nep-bec New Economics Papers
on Business Economics
Issue of 2011‒05‒07
fourteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Shocks and Crashes By Martin Lettau; Sydney V. Ludvigson
  2. Cash Holdings and Credit Risk By Viral V. Acharya; Sergei A. Davydenko; Ilya A. Strebulaev
  3. Counterparty Risk Externality: Centralized Versus Over-the-counter Markets By Viral V. Acharya; Alberto Bisin
  4. Illiquid Banks, Financial Stability, and Interest Rate Policy By Douglas W. Diamond; Raghuram Rajan
  5. What do Basel Capital Accords mean for SMEs? By Clara Cardone Riportella; Antonio Trujillo; Anahí Briozzo
  6. The Twelve Principles of Incentive Pay By Marcel Boyer
  7. Real wage growth over the business cycle:contractual versus spot markets By Bellou, Andriana; Kaymak, Baris
  8. Leverage ratio requirement, credit allocation and bank stability By Kiema , Ilkka; Jokivuolle, Esa
  9. Does Pervasive Corruption Matter For Firm's Demand for Good Governance in Developing Countries? By Gaoussou Diarra; Sébastien Marchand
  10. Long-run factors of firm growth - a study of German firms By Schimke, Antje; Brenner, Thomas
  11. Firm Characteristics and the Cyclicality of R&D Investments By Spyros Arvanitis; Martin Woerter
  12. Competition between the U.S. and West Africa in International Cotton Trade: A Focus on Import Demand in China By Muhammad, Andrew; McPhail, Lihong; Kiawu, James
  13. The Portuguese Business Cycle: Chronology and Duration Dependence By Vitor Castro
  14. Innovation Activities and Competitiveness: Empirical Evidence on the Behaviour of Firms in the New EU Member States and Candidate Countries By Iraj Hashi; Nebojsa Stojcic; Shqiponja Telhaj

  1. By: Martin Lettau; Sydney V. Ludvigson
    Abstract: Three shocks, distinguished by whether their effects are permanent or transitory, are identified to characterize the post-war dynamics of aggregate consumer spending, labor earnings, and household wealth. The first shock accounts for virtually all of the variation in consumption and has effects akin to a permanent total factor productivity shock in canonical frictionless macroeconomic models. The second shock underlies the bulk of fluctuations in labor income, accounting for 76% of its variation. This shock permanently reallocates rewards between shareholders and workers but leaves consumption unaffected. Over the last 25 years, the cumulative effect of this shock has persistently boosted stock market wealth and persistently lowered labor earnings. The third shock is a persistent but transitory innovation that accounts for the vast majority of quarterly fluctuations in asset values but has a negligible impact on consumption and labor earnings at all horizons. We show that the 2000-02 asset market crash was the result of a negative transitory wealth shock, which predominantly affected stock market wealth. By contrast, the 2007-09 crash was accompanied by a string of large negative realizations in both the transitory shock and the permanent productivity shock, with the latter having especially important implications for housing wealth.
    JEL: E10 E21 E27 E44 G12
    Date: 2011–04
  2. By: Viral V. Acharya; Sergei A. Davydenko; Ilya A. Strebulaev
    Abstract: Intuition suggests that firms with higher cash holdings are safer and should have lower credit spreads. Yet empirically, the correlation between cash and spreads is robustly positive and higher for lower credit ratings. This puzzling finding can be explained by the precautionary motive for saving cash. In our model endogenously determined optimal cash reserves are positively related to credit risk, resulting in a positive correlation between cash and spreads. In contrast, spreads are negatively related to the "exogenous'' component of cash holdings that is independent of credit risk factors. Similarly, although firms with higher cash reserves are less likely to default over short horizons, endogenously determined liquidity may be related positively to the longer-term probability of default. Our empirical analysis confirms these predictions, suggesting that precautionary savings are central to understanding the effects of cash on credit risk.
    JEL: G32 G33
    Date: 2011–04
  3. By: Viral V. Acharya; Alberto Bisin
    Abstract: We model the opacity of over-the-counter (OTC) markets in a setup where agents share risks, but have incentives to default and their financial positions are not mutually observable. We show that this setup results in excess "leverage" in that parties take on short OTC positions that lead to levels of default risk that are higher than Pareto-efficient ones. In particular, OTC markets feature a "counterparty risk externality" that we show can lead to ex-ante productive inefficiency. This externality is absent when trading is organized via a centralized clearing mechanism that provides transparency of trade positions, or a centralized counterparty (such as an exchange) that observes all trades and sets prices competitively. While collateral requirements and subordination of OTC positions in bankruptcy can ameliorate the counterparty risk externality, they are in general inadequate in addressing it fully.
    JEL: D52 D53 D62 G14 G2 G33
    Date: 2011–04
  4. By: Douglas W. Diamond; Raghuram Rajan
    Abstract: Do low interest rates alleviate banking fragility? Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may choose to bail out banks being run. Unconstrained bailouts undermine the disciplinary role of deposits. Moreover, competition forces banks to promise depositors more, increasing intervention and making the system worse off. By contrast, constrained intervention to lower rates maintains private discipline, while offsetting contractual rigidity. It may still lead banks to make excessive liquidity promises. Anticipating this, central banks can reduce financial fragility by raising rates in normal times to offset their propensity to reduce rates in adverse times.
    JEL: E4 E5 G2
    Date: 2011–04
  5. By: Clara Cardone Riportella; Antonio Trujillo; Anahí Briozzo
    Abstract: This paper analyses the impact of the new Basel Capital Accords (Basel II and Basel III) on the bank’s capital requirements in a portfolio of Small and Medium-sized Enterprises (SMEs) when the internal ratings-based (IRB) approach is used. To do this, the study uses a large database of Spanish firms and covers the period from 2005 to 2009. We also examine the effect on the credit risk premium charged by banks of the guarantee offered by a Loan Guarantee Association (LGA) to a SME; and whether this foreseeable decrease in the interest rates applicable to the SME is compensated by the cost of this guarantee
    Keywords: Bank capital requirements, Credit risk mitigation, Bank financing of SMEs, Basel II, Basel III Loan Guarantee Association
    JEL: G21 G32
    Date: 2011–04
  6. By: Marcel Boyer
    Abstract: The incentive mechanisms used in the financial services industry in particular, but also in many other contexts, reward income generated almost regardless of risk, with negligent and faulty risk measurement and unjustified risk taking as predictable results. A number of economists warned financial, industrial and service corporations against these practices, reminding them that, in designing incentive mechanisms, it is necessary to take account of the risks taken or incurred to avoid what economists and insurers call “moral hazard.” I review incentive pay based on first principles of the economics of organization. Clearly, in many cases, those principles were not followed, which led to a governance crisis, a financial crisis and an economic crisis. <P>Les mécanismes d'incitation utilisés dans l'industrie des services financiers en particulier, mais aussi dans de nombreux autres contextes, reconnaissent les revenus générés presque indépendamment des risques, menant à la négligence des risques et donc à une prise injustifiée risques. Plusieurs économistes ont mis en garde les entreprises financières, industrielles et de services contre ces pratiques, leur rappelant l’importance de bien considérer la prise de risque pour éviter ce que les économistes et les assureurs appellent « l'aléa moral ». Je passe en revue la rémunération incitative basée sur les premiers principes de l'économie des organisations. De toute évidence, dans de nombreux cas, ces principes n'ont pas été suivis, ce qui a conduit à une crise de gouvernance, une crise financière et une crise économique.
    Keywords: Incentive mechanisms, risk, incentive pay, mécanismes d’incitation, risque, rémunération incitative
    Date: 2011–04–01
  7. By: Bellou, Andriana; Kaymak, Baris
    Abstract: We study the wage growth of job stayers over the business cycle, and show that wage adjustments within a job spell display significant history dependence. This is at odds with the spot market model, which implies that the wage growth of a worker within a job spell depends solely on the change in the contemporaneous economic conditions. Instead, we find that workers hired during recessions, or those who experienced unfavorable economic conditions since they were hired, receive larger wage raises during expansions, and are subject to smaller wage cuts during downswings. The change in the contemporaneous conditions, on the other hand, is not a significant determinant of wage growth. Our findings are consistent with a model of implicit insurance contracts where neither the employer nor the worker can fully commit to the contract.
    Keywords: Business Cycles;Wage Rigidity; Implicit Contracts; Cyclical Selection
    JEL: E32 J31 J41
    Date: 2011
  8. By: Kiema , Ilkka (University of Helsinki, Department of Political and Economic Studies); Jokivuolle, Esa (Aalto University School of Economics, Department of Finance and Bank of Finland, Monetary Policy and Research)
    Abstract: We study the effects on credit allocation and bank stability of introducing a leverage ratio requirement (LRR) on top of risk-based capital requirements, as in Basel III. For the current 3% LRR, both low-risk and high-risk loan rates and volumes remain essentially unchanged, because banks previously specializing in low-risk lending can adapt by granting both low-risk and high-risk loans. For sufficiently high LRRs, low-risk lending rates would significantly increase and high-risk lending rates would fall. In the presence of severe ‘model risk’ concerning low-risk loans, as happened in the subprime crisis, the current 3% LRR might even reduce bank stability, counter to regulatory intentions. This is because the allocational effect caused by the LRR, which makes bank loan portfolios more alike, may turn beneficial risk spreading into harmful risk contamination. For higher levels of LRR, however, bank stability is likely to be improved even in the presence of model risk.
    Keywords: bank regulation; Basel III; capital requirements; credit risk; leverage ratio
    JEL: D41 D82 G14 G21 G28
    Date: 2011–04–21
  9. By: Gaoussou Diarra (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Sébastien Marchand (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This paper investigates empirically the relationships between the corruption climate and the demand for good governance by focusing on firms' behaviors in developing countries. The concept of demand for good governance is conceived in terms of a firm's willingness to comply with regulatory norms measured through the firm's perception of the level of public accountability as well as the firm's behavior in terms of corruption practices. While there is a growing theoretical literature on the importance of externality mechanisms of corruption phenomena, little empirical evidences has been highlighted. This paper contributes to fill this gap by using firm-level data from the World Bank Enterprise Survey. We show that when corruption is found to be a very important constraint for a firm's business, its willingness to comply decreases and the probability of the firm's corrupting officials increases. These results support arguments according to which the demand for good governance is likely to be influenced by the perception of the existence of pervasive corruption. Moreover, the results are conditioned on countries' institutional features and the type of regulation. Some evidence is also found for firms' environmental overcompliance.
    Keywords: Corruption; Compliance; Regulation; Firms
    Date: 2011–04–22
  10. By: Schimke, Antje; Brenner, Thomas
    Abstract: This paper investigates whether the economic factors that are related to firm growth in the literature also determine the development path of firms. This means that we test which economic factors possess the ability to remain effective for a longer period of time. We examine three variables: firm size, innovation effort and export share. To this end, we use panel-data on 178 German manufacturing firms over the period from 1992 to 2007. We find that the determinants of permanent growth path are not the same as the determinants of firm growth at one point in time. --
    Keywords: firm growth,firm growth paths,firm size,export,innovation effort
    Date: 2011
  11. By: Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Aim of this study is to combine micro-aspects of firm behaviour with macro-aspects of business development and identify market conditions (for example, price competition) and firm characteristics (for example, type of R&D partners) that enable a firm to have a procyclical, anti-cyclical or non-systematic R&D investment behaviour. New elements of our analysis are: (a) the identification in our data of the above three main types of R&D behaviour with respect to the fluctuation of overall economic activity as measured by a standard composite indicator of the business conditions at industry level and (b) the investigation of a series of hypotheses as to innovation-relevant firm characteristics that underline the three different behaviour categories. The empirical results confirm to large extent our hypotheses and allow us to make profiles of the three types of R&D behaviour.
    Keywords: R&D, anti-cyclical behaviour, pro-cyclical behaviour
    JEL: O3
    Date: 2011–04
  12. By: Muhammad, Andrew; McPhail, Lihong; Kiawu, James
    Abstract: We estimate the demand for imported cotton in China and assess the competitiveness of cotton-exporting countries. Given the assertion that African cotton producers are ill affected by U.S. cotton subsidies, our focus is the price competition between the C4 countries (Benin, Burkina Faso, Chad and Mali) and United States in China. Demand estimates are used to project how U.S. prices affect Chinaâs imports by country. In comparing demand projections, results show that the relationship between the United States and the C4 has more to do with how U.S. prices can affect global prices rather than any substitute or competitive relationship in the Chinese market.
    Keywords: Africa, China, cotton, demand, imports, United States, Demand and Price Analysis, International Relations/Trade, F17, Q11, Q17,
    Date: 2011
  13. By: Vitor Castro (University of Coimbra, GEMF and NIPE)
    Abstract: his paper tries to identify, for the first time, a chronology for the Portuguese business cycle and test for the presence of duration dependence in the respective phases of expansion and contraction. A duration dependent Markov-switching vector autoregressive model is employed in that task. This model is estimated over monthly and year-on-year (monthly) growth rates of a set of relevant economic indicators, namely, industrial production, a composite leading indicator and, additionally, civilian employment. The estimated specifications allow us to identify four main periods of contraction during the last three decades and the presence of positive duration dependence in contractions, but not in expansions.
    Keywords: business cycles; duration dependence; Markov-switching.
    JEL: E32 C41 C24
    Date: 2011–04
  14. By: Iraj Hashi; Nebojsa Stojcic; Shqiponja Telhaj
    Abstract: This paper aims to explore the factors influencing the ability of firms to compete in globalised markets. The Austrian and evolutionary economics and the endogeneous growth literature highlight the role of innovation activities in enabling firms to compete more effectively - and expand their market share. On the basis of these theories, and using a large panel of firms from several Central and East European Countries (CEECs), this paper attempts to identify the factors and forces which determine the ability of firms to compete in conditions of transition. The competitiveness of firms, measured by their market share, is postulated to depend on indicators of firms' innovation behaviour such as improvements in cost-efficiency, labour productivity and investment in new machinery and equipment as well as characteristics of firms and their environment such as location, experience, technological intensity of their industries and the intensity of competition. To control for the dynamic nature of competitiveness and the potential endogeneity of its determinants, and to distinguish between short and long run effects of firm behaviour, a dynamic panel methodology is employed. The results indicate that the competitiveness of firms in transition economies is enhanced with improvements in their cost efficiency, productivity of labour, investment and their previous business experience while stronger competition has a negative impact on it.
    Keywords: competitiveness, restructuring, transition economies, market share, dynamic panel analysis
    JEL: O31
    Date: 2011–04

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