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on Business Economics |
| By: | Patrick Bolton; Martin Oehmke |
| Abstract: | Derivative contracts, swaps, and repos enjoy "super-senior" status in bankruptcy: they are exempt from the automatic stay on debt and collateral collection that applies to virtually all other claims. We propose a simple corporate finance model to assess the effect of this exemption on firms' cost of borrowing and incentives to engage in swaps and derivatives transactions. Our model shows that while derivatives are value-enhancing risk management tools, super-seniority for derivatives can lead to inefficiencies: collateralization and effective seniority of derivatives shifts credit risk to the firm's creditors, even though this risk could be borne more efficiently by derivative counterparties. In addition, because super-senior derivatives dilute existing creditors, they may lead firms to take on derivative positions that are too large from a social perspective. Hence, derivatives markets may grow inefficiently large in equilibrium. |
| JEL: | G21 G33 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17599&r=bec |
| By: | Alex Edmans; Itay Goldstein; John Y. Zhu |
| Abstract: | This paper studies optimal contracting under synergies. We define influence as the extent to which effort by one agent reduces a colleague's marginal cost of effort, and synergy to be the sum of the (unidimensional) influence parameters across a pair of agents. In a two-agent model, effort levels are equal even if influence is asymmetric. The optimal effort level depends only on total synergy and not individual influence parameters. An increase in synergy raises total effort and total pay, consistent with strong equity incentives in small firms, including among low-level employees. The influence parameters matter only for individual pay. Pay is asymmetric, with the more influential agent being paid more, even though the level and productivity of effort are both symmetric. With three agents, effort levels differ and are higher for more synergistic agents. An increase in the synergy between two agents can lead to the third agent being excluded from the team, even if his productivity is unchanged. This has implications for optimal team composition and firm boundaries. Agents that influence a greater number of colleagues receive higher wages, consistent with the salary differential between CEOs and divisional managers. |
| JEL: | D86 J31 J33 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17606&r=bec |
| By: | Lofstrom, Magnus (Public Policy Institute of California); Bates, Timothy (Wayne State University, Detroit); Parker, Simon C. (University of Western Ontario) |
| Abstract: | Drivers of entrepreneurial entry are investigated in this study by examining how entry into small-business ownership is shaped by industry-specific constraints. The human- and financial-capital endowments of potential entrepreneurs entering firms in various industries are shown to differ profoundly, depending on the type of venture entered. The educational credentials of highly educated potential entrepreneurs, in particular, predict avoidance of small-firm ownership in some industries as well as attraction to others. Recognizing that individuals choose an industry sector jointly with their decision to enter entrepreneurship, we find that the conventional practice of conflating different industry types in empirical analyses of transitions to entrepreneurship generates misleading findings about the determinants of entrepreneurship. |
| Keywords: | entrepreneurship, self-employment, capital constraints, transitions, entry barriers, business start-ups |
| JEL: | J24 L26 M13 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6103&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:tse:wpaper:24306&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:tse:wpaper:24151&r=bec |
| By: | Mitraille, Sébastien (Toulouse Business School); Moreaux, Michel (Toulouse School of Economics (IDEI and LERNA)) |
| Abstract: | Two-period Cournot competition between n identical firms producing at constant marginal cost and able to store before selling has pure strategy Nash- perfect equilibria, in which some firms store to exert endogenously a leader- ship over rivals. The number of firms storing balances market share gains, obtained by accumulating early the output, with losses in margin resulting from increased competition and higher operation costs. This number and the industry inventories are non monotonic in n. Concentration (HHI) and competition increase due to the strategic use of inventories. |
| JEL: | D43 L13 |
| Date: | 2011–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:24803&r=bec |
| By: | Shingo Ishiguro (Graduate School of Economics, Osaka University) |
| Abstract: | In this paper we present an axiomatic approach to characterize the optimal contracts, which we call gfair contracts,h in the general moral hazard model. The two main axioms we employ are incentive efficiency and no-envyness. The incentive efficiency requires that agents of organization select the Pareto efficient contracts among all possible incentive compatible contracts. No-envyness is equity requirement to ensure that each agent does not envy contracts of others in the same organization. We then show that, due to the tension between incentive efficiency and no-envyness, fair contracts have the very simple feature that risk averse agents are offered the fixed wage to choose only the least costly action. |
| Keywords: | Moral Hazard, Incentive Contracts, Fairness. |
| JEL: | D82 D86 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1130&r=bec |
| By: | Cavallari Lilia |
| Abstract: | This paper provides a novel theory of the international business cycle grounded on firms entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry can generate fluctuations in consumption, output and investment as large as those observed in the data while at the same time providing positive international comovements and highly volatile terms of trade. The capacity to capture these stylized facts of the international business cycle overcomes the well-known difficulties of the standard open economy real business cycle model in this regard. Numerical simulations show that floating regimes exacerbate counter-cyclical markup movements. Fixed regimes, on the other hand, lead to an increase in the volatility of?firm entry. |
| Keywords: | product variety, firm entry, international business cycle, monetary policy, interest rate rules, exchange rate regimes |
| JEL: | E31 E32 E52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0086&r=bec |
| By: | Langenmayr, Dominika |
| Abstract: | This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as this makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it may even be optimal no to limit profit shifting at all. |
| Keywords: | profit shifting; heterogeneous firms; tax competition |
| JEL: | H25 H73 F23 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12419&r=bec |
| By: | Kai Andree |
| Abstract: | This paper develops the incentives to collude in a model with spatially separated markets and quantity setting firms. We find that increases in transportation costs stabilize the collusive agreement. We also show that, the higher the demand in both markets the less likely will collusion be sustained. Gross and Holahan (2003) use a similar model with price setting firms, we compare their results with ours to analyze the impact of the mode of competition on sustainability of collusion. Further we analyze the impact of collusion on social welfare and find that collusion may be welfare enhancing. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:pot:vwldis:104&r=bec |
| By: | Jung Hur (Department of Economics, Sogang University, Seoul); Hea-Jung Hyun (Department of International Trade, Dankook University, Gyeonggi-do, Korea) |
| Abstract: | This paper examines the role of firm heterogeneity in the choice made by multinationals with regards to FDI type and location. Using Korean firm-level data, we find that highly productive firms are more likely than their less efficient counterparts to invest in tough markets and choose combined FDI strategy against either horizontal FDI or vertical FDI across different host countries. These findings, consistent with the recent theories in international economics, suggest that firm heterogeneity may play a significant role in FDI strategy as well as location decision. |
| Keywords: | Foreign Direct Investment, Multinationals, Horizontal Investment, Vertical Investment, Firm Heterogeneity, Location Decision |
| JEL: | F23 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:1105&r=bec |
| By: | Ioannis N. Pinopoulos (Department of Economics, University of Macedonia) |
| Abstract: | We analyze a successive vertical Cournot oligopoly model with homogeneous intermediate and final goods. Under restricted entry in both upstream and downstream markets, the input price continuously falls on a sequential merger path. Partial input foreclosure never occurs. However, when there is free entry in the upstream market, we find that the input price initially falls but eventually rises as incremental vertical mergers occur. Thus, under upstream free-entry equilibrium, the possibility of partial input foreclosure arises. |
| Keywords: | Input foreclosure; Vertical integration; Vertical mergers; Free entry. |
| JEL: | L1 L4 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2011_15&r=bec |
| By: | Alex Bryson; Michael White |
| Abstract: | The HRM-performance linkage often invokes an assumption of increased employee commitment to the organization and other positive effects of a motivational type. We present a theoretical framework in which motivational effects of HRM are conditional on its intensity, utilizing especially the idea of HRM 'bundling'. We then analyse the association between HRM practices and employees' organisational commitment (OC) and intrinsic job satisfaction (IJS). HRM practices have significantly positive relationships with OC and IJS chiefly at high levels of implementation, but with important distinctions between the domain-level analysis (comprising groups of practices for specific domains such as employee development) and the across-domain or HRM-system level. Findings support a threshold interpretation of the link between HRM domains and employee motivation, but at the system-level both incremental and threshold models receive some support. |
| Keywords: | Human resource management, high performance, organizational commitment |
| JEL: | J28 L23 M12 M54 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1097&r=bec |
| By: | James Harrigan; Ariell Reshef |
| Abstract: | We propose a theory that rising globalization and rising wage inequality are related because trade liberalization raises the demand for highly competitive skill-intensive firms. In our model, only the lowest-cost firms participate in the global economy exactly along the lines of Melitz (2003). In addition to differing in their productivity, firms in our model differ in their skill intensity. We model skill-biased technology as a correlation between skill intensity and technological acumen, and we estimate this correlation to be large using firm-level data from Chile in 1995. A fall in trade costs leads to both greater trade volumes and an increase in the relative demand for skill, as the lowest-cost/most-skilled firms expand to serve the export market while less skill-intensive non-exporters retrench in the face of increased import competition. This mechanism works regardless of factor endowment differences, so we provide an explanation for why globalization and wage inequality move together in both skill-abundant and skill-scarce countries. In our model countries are net exporters of the services of their abundant factor, but there are no Stolper-Samuelson effects because import competition affects all domestic firms equally. |
| JEL: | F1 F16 J3 J31 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17604&r=bec |
| By: | Bourjade, Sylvain; Germain, Laurent |
| Abstract: | The aim of this paper is to study what is the best structure of a Board of Directors when collusive aspects between the Board and the CEO are taken into account. We analyze how shareholders should select the members of the Board in a framework with asymmetric information and uncertainty about the optimal projects for the firm. In particular, we examine the optimal degree of independence of the Board from a shareholders perspective. This allows us to state when it is beneficial for shareholders to have an insider-oriented board or an outsider oriented board with a majority of independent directors when collusion is a major threat. |
| Keywords: | Collusion; Corporate Governance; Asymmetric Information; Uncertainty |
| JEL: | D81 G34 D82 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34814&r=bec |
| By: | Duschl, Matthias; Schimke, Antje; Brenner, Thomas; Luxen, Dennis |
| Abstract: | In this paper the relationship between firm growth and external knowledge sources, such as related firms and universities, is studied. The spatial characteristics of these relationships are examined by geolocating firms into a more realistic relational space using travel time distances and using flexible distance decay function specifications. This approach properly accounts for growth relevant knowledge spillovers and allows for estimating their spatial range and functional form. Applying quantile regression techniques on a large sample of German manufacturing firms, we show that the impact of external factors substantially differ along firms' size, type of knowledge source and growth level. -- |
| Keywords: | Firm growth,external factors,universities,agglomeration,space,spatial range,distance decay functions,knowledge spillovers,high growth firms,quantile regression |
| JEL: | C31 D92 L25 R11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:36&r=bec |
| By: | Hüschelrath, Kai; Müller, Kathrin |
| Abstract: | We use T-100 traffic data and DB1B fare data from the U.S. Department of Transportation to identify patterns and effects of entry by network carriers and low-cost carriers in non-stop U.S. airline markets. For the sample period from 1996 to 2009, we find that entry activity of low-cost carriers did not only experience significant absolute increases but also led to substantial fare reductions. As route entries by network carriers do not have comparable effects, the existence and expansion of low-cost carriers must be considered as the main driver of competition in the domestic U.S. airline industry. -- |
| Keywords: | Airline industry,liberalisation,entry,low-cost carriers |
| JEL: | L40 L93 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:11059&r=bec |
| By: | Cécile Carpentier; Jean-Marc Suret |
| Abstract: | <P>Selon les promoteurs de la commission unique, les entreprises canadiennes se transigeraient à escompte par rapport à des entreprises semblables aux États-Unis, en raison de la structure déficiente de la réglementation des valeurs mobilières au Canada. <p> Nous testons l’argument de l’escompte canadien en utilisant deux méthodes complémentaires. La première consiste à déterminer si la valeur d’entreprises canadiennes diffère de celle d’un échantillon d’entreprises américaines comparables. La seconde consiste à étudier l’évolution de la valeur des entreprises canadiennes qui s’interlistent. S’il existe effectivement un escompte canadien induit par la réglementation, on devrait observer une augmentation significative et permanente de la valeur des entreprises canadiennes qui s’inscrivent aux États-Unis. La valeur de ces entreprises devrait rejoindre alors celles d’entreprises américaines similaires. <p> Nous analysons l’ensemble des entreprises canadiennes qui se sont interlistées aux États-Unis entre 1990 et 2009. Nous comparons la valeur de ces entreprises au moment de l’interlistage, et au cours des 3 années ultérieures, à celle d’entreprises similaires américaines puis canadiennes. Nous comparons également les entreprises canadiennes non interlistées à leurs homologues américaines. Dans les deux cas, nous comparons des entreprises de taille, secteur, croissance et rentabilité similaires et conservons dans l’échantillon les entreprises dont les bénéfices sont négatifs.<p> L’analyse multivariée de l’écart d’évaluation entre les entreprises canadiennes non interlistées et les américaines montre qu’il n’existe pas de différence d’évaluation entre les deux groupes lorsque l’on tient compte de la liquidité des titres. L’escompte canadien ne résiste donc pas à la prise en compte des divers paramètres qui influencent la valeur, dont la croissance, la rentabilité et la liquidité. <p> Les entreprises canadiennes qui s’interlistent bénéficient d’une prime par rapport aux entreprises canadiennes. Une partie de cette différence découle des écarts de liquidité : l’écart d’évaluation diminue lorsqu’on introduit la rotation des titres dans le modèle. Cette différence d’évaluation n’est toutefois pas permanente; elle disparaît trois ans après l’interlistage. Les entreprises canadiennes qui s’interlistent bénéficient d’une prime par rapport aux entreprises américaines. Cette prime, qui s’estompe toutefois rapidement, ne peut découler que des performances supérieures et des fortes anticipations de croissance des entreprises qui s’interlistent. <p> Dans l’ensemble, ces résultats infirment l’hypothèse d’un escompte canadien lié à la structure de la réglementation. Ils mettent toutefois en évidence le fait que la liquidité plus élevée du marché américain semble réduire le coût du capital, en particulier pour les entreprises de taille petite et moyenne qui composent nos échantillons. |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirpro:2011rp-11&r=bec |
| By: | Tirole, Jean; Weyl, Glen |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:24720&r=bec |
| By: | Hayafumi Watanabe; Hideki Takayasu; Misako Takayasu |
| Abstract: | To investigate the actual phenomena of transport on a complex network, we analysed empirical data for an inter-firm trading network, which consists of about one million Japanese firms and the sales of these firms (a sale corresponds to the total in-flow into a node). First, we analysed the relationships between sales and sales of nearest neighbourhoods from which we obtain a simple linear relationship between sales and the weighted sum of sales of nearest neighbourhoods (i.e., customers). In addition, we introduce a simple money transport model that is coherent with this empirical observation. In this model, a firm (i.e., customer) distributes money to its out-edges (suppliers) proportionally to the in-degree of destinations. From intensive numerical simulations, we find that the steady flows derived from these models can approximately reproduce the distribution of sales of actual firms. The sales of individual firms deduced from the money-transport model are shown to be proportional, on an average, to the real sales. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1111.4852&r=bec |
| By: | Biais, Bruno (Toulouse School of Economics (CNRS-CRM, IDEI)); Hombert, Johan (HEC Paris); Weill, Pierre-Olivier (University of California and NBER) |
| Abstract: | We study the reaction of financial markets to aggregate liquidity shocks when traders face cognition limits. While each financial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay, reecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the recovery process. They also imply that traders who find their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can only place orders when they have completed their information processing task. |
| Keywords: | Liquidity shock, Limit-orders, Asset pricing and liquidity, Algorithmic trading, Limited cognition, Sticky plans |
| JEL: | D83 G12 |
| Date: | 2010–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:24591&r=bec |
| By: | Agustí Segarra (Research Group of Industry and Territory, Department of Economics, Universitat Rovira i Virgili.) |
| Abstract: | This paper explores the factors that determine firm’s R&D cooperation with different partners, paying special attention on the role of tertiary education (degree and PhDs level) in facilitating the connection between the firms and the to scientific bodies (technology centres, public research centres and universities). Here, we attempt to answer two questions. First, are innovative firms that carry out internal and external R&D activities more likely to cooperate on R&D projects with other partners? Second, do Spanish innovative firms with a high participation of researchers with degrees or PhDs tend to cooperate more with scientific partners? To answer both questions we apply a three-dimensional approach on a firm level Panel Data with a sample of 4.998 manufacturing and services Spanish firms. First, we run a complementary test between external R&D acquisition and skilled research workers and find that firms which carry out external R&D activities obtain a greater return on R&D cooperation when they have skilled workers in R&D, especially in high-tech manufactures and KIS services. Second, we carry out a 2-step tobit model to estimate, in the first stage, the determinants that explain whether Spanish innovative firms cooperate or not; and in the second stage the factors that affect the choice of partners. And third, we apply an ordered probit model to test the marginal effects of explanatory variables on the different partners. Here we contrast some of the most interesting empirical hypotheses of previous studies, and which emphasize the role of employees with degrees and PhDs in facilitating cooperative R&D between firms and scientific partners. |
| Keywords: | Determinants R&D cooperation, industry-university flows, PhD research workers |
| JEL: | O31 O33 O38 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2011-17&r=bec |
| By: | Kajal Lahiri; George Monokroussos |
| Abstract: | We study the role of the well-known monthly diffusion indices produced by the Institute or Supply Management in nowcasting current quarter US GDP growth. We investigate their marginal impact on these nowcasts when large unbalanced (jagged edge) macroeconomic data sets are used in real time to generate them. We find some evidence that these ISM indices can be helpful in improving the nowcasts in the beginning of the month when new ISM information becomes available ahead of other monthly indicators. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nya:albaec:11-01&r=bec |