nep-bec New Economics Papers
on Business Economics
Issue of 2011‒03‒26
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Capital Regulation and Tail Risk By Enrico Perotti; Lev Ratnovski; Razvan Vlahu
  2. What Do CEOs Do? By Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
  3. Disentangling the Enteprise Book-to-Price and Leverage Effects in Stock Returns By Skogsvik, Kenth; Skogsvik, Stina; Thorsell, Håkan
  4. Understanding the Size and Profitability of Firms: The Role of a Biological Factor By Luigi Guiso; Aldo Rustichini
  5. Trust in Public Institutions over the Business Cycle By Stevenson, Betsey; Wolfers, Justin
  6. Externalities in Recruiting By Matthias Kräkel; Frauke Lammers; Nora Szech
  7. The wage premium puzzle and the quality of human capital By Milton H. Marquis; Bharat Trehan; Wuttipan Tantivong
  8. US Oil Price Exposure: The Industry Effects By Don Bredin; John Elder
  9. Estimating the Lock-in Effects of Switching Costs from Firm-Level Data By Gabor Kezdi; Gergely Csorba
  10. Collective Bargaining under Non-binding Contracts By Sabien Dobbelaere; Roland Iwan Luttens
  11. Union Threat and Non-Union Employment: A Natural Experiment on the Use of Temporary Employment in British Firms By Salvatori, Andrea
  12. Does International Trade Really Lead to Business Cycle Synchronization?−A panel data approach By Michael Artis; Toshihiro Okubo
  13. Intra-firm bargaining and learning in a market equilibrium By Mikhail Drugov
  14. Endogenous Market Structures and the Business Cycle By colciago , andrea; Rossi, Lorenza
  15. Applying shape and phase restrictions in generalized dynamic categorical models of the business cycle By Don Harding
  16. Are Capital Intensive Firms the Biggest Exporters? By Rikard FORSLID; OKUBO Toshihiro
  17. Short-term borrowing for long-term projects: Are family businesses more susceptible to 'irrational' financing choices? By Peters, Bettina; Westerheide, Peter
  18. Keeping it Together: Tracking Firms on New Zealand’s Longitudinal Business Database By Richard Fabling
  19. Firm Dynamics and Productivity Growth in Indian Manufacturing: Evidence from Plant Level Panel Dataset By Aradhna Aggarwal; Takahiro Sato
  20. Production under foreign ownership and domestic volatility: An empirical investigation at the sector level By Sandrine Levasseur
  21. Productivity distribution, firm heterogeneity, and agglomeration: Evidence from firm-level data By Toshihiro Okubo; Eiichi Tomiura

  1. By: Enrico Perotti (University of Amsterdam, Duisenberg school of finance, and CEPR); Lev Ratnovski (International Monetary Fund); Razvan Vlahu (Dutch Central Bank)
    Abstract: The paper studies risk mitigation associated with capital regulation, in a context when banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. When capital raising is costly, poorly capitalized banks may limit risk to avoid breaching the minimal capital ratio. A bank with higher capital has less
    Keywords: Bank Regulation; Risk Shifting; Capital Requirements; Tail Risk; Systemic Risk
    JEL: E6 F3 F4 G2 G3 O16
    Date: 2011–02–17
  2. By: Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun
    Abstract: We develop a methodology to collect and analyze data on CEO’s time use. The idea sketched out in a simple theoretical set-up is that CEO time is a scarce resource and its allocation can help us identify the firm’s priorities as well as the presence of governance issues. We follow 94 CEOs of top-600 Italian firms over a pre-specified week and record the time devoted each day to different work activities. We focus on the distinction between time spent with insiders (employees of the firm) and outsiders (people not employed by the firm). Individual CEOs differ systematically in how much time they spend at work and in how much time they devote to insiders vs. outsiders. We analyze the correlation between time use, managerial effort, quality of governance and firm performance, and interpret the empirical findings within two versions of our model, one with effective and one with imperfect corporate governance. The patterns we observe are consistent with the hypothesis that time spent with outsiders is on average less beneficial to the firm and more beneficial to the CEO and that the CEO spends more time with outsiders when governance is poor.
    Date: 2011
  3. By: Skogsvik, Kenth (Dept. of Business Administration, Stockholm School of Economics); Skogsvik, Stina (Dept. of Business Administration, Stockholm School of Economics); Thorsell, Håkan (Dept. of Business Administration, Stockholm School of Economics)
    Abstract: Despite the propositions in Miller and Modigliani (1958) and (1963), claims of a puzzling negative empirical relationship between stock returns and financial leverage have been made in Penman et al. (2007). Based on the leverage formula of Miller and Modigliani, we take account of a twofold effect of leverage on stock returns – a compounding operating risk effect and a negative interest cost effect. The first effect is captured by multiplying the firm’s operating risk by its leverage. Using a large U.S. sample, stock returns have been regressed on variables representing the operating covariance risk premium, leverage and the compounding operating covariance risk. The results show that there is a positive coefficient associated with the operating covariance risk premium and the corresponding compounding operating risk variable. There is also a negative coefficient associated with leverage, presumably mirroring the negative interest cost of debt. The results also hold for the accounting-based indicator of operating risk – the enterprise book-to-price ratio – suggested in Penman et al. (2007). The observed negative coefficient of leverage hence appears to be due to the omission of the compounding operating risk effect of leverage. Additional analyses show that the enterprise book-to-price ratio potentially represents two characteristics of operating risk – the operating covariance risk and a novel risk factor representing the assessment of the firm’s competitive advantage.
    Keywords: financial risk; leverage; operating risk; book-to-market; enterprise book-to-price
    Date: 2011–03–04
  4. By: Luigi Guiso; Aldo Rustichini
    Abstract: We collect information on prenatal testosterone in a large sample of entrepreneurs by measuring the length of their 2th to 4th fingers in face to face interviews. Entrepreneurs with higher exposure to prenatal testosterone (lower second to fourth digit ratio) manage larger firms, are matched with larger firms when acquire control and experience faster average growth over the years they manage the firm. We also find that prenatal testosterone is correlated with elicited measures of entrepreneurial skills such as ability to stand work, and the latter are correlated with firm size. This evidence suggests entrepreneurial skills have a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability. However, firms run by high-testosterone entrepreneurs have lower profitability as measured by return on assets. We offer evidence that this is because the same biological factor that enhances entrepreneurial skills also induces empire building preferences, which leads high-testosterone entrepreneurs to target a firm size that exceeds the profit maximizing value.
    Keywords: Firm size distribution, Entrepreneurial success, Digit ratio
    JEL: L26 L21 L25
    Date: 2011
  5. By: Stevenson, Betsey (Wharton School, University of Pennsylvania); Wolfers, Justin (Wharton School, University of Pennsylvania)
    Abstract: We document that trust in public institutions – and particularly trust in banks, business and government – has declined over recent years. U.S. time series evidence suggests that this partly reflects the pro-cyclical nature of trust in institutions. Cross-country comparisons reveal a clear legacy of the Great Recession, and those countries whose unemployment grew the most suffered the biggest loss in confidence in institutions, particularly in trust in government and the financial sector. Finally, analysis of several repeated cross-sections of confidence within U.S. states yields similar qualitative patterns, but much smaller magnitudes in response to state-specific shocks.
    Keywords: trust, institutions, confidence, survey data, congress, banks, big business, media, courts
    JEL: D72 E32 E65 K0 O4 P52 Z13
    Date: 2011–03
  6. By: Matthias Kräkel; Frauke Lammers; Nora Szech
    Abstract: According to the previous literature on hiring, ?rms face a trade-off when deciding on external recruiting: From an incentive perspective, external recruiting is harmful since admission of external candidates reduces internal workers’ career incentives. However, if external workers have high abilities hiring from outside is bene?cial to improve job assignment. In our model, external workers do not have superior abilities. We show that external hiring can be pro?table from a pure incentive perspective. By opening its career system, a ?rm decreases the incentives of its low-ability workers. The incentives of high-ability workers can increase from a homogenization of the pool of applicants. Whenever this effect dominates, a ?rm prefers to admit external applicants. If vacancies arise simultaneously, ?rms face a coordination problem when setting wages. If ?rms serve the same product market, weaker ?rms use external recruiting and their wage policy to offset their competitive disadvantage.
    Keywords: contest, externalities, recruiting, wagepolicy
    JEL: C72 J2 J3
    Date: 2011–03
  7. By: Milton H. Marquis; Bharat Trehan; Wuttipan Tantivong
    Abstract: The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogenous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.
    Keywords: Labor supply ; Wages
    Date: 2011
  8. By: Don Bredin (University College Dublin); John Elder (Colorado State University)
    Abstract: This paper investigates the exposure of industry level portfolios to oil price shocks. Our paper utilizes the Campbell (1991) decomposition of stock returns based on a log-linear approximation to the discounted present value relation while allowing for time varying expected returns. The results from our baseline regressions indicate that there is little sensitivity in industry level portfolios to unexpected movements in oil prices, with the gold, oil & gas and retail industries being the only exception. In contrast, based in the Campbell (1991) decomposition, we identify extensive exposure to oil prices in industry level returns in particular channels. The extent of the exposure is particularly significant for a number of the industries, with positive (negative) permanent implications for gold, and the oil and gas industries (retail and meals, restaurants and hotels).
    Keywords: Oil, Industry Stock Returns, Vector autoregression
    JEL: E32 C32
    Date: 2011–03–11
  9. By: Gabor Kezdi (Institute of Economics Hungarian Academy of Sciences); Gergely Csorba (Institute of Economics Hungarian Academy of Sciences)
    Abstract: This paper proposes a simple method for estimating the lock-in effects of switching costs from firm-level data. We compare the behavior of already contracted consumers to the behavior of new consumers as the latter can serve as contrafactual to the former. In panel regressions on firms' incoming and quitting consumers, we look at the differential response to price changes and identify the lock-in effect of switching costs from the difference between the two. We illustrate our method by analyzing the Hungarian personal loan market and find strong lock-in effects.
    Keywords: switching costs, lock-in, panel data
    JEL: C33 D12 L13
    Date: 2011–02
  10. By: Sabien Dobbelaere (VU University Amsterdam); Roland Iwan Luttens (Ghent University, CORE - Cath. University Louvain)
    Abstract: We introduce collective bargaining in a static framework where the firm and its risk-neutral employees negotiate over wages in a non-binding contract setting. Our main result is the equivalence between the non-binding collective equilibrium wage-employment contract and the equilibrium contract under binding risk-neutral efficient bargaining. We also demonstrate that our non-cooperative equilibrium wages and profits coincide with the Owen values of the corresponding cooperative game with the coalitional structure that follows from unionization.
    Keywords: Collective bargaining; union; firm; bargaining power; non-binding contract
    JEL: C71 J51 L20
    Date: 2011–02–18
  11. By: Salvatori, Andrea (ISER, University of Essex)
    Abstract: This paper presents the first empirical evidence on the effect of the threat of unionisation on the use of a predominantly non-union type of employment, i.e. temporary employment. The identification strategy exploits an exogenous variation in union threat induced in the UK by new legislation enabling unions to obtain recognition even against the will of the management. The analysis finds no evidence of an effect on the probability that a firm employs fixed-term workers, and some weak evidence of a negative effect on the probability of using agency workers. Overall, therefore, there is no support for the hypothesis that firms under the threat of unionisation are more likely to use this type of non-union employment.
    Keywords: temporary employment, union threat, difference in difference
    JEL: J51
    Date: 2011–03
  12. By: Michael Artis (Swansea University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper re-estimates the correlation between trade and business cycle synchronization. Different from other previous studies, we employ long-run GDP and trade data and use the GDP cross-correlation index a la Cerqueira and Martins (2009) rather than over-time cross-correlations. We find a positive impact of trade on business cycle synchronization particularly in the current wave of globalization, although the inter-war period sees negative impacts. The current economic integration and currency unions also positively affect business cycle synchronization.
    Keywords: business cycle synchronization, trade, panel approach
    JEL: E32 F15 F43
    Date: 2011–01
  13. By: Mikhail Drugov
    Abstract: This paper introduces an agency relationship into a dynamic game with informational externalities. Two principals bargain with their respective agents about the production cost which is the private information of the agents and is correlated between them. We find that the agency relationship creates an incentive for simultaneous production, even if this involves an inefficient delay. As the commitment power of the principals decreases, this incentive becomes stronger. When principals compete, the effect of competition is decomposed into two parts. Inter-period competition (from past and future actions) pushes principals towards simultaneous actions, while intra-period competition (from concurrent actions) does the opposite.
    Keywords: Bargaining, Adverse selection, Learning, Information, Externalities, Delay
    JEL: C78 D82 D83 L10
    Date: 2011–03
  14. By: colciago , andrea; Rossi, Lorenza
    Abstract: We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms' entry is procyclical and the price mark up is countercyclical.
    Keywords: Endogenous Market Structures; Firms' Entry; Search and Matching Frictions
    JEL: E32 L11 E24
    Date: 2011–02
  15. By: Don Harding (School of Economics and Finance, La Trobe University)
    Abstract: To match the NBER business cycle features it is necessary to employ Gen- eralised dynamic categorical (GDC) models that impose certain phase re- strictions and permit multiple indexes. Theory suggests additional shape re- strictions in the form of monotonicity and boundedness of certain transition probabilities. Maximum likelihood and constraint weighted bootstrap esti- mators 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
  16. By: Rikard FORSLID; OKUBO Toshihiro
    Abstract: This paper starts out from the observation that the export shares of firms (export to sales ratio) vary greatly among firms, and tend to be systematically related to the firms' capital labour ratios. This observation cannot be explained by e.g. the standard Melitz model, since it predicts that all exporting firms have identical export shares. In our model, we relate the difference in export shares to firm level differences in transport costs. Two factors influence a firm's transport cost in our model. First, firm scale can affect transportation costs. Second, we allow for an association between the capital intensity of a firm and its transportation costs. As in our data, we assume this relationship to be sector specific. Our model can generate the result that more productive and capital intensive firms have higher export shares due to scale economies in transportation, but the model can also generate the opposite pattern that more capital intensive firms have lower export shares due to a strong positive association between capital labour ratio and transportation costs. We use Japanese manufacturing firm level data to calibrate our model by matching firm level export shares to data sector by sector. Regressing the calibrated transportation costs on actual data then shows that the calibrated (calculated) numbers can explain about half of the variation in the data.
    Date: 2011–03
  17. By: Peters, Bettina; Westerheide, Peter
    Abstract: There are noticeable differences between the roles that various forms of credit financing play in family businesses and in other businesses. Family businesses take out more often bank loans specifically to finance investments and innovations, and they particularly often resort to the short-term and relatively expensive option of an overdraft. How can we explain these differences in financing choices? Do family businesses tend to use shorter-term, more expensive sources of financing because they face more restrictions than other or are there other motives such as financial independence at play? Our econometric approach to these issues is to study the financing behaviour and creditworthiness. For both of these aspects, we compare family businesses with non-family-run businesses that otherwise have the same characteristics. Our results do not confirm that family businesses are faced by stronger financial constraints but they indicate that family firms are prepared to accept higher financing costs in order to preserve their financial independence. --
    Keywords: Corporate financing,innovation,family businesses,financing restrictions
    JEL: G32 G31 M14
    Date: 2011
  18. By: Richard Fabling (Reserve Bank of New Zealand)
    Abstract: Having good longitudinal identifiers is important in empirical microeconomics, since researchers often need to be able to observe the same unit over time to make causal inferences. However, firm identifiers in Statistics New Zealand’s Longitudinal Business Database can be “broken” by, among other things, changes in the legal status of the firm. This paper proposes a simple method for repairing broken firm identifiers, making use of existing plant migration data. We show that making such repairs materially reduces the apparent rate of business entry and exit, and allows real economic phenomena, such as small business incorporation, to be observed for the first time.
    Keywords: firm identifiers; entry and exit; plant transfers
    JEL: D20
    Date: 2011–03
  19. By: Aradhna Aggarwal (Research Institute for Economics and Business Administration, Kobe University and the Department of Business Economics, University of Delhi, New Delhi 110021 INDIA); Takahiro Sato (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper examines the effects of firms‟ dynamics on industry level productivity growth in India during the period 2000-01 to 2005-06 using plant level panel data of 22 manufacturing industries. The empirical analysis is based on decomposition techniques of aggregate productivity growth. The analysis is confined to large sector plants. Results suggest that the contribution of entry of new plants to aggregate productivity growth is positive in most industries. While newly established plants have rather small entry effect, small plants that grow and enter the large size class have substantial effects on industry level productivity growth. In low tech matured industries entry effects are supported by the productivity growth of the continuing firms. In medium tech industries entry effects are modest; productivity growth of the continuing firms is supported by reallocation effects. In high tech industries all the three effects seem to reinforce productivity growth.
    JEL: O14 O33 O53
    Date: 2011–02
  20. By: Sandrine Levasseur (Observatoire Français des Conjonctures Économiques and SKEMA Business School)
    Abstract: The main goal of this paper is to assess empirically to which extent the volatility of production is due to activities of firms under foreign ownership. Following Bergin et al. (2009) and Levasseur (2010), we postulate that multinational firms can use their contractors and their sites of production located abroad to “export” some of their domestic fluctuations, thus exacerbating further the business cycles of the hosting economy. Using a sample of twelve manufacturing sectors in eight EU countries and a data panel estimation, we find that the higher the share of firms under foreign ownership in a given sector of a country, the higher the volatility of production in that sector of that country, thus confirming the aforementioned assumption. Moreover, our estimates show how important to deal with sector-specific volatility, a result we attribute to idiosyncratic shocks arising at the sector level from both demand and supply sides. Our findings are robust to various ways of extracting cycles and to different time spans for measuring volatility.
    Keywords: Offshoring, European integration, sector analysis, business cycles volatility, data panel estimation.
    JEL: F21 F23 F4 L60 C30
    Date: 2011–03
  21. By: Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University); Eiichi Tomiura (Department of Economics, Yokohama National University)
    Abstract: This paper empirically examines how productivity distributions of firms vary across regions based on Japan's manufacturing census data. We find that firm productivity is distributed with wide dispersions, especially in core regions. Our firm-level estimates demonstrate that the productivity distribution of firms tends to be noticeably left-skewed, deviating from the normal distribution, especially in regions with weak market potential but also in agglomerated or urbanized regions. These findings suggest that agglomeration economies are likely to accommodate heterogeneous firms that co-exist in the same region.
    Keywords: agglomeration; productivity; gamma distribution; heterogeneity; firm-level data
    JEL: L11 R12
    Date: 2011–02

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