|
on Business Economics |
| By: | Simon Gilchrist; Egon Zakrajšek |
| Abstract: | This paper examines the evidence on the relationship between credit spreads and economic activity. Using an extensive data set of prices of outstanding corporate bonds trading in the secondary market, we construct a credit spread index that is—compared with the standard default-risk indicators—a considerably more powerful predictor of economic activity. Using an empirical framework, we decompose our index into a predictable component that captures the available firm-specific information on expected defaults and a residual component—the excess bond premium. Our results indicate that the predictive content of credit spreads is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that during the 2007–09 financial crisis, a deterioration in the creditworthiness of broker-dealers—key financial intermediaries in the corporate cash market—led to an increase in the excess bond premium. These find- ings support the notion that a rise in the excess bond premium represents a reduction in the effective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy. |
| JEL: | E22 E44 G12 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17021&r=bec |
| By: | Rey, Patrick (Toulouse School of Economics); Whinston, Michael (Northwestern University and NBER) |
| Abstract: | This paper examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers (who have no bargaining power) from obtaining adequate distribution. In contrast to the findings of Marx and Shaffer (2007), who showed that all equilibria involve limited distribution (i.e., exclusion of a retailer), we show that there is always an equilibrium in which full distribution is obtained, provided that full distribution is the industry profit-maximizing outcome. The key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:24176&r=bec |
| By: | Loureiro, Gilberto (University of Minho); Makhija, Anil K. (OH State University); Zhang, Dan (Erasmus University Rotterdam) |
| Abstract: | We find evidence consistent with the view that $1 CEO salaries are a ruse hiding the rentseeking pursuits of CEOs adopting these pay schemes. CEOs with these arrangements, despite the drastic cuts in salary, have total compensation that is similar to that at other firms, making up lost salary through not-so-visible forms of equity-based compensation. There is greater likelihood of a $1 CEO salary when the CEO is rich, overconfident, owns a sizeable ownership stake, and institutional ownership is relatively low. These powerful CEOs are in a position to draw significant undue private benefits, and need not replace certain salary dollars with risky future income. However, we find that they are at risk of engendering public outrage over their private benefits, against which the $1 salary constitutes valuable deflection of attention. Shareholders of firms with $1 CEO salaries do not fare well in the aftermath of these adoptions. Thus, rather than being the sacrificial acts they are projected to be, our findings suggest that adoptions of $1 CEO salaries are opportunistic behavior of the wealthier, more overconfident, influential CEOs. Overall, these findings support the Managerial Power Hypothesis in the literature, which claims that CEOs employ camouflage in compensation schemes to avoid public outrage over excessive private benefits. |
| JEL: | G30 G32 G34 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2011-7&r=bec |
| By: | di Iasio, Giovanni; Quagliariello, Mario |
| Abstract: | Following a decline in the fundamental risk of assets, the ability of banks to expand the balance sheet under a Value-at-Risk constraint in- creases (as in Adrian and Shin (2010)), boosting the bank’s incentives to provide costly monitoring effort that prevents asset deterioration. On the other hand, high asset demand and prices, eventually, raise the bank’s pay- off in the event of liquidation associated to asset deterioration, jeopardiz- ing incentives. This paper shows that a microprudential regulatory regime that disregards the equilibrium effect of macro variables (asset prices) on micro behavior (effort), performs poorly as low fundamental (exogenous) risk reduces bank’s effort and induces high (endogenous) deterioration risk. This analysis calls for a macroprudential regulatory regime in which the equilibrium feedback effect is fully taken into account by the author- ity in designing incentive compatible capital requirements, providing a theoretical foundation to the countercyclical buffer of Basel III. |
| Keywords: | Macroprudential regulation; financial stability; capital requirement. |
| JEL: | D86 G18 E44 |
| Date: | 2011–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30769&r=bec |
| By: | Armin Falk (University of Bonn and IZA); David Huffman (Swarthmore College and IZA); W. Bentley Macleod (Columbia University and IZA) |
| Abstract: | We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded. |
| Keywords: | incomplete contracts, bonus pay, efficiency wages, employment protection, firing costs, experiment |
| JEL: | J41 J3 C9 D01 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:361&r=bec |
| By: | Sean HOLLY; Ivan PETRELLA; Emiliano SANTORO |
| Abstract: | This paper argues that important insights into the business cycle can be obtained by exploring the micro-structure of macroeconomic fluctuations. We fit firm-level growth data with the Asymmetric Exponential Power density, which accounts for asymmetric dispersion and kurtosis on either side of the modal rate. Three novel results are reported. First, firms in the left side of the distribution, that is firms that are growing more slowly or declining, are typically more responsive to aggregate shocks than those in the right side of the distribution. Second, trending behavior in the volatility of firm growth is predominantly driven by increasing dispersion in the growth of highly performing .rms. Last, we deliver evidence in support of the view that shifts in the probability mass on either side of the mode may act as important propagators of business fluctuations. The analysis points to .financial frictions as one of the mechanisms capable of inducing non-linear micro adjustment consistent with both aggregate and cross-sectional dynamics. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces11.06&r=bec |
| By: | Krüger, Philipp; Landier, Augustin; Thesmar, David |
| Abstract: | We document investment distortions induced by the use of a single discount rate within firms. According to textbook capital budgeting, firms should value any project using a discount rate determined by the risk characteristics of the project. If they use a unique company-wide discount rate, they overinvest (resp. underinvest) in divisions with a market beta higher (resp. lower) than the firm's core industry beta. We directly test this consequence of the WACC fallacy and establish a robust and significant positive relationship between division-level investment and the spread between the division's market beta and the firm's core industry beta. Consistently with bounded rationality theories, this bias is stronger when the measured cost of taking the wrong discount rate is low, for instance, when the division is small. Finally, we measure the value loss due to the WACC fallacy in the context of acquisitions. Bidder abnormal returns are higher in diversifying mergers and acquisitions in which the bidder's beta exceeds that of the target. On average, the present value loss is about 0.7% of the bidder's market equity. |
| Keywords: | Investment, Behavioral finance, Cost of capital |
| JEL: | G11 G31 G34 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:24153&r=bec |
| By: | Martin Brown (Swiss National Bank and CenTER Tilburg University); Armin Falk (University of Bonn); Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich) |
| Abstract: | When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity. |
| Keywords: | Relational Contracts, Involuntary Unemployment |
| JEL: | D82 J3 J41 E24 C9 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:359&r=bec |
| By: | Rupayan Pal |
| Abstract: | This paper compares and contrasts equilibrium outcomes under right-to-manage bargaining (RTM) and efficient bargaining (EB) corresponding to two alternative pay schemes, fixed wage vis-a-vis piece-rate. [WP No.8]. URL:[http://www.gipe.ac.in/pdfs/working% 20papers/wp8.pdf]. |
| Keywords: | equilibrium, RTM, Efficient bargaining, EB, alternative pay, fixed wage, union, firm, Bargaining,, piece-rate, Social welfare, Union, output, payoff, manufacturing, firms, pune, India, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:3803&r=bec |
| By: | Wrage, Markus; Tuschke, Anja; Bresser, Rudi K. F. |
| Abstract: | In this study, we address the question of why some CEOs stay in office during a performance downturn while others don't. Based on a social capital perspective we assume that (1) the social capital endowment of an underperforming CEO may reduce the risk of getting dismissed and that (2) the tendency of board members to dismiss the CEO is moderated by their own social capital. Using data of large German corporations, we find support for our assumptions regarding the influence of a CEO's social capital on the risk of getting dismissed. We find partial evidence for a moderating effect of the social capital of board members. Our findings' implications for the literatures on social capital and CEO turnover are discussed. -- |
| Keywords: | CEO turnover,board interlocks,social capital |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20115&r=bec |
| By: | Aguilera, Ruth V. (University of IL); Desender, Kurt A. (Universidad Carlos III de Madrid); Kabbach de Castro, Luiz Ricardo (University of IL) |
| Abstract: | We seek to bring to the core of the study of comparative corporate governance analysis the idea that within countries and industries, there exist multiple configurations of firm level characteristics and governance practices leading to effective corporate governance. In particular, we propose that configurations composed of different bundles of corporate governance practices are a useful tool to examine corporate governance models across and within countries (as well as potentially to analyze over time changes). While comparative research, identifying stylized national models of corporate governance, has been fruitful to help us think about the key institutional and shareholder rights determining governance differences and similarities across countries, we believe that given the financialization of the corporate economy, current globalization trends of investment, and rapid information technology advances, it is important to shift our conceptualization of governance models beyond the dichotomous world of common-law/outsider/shareholder-oriented system vs. civil law/insider/stakeholder oriented system. Our claim is based on the empirical observation that there exists a wide range of firms that either (1) fall in the "wrong" corporate governance category; (2) are a hybrid of these two categories; or (3) should be placed into an entirely new category such as firms in emerging markets or state-owned firms. In addition, as Aguilera and Jackson (2003) argue, firms, regardless of their legal family constraints, their labor and product markets, and the development of the financial markets from which they can draw, have significant degrees of freedom to chose whether to implement different levels of a given corporate governance practice. That is, firms might chose to fully endorse a practice or simply seek to comply with the minimum requirements without truly internalizing the governance practice. An illustrative example of the different degrees of internalization of governance practices is the existing variation in firms' definition of director independence or disclosure of compensation systems. We first discuss the conceptual idea of configurations or bundles of corporate governance practices underscoring the concept of equifinal paths to given firm outcomes as well as the complementarity and substitution in governance practices. We then move to the practice level of analysis to show how three governance characteristics (legal systems, ownership and boards of directors) cannot be conceptualized independently, as each of them is contingent on the strength and prevalence of other governance practices. In the last section, we illustrate how different configurations are likely to playout across industries and countries, taking as the departing practice, corporate ownership. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:illbus:11-0103&r=bec |
| By: | Christian Ewerhart |
| Abstract: | Using an expanded notion of concavity, the N-fi rm Cournot model is reviewed to obtain generalized and unifi ed conditions for existence of a pure strategy Nash equilibrium. The main theorem imposes independent conditions on inverse demand (generalized concavity) and cost functions (monotonicity). No separate assumption for large outputs is needed. We also find new conditions for strict quasiconcavity and equilibrium uniqueness. |
| Keywords: | Cournot competition, existence and uniqueness of Nash equilibrium, generalized concavity, supermodular games. |
| JEL: | L13 C72 C62 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:016&r=bec |
| By: | Michele Battisti (University of Palermo); Giovanna Vallanti (LUISS "Guido Carli" University) |
| Abstract: | This paper focuses on the effects of decentralized wage schemes and temporary forms of employment on worker/firm performance. The effect of monetary incentives on worker effort and firm performance is a central topic in economics. According to the principal-agent paradigm, firms (the principal) have to link employees’ remuneration scheme to any verifiable indicator of performance in order to avoid opportunistic behaviours. The effectiveness of incentives on workers’ behaviour may vary significantly accordingly to the institutional/economic context in which the firms operate but in general the empirical evidence shows that financial incentives have the potential to exert strong effects on indicators of firm performance, such as productivity and worker absenteeism. Both from a theoretical and empirical point of view, the prediction on the effects of temporary forms of employment on effort and productivity is less neat. In light of these considerations, the aim of this paper is to provide further empirical evidence on whether and to what extent the performance related pay and the contract flexibility affect workers effort and in turn firm productivity for different type of workers (white collar vs. blue collar), working in workplaces characterized by different degree of uncertainty and risk and in firms operating in different economic and institutional settings using a sample of Italian firms. According to our results, wage flexibility appears to have a significant effect on effort and then on firm’s productivity and white collars are more responsive to monetary incentives than blue collars. Moreover, the presence of a large share of temporary contracts implies a lower dismissal probability for permanent workers and a deterioration in the working environment and then it reduces workers’ motivation and effort. |
| Keywords: | Productivity, Effort, Performance-related-pay, Temporary contracts. |
| JEL: | J22 J33 J38 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lui:celegw:1105&r=bec |
| By: | Hyll, Walter; Stark, Oded |
| Abstract: | We analyze the impact on a firm's profits and optimal wage rates, and on the distribution of workers' earnings, when workers compare their earnings with those of co-workers. We consider a low-productivity worker who receives lower wage earnings than a high-productivity worker. When the low-productivity worker derives (dis)utility not only from his own effort but also from comparing his earnings with those of the high-productivity worker, his response to the sensing of relative deprivation is to increase the optimal level of effort. Consequently, the firm's profits are higher, its wage rates remain unchanged, and the distribution of earnings is compressed. -- |
| Keywords: | Social comparisons,Heterogeneous workforce,Relative deprivation,Effort exertion,Earnings gap,Earnings compression |
| JEL: | D01 D21 J22 J24 J31 M54 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:6&r=bec |
| By: | TAKII Katsuya |
| Abstract: | We construct a dynamic assignment model that explains persistent productivity differences between firms. Large expected organization capital (firm-specific knowledge) attracts skilled workers, who help to accumulate organization capital. Accumulated large organization capital leads to good performances, which, in turn, confirm high expectations. It is shown that the sluggish movement of expected productivity that occurs through this positive feedback can play a role similar to an unobserved fixed effect in the productivity dynamics. Our calibration exercises suggest that the proposed feedback accompanied by amplification mechanisms inherent in the assignment model can explain a major part of the observed persistence and disparity in productivity. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:11048&r=bec |
| By: | Foros, Øystein (Dept of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Shaffer, Greg (University of Rochester and University of East Anglia) |
| Abstract: | In this paper we compare the profitability of a merger to the pro…tability of a partial ownership arrangement and …nd that partial ownership arrangements can be more profiable for the acquiring and acquired firm because they can result in a greater dampening of competition. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firms. In a dual context, we show that a cross-majority owner may have incentives to sell a fraction of the shares in one of the firms he controls to a silent investor who is outside the industry. Aggregate ex post operating profit in the two firms controlled by the cross-majority shareholder then increases, such that both the cross-majority shareholder and the silent investor will be better o¤ with than without the partial divestiture. |
| Keywords: | Media economics; Mergers; Corporate Control; Financial Control |
| JEL: | L13 L22 L82 |
| Date: | 2010–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2010_001&r=bec |
| By: | Aparicio Fenoll, Ainhoa (Collegio Carlo Alberto) |
| Abstract: | This paper assesses the impact of product market competition on job instability as proxied by the use of fixed-term labor contracts. Using both worker data from the Spanish Labor Force Survey and firm data from the Spanish Business Strategies Survey, I show that job instability rises with competition. In particular, a one standard deviation increase in competition in an economic sector decreases the probability that a fixed-term worker gets an open-ended contract within that sector in a given year by more than 30%. The effect is identified by means of exogenous shifts in competition brought about by changes in legislation. |
| Keywords: | fixed-term employment, product market competition, labor contract |
| JEL: | J24 M51 C41 C33 C35 J6 L1 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5669&r=bec |
| By: | Dittrich, Dennis A. V.; Kocher, Martin G. |
| Abstract: | We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under standard assumptions. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the employer to solely rely on the reciprocity of employees. |
| Keywords: | incentive contracts; supervision; efficiency wages;experiment; incomplete contracts; reciprocity |
| JEL: | C91 J31 J41 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12222&r=bec |
| By: | Mike, Tsionas; Subal, Kumbhakar |
| Abstract: | This paper provides a new model that disentangles firm effects from persistent (time-invariant/long-term) and transient (time-varying/short-term) technical inefficiency. |
| Keywords: | Bayesian analysis; Markov Chain Monte Carlo; Technical efficiency. |
| JEL: | C13 C23 C11 |
| Date: | 2011–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30737&r=bec |