could change). When hit by a shock, households become mismatched and seek to buy a new home. Yet they take time to locate an appropriate housing unit and to sell their current home. Competitive forces are present in the housing market since, by posting lower prices, sellers increase the average number of buyer visits they get and sell their property faster. We characterize a stationary equilibrium for a fixed housing stock. We then calibrate a stochastic version of the model to reproduce selected aggregate statistics of the U.S. economy. The model is consistent with the high volatility of prices, sales and average time on the market, the positive correlation of prices and sales, and the negative correlation of prices and average time on the market observed in the data. This is not the case when we consider the perfectly competitive version of the model
    Keywords: House prices, Sales, Time on the market, Search frictions, Competitive search
    JEL: R31 D83 D40
    Date: 2010–10
  14. By: Pascal François; Georges Hübner
    Abstract: This paper studies the contracting choices between an entrepreneur and venture capital investors in a portfolio context. We rely on the mean-variance framework and derive the optimal choices for an entrepreneur with and without the presence of different kinds of venture capitalists. In particular, we show that the entrepreneur always has the incentive to share the risk and benefits of the venture whenever possible. On the basis of their objectives and characteristics, we distinguish the situations of the corporate, independent, and bank-sponsored venture capital funds. Our framework enables us to derive the optimal contract design for the entrepreneur, featuring the choice of investor, the entrepreneur’s investment in the venture, and her dilution in the project’s equity as a function of her bargaining power. This result allows us to characterize the choice of the investor depending on her cost of equity and debt capital. In addition to project size and risk, entrepreneur’s risk aversion turns out to be a critical determinant of VC investor choice –a finding which is strongly supported by a panel analysis of VC fund flows for 5 European countries over the 2002-2009 period.
    Keywords: Venture capital, Portfolio choice, Entrepreneur, Risk aversion
    JEL: G11 G32 G39
    Date: 2010
  15. By: Andri Chassamboulli
    Abstract: This paper examines the cyclical properties of employment rates in a search and matching model that features heterogeneous workers and jobs. Firms can create vacancies for jobs that that require either a high- or a low-skill level. High-skill workers are best suited for high-skill jobs, but are also qualified for low-skill jobs, whereas low-skill workers are only qualified for low-skill jobs. My analysis highlights the importance of a vertical type of transitory skill-mismatch, which takes the form workers accepting jobs below their skill level to escape unemployment and upgrading by on-the-job search, in explaining why typically employment is lower and more procyclical at lower skill levels. I show that this feature makes low-skill vacancy creation more strongly procyclical than high-skill vacancy creation. The model is also consistent with important features of the labor market, such as a procyclical rate of job-to-job transitions and evidence that the educational levels of new hires within occupations are higher in recessions and lower in booms.
    Date: 2010–12
  16. By: Jan Willem van den End
    Abstract: This paper presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenising liquidity risk. The model shows how banks’ reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations.
    Keywords: banking; financial stability; stress-tests; liquidity risk
    JEL: C15 E44 G21 G32
    Date: 2010–12
  17. By: John Whalley; Xiliang Zhao
    Abstract: This paper develops a human capital measure in the sense of Schultz (1960) and then reevaluates the contribution of human capital to China’s economic growth. The results indicate that human capital plays a much more important role in China’s economic growth than available literature suggests, 38.1% of economic growth over 1978-2008, and even higher for 1999-2008. In addition, because human capital formation accelerated following the major educational expansion increases after 1999 (college enrollment in China increased nearly fivefold between 1997 and 2007) while growth rates of GDP are little changed over the period after 1999, total factor productivity increases fall if human capital is used in growth accounting as we suggest. TFP, by our calculations, contributes 16.92% of growth between 1978 and 2008, but this contribution is -7.03% between 1999 and 2008. Negative TFP growth along with the high contribution of physical and human capital to economic growth seem to suggest that there have been decreased in the efficiency of inputs usage in China or worsened misallocation of physical and human capital in recent years. These results underscore the importance of efficient use of human capital, as well as the volume of human capital creation, in China’s growth strategy.
    JEL: O0 O10 O4 O47
    Date: 2010–12
  18. By: Ferguson, Shon (Dept. of Economics, Stockholm University)
    Abstract: Recent empirical evidence suggests that prices for many goods and services are higher in larger markets. This paper provides an explanation for this phenomenon when firms can choose how much to differentiate their products in a monopolistically competitive environment. The model proposes that consumers’ love of variety makes them more sensitive to product differentiation efforts by firms, which leads to higher prices in larger markets. Larger markets lead to greater variety and products that are more differentiated, which provides consumers with greater welfare despite the adverse effect of product differentiation on prices. The social planner does not charge a markup, which allows it to differentiate products more than is possible in the competitive equilibrium. The model also provides an explanation for why prices do not always fall when trade is liberalized.
    Keywords: Endogenous Technology; Market Size Effect; International Trade
    JEL: D43 F12 L13
    Date: 2010–12–09
  19. By: Gabriel Jiménez; Atif R. Mian; José-Luis Peydró; Jesús Saurina
    Abstract: While banks may change their supply of credit due to bank balance sheet shocks (the local lending channel), firms can react by adjusting their sources of financing in equilibrium (the aggregate lending channel). We formalize a methodology for separately estimating these effects. We estimate the local and aggregate lending channel effects of the banks' ability to securitize real estate assets on non-real estate firms in Spain. We show that equilibrium dynamics nullify the strong local lending channel effect on credit quantity for firms with multiple banking relationships. However, credit terms for these firms become significantly more favorable due to securitization. Securitization also leads to an expansion in credit on the extensive margin towards first-time bank clients, and these borrowers are significantly more likely to end up in default. Finally, the 2008 collapse in securitization leads to a reversal in local lending channel.
    JEL: E44 G21
    Date: 2010–12
  20. By: Alessio De Vincenzo (Banca d'Italia); Maria Alessandra Freni (Banca d'Italia); Andrea Generale (Banca d'Italia); Sergio Nicoletti Altimari (Banca d'Italia); Mario Quagliariello (Banca d'Italia)
    Abstract: The financial crisis that began in 2007 has revealed a need for a new supervisory and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. Three ingredients are needed to ensure financial stability: robust analysis, better regulation, and international cooperation. First, financial stability analysis must be improved to take full account of the different sources of systemic risk. Data coverage of the balance sheets of both non-bank financial institutions and the non-financial sectors should be increased. Moreover, to address the problems raised by the interconnections among financial institutions more granular and timely information on their exposures is needed. There must be further integration of macro- and micro-information and an upgrading of financial stability models. The second ingredient is the design of robust regulatory measures. Under the auspices of the G20 and the Financial Stability Board, the Basel Committee on Banking Supervision recently put forward substantial proposals on capital and liquidity. They will result in more robust capital base, lower leverage, less cyclical capital rules and better control of liquidity risk. Finally, the third ingredient is strong international cooperation. Ensuring more effective exchanges of information among supervisors in different jurisdictions and successful common actions is key in preserving financial integration, while avoiding negative cross-border spill-overs. Better resolution regimes are part of the efforts to ensure that the crisis of one institution does not impair the ability of the financial markets to provide essential services to the economy.
    Keywords: financial crisis, international cooperation, macroprudential analysis, procyclicality, prudential regulation, stress tests
    JEL: G18 G28
    Date: 2010–12
  21. By: Beatrice Brunner; Andreas Kuhn
    Abstract: We estimate the effects of labor market entry conditions on wages for male individuals first entering the Austrian labor market between 1978 and 2000. We find a large negative effect of unfavorable entry conditions on starting wages as well as a sizeable negative long-run effect. Specifically, we estimate that a one percentage point increase in the initial local unemployment rate is associated with an approximate shortfall in lifetime earnings of 6.5%. We also show that bad entry conditions are associated with lower quality of a worker's first job and that initial wage shortfalls associated with bad entry conditions only partially evaporate upon involuntary job change. These and additional findings support the view that initial job assignment, in combination with accumulation of occupation or industry-specific human capital while on this first job, plays a key role in generating the observed wage persistencies.
    Keywords: Initial labor market conditions, endogenous labor market entry, initial job assignment, specific human capital
    JEL: E3 J2 J3 J6 M5
    Date: 2010–12
  22. By: José Mata; Pedro Portugal
    Abstract: We analyze the patterns of international joint venture termination, to compare the learning and trust views of joint ventures. We distinguish between three ways in which termination may occur and allow for the possibility that some joint ventures never confront the chances of terminating in these ways. We find that the chances of terminating a joint venture increase over time, in particular when the joint venture is terminated by dissolution of the firm and by acquisition by the foreign partner. Our findings thus support the view thatlearning outperforms trust in explaining the time patterns of joint venture survival.
    JEL: L25 L10
    Date: 2010

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