|
on Business Economics |
| By: | Fabbri, Francesca (University of East Anglia); Marin, Dalia (University of Munich) |
| Abstract: | The compensation of executive board members in Germany has become a highly controversial topic since Vodafone’s hostile takeover of Mannesmann in 2000 and it is again in the spotlight since the outbreak of the financial crisis of 2009. Based on unique panel data evidence of the 500 largest firms in Germany in the period 1977-2009 we test two prominent hypotheses in the literature on executive pay: the manager power hypothesis and the efficient pay hypothesis. We find support for the manager power hypothesis for Germany as executives tend to be rewarded when the sector is doing well rather than the firm they work for. We reject, however, the efficient pay hypothesis as CEO pay and the demand for managers increases in Germany in difficult times when the typical firm size shrinks. We find further that domestic and global competition for managers has contributed to the rise in executive pay in Germany. Lastly, we show that CEOs in the banking sector are provided with incentives for performance and that the great recession of 2009 acted as a disciplining devise on CEO pay in Germany. |
| Keywords: | executive compensation, corporate governance |
| JEL: | F23 J3 M12 M52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6420&r=bec |
| By: | Hristos Doucouliagos; Michael Graham; Janto Haman |
| Abstract: | This study investigates dynamics and convergence in CEO pay in Australia’s largest corporations over an 18 year period. Utilizing dynamic panel estimators, we find that CEO pay is driven by dynamic adjustments, firm size, board size, CEO tenure and firm performance. The largest pay-performance effect emerges for long-term incentive pay. We also show that by ignoring dynamics, prior studies may have understated the size of payperformance effects. Analysis of convergence shows a clear pattern of catch up among firms making CEO pay more equitable over time. The analysis points to efficiency in CEO remuneration contracts rather than managerial entrenchment. |
| Keywords: | CEO Pay; Dynamic Panel Data Analysis; Pay for Performance; Convergence |
| JEL: | G30 J33 M52 |
| Date: | 2012–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2012_3&r=bec |
| By: | Alex Bryson; John Forth; Minghai Zhou |
| Abstract: | Despite their theoretical value in tackling principal-agent problems at low cost to firms there is almost no empirical literature on the prevalence and correlates of performance bonds posted by corporate executives. Using data for China we examine their incidence and test propositions from principal-agent theory regarding their correlates. Around one-tenth of corporations deploy performance bonds. They are sizeable relative to CEO cash compensation. Ceteris paribus, CEO's posting performance bonds are more likely than other CEO's to have their compensation linked to firm performance in other ways and the elasticity of their pay with respect to firm performance is greater. They are also more likely to hold company stock. Thus bonds appear to be complements to rather than substitutes for other forms of corporate incentive. The negative association between bonds and sales volatility is consistent with principal-agent theory. Positive associations between performance bonds and firm age, the CEOs ranking in the Communist Party, and city-level clustering in the use of bonds are all consistent with "legacy" effects dating back to the use of performance bonds in the early reform period. The only corporate governance measure that is strongly and robustly associated with an increased use of bonds is employee representation on the board of directors. |
| Keywords: | performance bonds, security deposits, executive compensation, CEOs, corporate governance, agency theory, China |
| JEL: | G34 J31 J33 M12 M52 O16 P31 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1135&r=bec |
| By: | Kangsik , Choi |
| Abstract: | We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities when the public firm is less efficient than the private firm. Thus, if the Singh and Vives assumption of positive primary outputs holds, (i) Bertrand competition or quantity-price competition can occur depending on the degree of public firm's inefficiency when the goods are substitutes. (ii) regardless of its inefficiency, there can be always sustained Bertrand competition when the goods are complements. (iii) the ranking of a private firm's profit is not reversed. However if we relax the parameter restriction imposed implicitly by Singh and Vives (i.e., we adopt Zanchettin (2006) assumption) to allow for a wider range of cost asymmetry, there can be always sustained multiple subgame Nash perfect equilibria in the contract stage by each critical value of the public firm's inefficiency. In particular, Cournot and Bertrand competition coexist if its inefficiency is sufficiently small or large. |
| Keywords: | Inefficiency; Cournot-Bertrand Competition; Mixed Duopoly |
| JEL: | L13 D43 H44 |
| Date: | 2012–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37704&r=bec |
| By: | Stefan Erdorf (University of Cologne); Thomas Hartmann-Wendels (University of Cologne); Nicolas Heinrichs (University of Cologne); Michael Matz (Bain & Company) |
| Abstract: | We survey the recent literature on corporate diversification. How does corporate diversification influence firm value? Does it create or destroy value? While, until the beginning of this century, the predominant thinking among researchers and practitioners was that corporate diversification leads to an average discount on firm value, several studies cast doubt on the diversification discount. In the last decade, there has been no clear consensus of whether there is a discount or even a premium on firm value. However, the recent literature concludes that the effect on value differs from firm to firm, and that corporate diversification alone does not drive the discount or premium. Rather, the effect is heterogeneous across certain industry settings, economic conditions, and governance structures. |
| Keywords: | corporate diversification, firm valuation, internal capital markets, discount, premium |
| JEL: | G11 G34 L25 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:03-01&r=bec |
| By: | Hunold, Matthias; Röller, Lars-Hendrik; Stahl, Konrad |
| Abstract: | We analyze the effects of downstream firms' acquisition of pure cash flow rights in an efficient upstream supplier when all firms compete in prices. With an acquisition, downstream firms internalize the effects of their actions on their rivals' sales. Double marginalization is enhanced. Whereas full vertical integration would lead to decreasing, passive backwards ownership leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient supplier to commit to high prices. All results are sustained when upstream suppliers are allowed to charge two part tariffs. -- |
| Keywords: | double marginalization,strategic delegation,vertical integration,partial ownership,common agency |
| JEL: | L22 L40 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:12022&r=bec |
| By: | Pierre Blanchard (University of Paris Est Créteil, ERUDITE); Emmanuel Dhyne (National Bank of Belgium, Research Department; Université de Mons); Catherine Fuss (National Bank of Belgium, Research Department; Université Libre de Bruxelles); Claude Mathieu (University of Paris Est Créteil, ERUDITE) |
| Abstract: | This paper revisits the "footloose" nature of multinational firms (MNFs) hypothesis. Using firm-level data for Belgium over the period 1997-2008, we rely on a Probit model and take into account the endogeneity of the determinants of firm exit. Our results may be summarised as follows. First, the unconditional exit probability of MNFs is lower than that of domestic firms. Second, controlling for firm and sector characteristics - firm age, Total Factor Productivity, sunk costs, size, competition on the product market, sector-level value added growth, and sector dummies - the difference between the exit probability of MNFs and domestic firms becomes positive. Third, our results show that MNFs have a lower sensitivity to sunk costs and size than do domestic firms, which may be interpreted as lower exit barriers due to greater possibilities of relocating tangible and intangible assets to foreign affiliates. |
| Keywords: | firm exit, multinationals, Total Factor Productivity, sunk costs, panel data, Probit model |
| JEL: | D22 F23 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201203-223&r=bec |
| By: | Laura NURSKI; Frank VERBOVEN |
| Abstract: | Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We first estimate a demand model with product and spatial differentiation, and quantify the role of a dense distribution network in explaining the car manufacturers’ market shares. We then perform policy counterfactuals to assess the pro.t incentives and entry-deterring effects of exclusive dealing. We find that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent efficiencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European firms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensified price competition. Our findings suggest that the European Commission’s recent decision to facilitate exclusive dealing in the car market may not have been warranted. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces11.37&r=bec |
| By: | Alex Bryson; Giambattista Rossi; Rob Simmons |
| Abstract: | In efficient global labour markets for very high wage workers one might expect wage differentials between migrant and domestic workers to reflect differences in labour productivity. However, using panel data on worker-firm matches in a single industry over a seven year period we find a substantial wage penalty for domestic workers which persists within firms and is only partially accounted for by individual labour productivity. We show that the differential partly reflects the superstar status of migrant workers. This superstar effect is also apparent in migrant effects on firm performance. But the wage differential also reflects domestic workers' preferences for working in their home region, an amenity for which they are prepared to take a compensating wage differential, or else are forced to accept in the face of employer monopsony power which does not affect migrant workers. |
| Keywords: | wages, migration, superstars, productivity, compensating wage differentials, sports |
| JEL: | J24 J31 J61 J71 M52 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1134&r=bec |
| By: | Chongwoo Choe; Noriaki Matsushima |
| Abstract: | The arm’s length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm’s length with each other. This paper examines the effect of the arm’s length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm’s length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties. |
| Keywords: | Transfer price, arm’s length principle, tacit collusion, stability of collusion. |
| JEL: | D43 L13 L41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2012-02&r=bec |
| By: | Thomas J. Chemmanur; Jie He |
| Abstract: | We develop a new rationale for IPO waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions. |
| Keywords: | CES,economic,research,micro,data,microdata,IPO waves, external capital, market share |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:12-07&r=bec |
| By: | Acharya, Viral V; Almeida, Heitor; Campello, Murillo |
| Abstract: | We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit lines and opt for cash in spite of higher opportunity costs and liquidity premium. Likewise, in times when aggregate risk is high, firms rely more on cash than on credit lines. We verify these predictions empirically. Cross-sectional analyses show that firms with high exposure to systematic risk have a higher ratio of cash to credit lines and face higher spreads on their lines. Time-series analyses show that firms' cash reserves rise in times of high aggregate volatility and in such times credit lines initiations fall, their spreads widen, and maturities shorten. Also consistent with the mechanism in the model, we find that exposure to undrawn credit lines increases bank-specific risks in times of high aggregate volatility. |
| Keywords: | asset beta; bank lines of credit; cash holdings; liquidity management; loan maturity; loan spreads; systemic risk |
| JEL: | E22 E5 G21 G31 G32 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8913&r=bec |
| By: | TODO Yasuyuki; INUI Tomohiko; YUAN Yuan |
| Abstract: | This paper examines whether or not privatization of Chinese state-owned enterprises (SOEs) increases the probability of exporting, and, if so, what channels generate such effect. Using firm-level data for the Chinese manufacturing sector for the period 2000-2007, we find that privatization has a positive effect on exporting decisions, productivity, and firm size and a negative effect on firms' long-term debt. We also find that Chinese firms are more likely to engage in export when the productivity level, firm size, or long-term debt is larger. These two sets of results suggest that privatization has positive effects on exporting decisions through improving productivity and firm size and a negative effect through lowering debt. However, quantitative analysis reveals that effects of privatization through these three channels are small. Therefore, we conclude that the positive effect of privatization on exporting decisions comes mostly from other unobservable factors, most probably changes in attitude toward profits and risks associated with privatization. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:12015&r=bec |
| By: | Fernando E. Alvarez; Francesco Lippi |
| Abstract: | We model the decisions of a multi-product firm that faces a fixed “menu” cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decisions in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model. |
| JEL: | E31 E4 E52 E60 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17923&r=bec |
| By: | Vinod Mishra; Russell Smyth |
| Abstract: | The purpose of this paper is to explore the factors that are correlated with hours worked in China. A distinguishing feature of the study is that we use representative matched employer and employee data. Hence, in addition to the usual worker characteristics examined in conventional economic models of labour supply, we also take account of the influence of firm characteristics and policies in influencing the number of hours worked. The results suggest that in addition to the hourly wage rate, labour supply characteristics and human capital characteristics of the individual, firm-level differences are important in explaining variation in weekly hours worked in Chinese firms. In particular, our results suggest that there is a norm of longer working hours in firms which employ a high proportion of female workers, that hours worked are less in firms which pay overtime and that hours worked are less in firms in which labour disputes have disrupted production. The implications of the results for Chinese firms wishing to improve labour management practices are discussed. |
| Keywords: | China, hours worked, wages, firms |
| JEL: | J22 J30 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2012-10&r=bec |