nep-bec New Economics Papers
on Business Economics
Issue of 2013‒03‒02
eight papers chosen by
Vasileios Bougioukos
Bangor University

  1. Risk Tolerance and Entrepreneurship By Hvide, Hans K.; Panos, Georgios A.
  2. Dynamics of Investment and Firm Performance: Comparative evidence from manufacturing industries By M. Grazzi; N. Jacoby; T. Treibich
  3. Contracting Institutions and Ownership Structure in International Joint Ventures By Ari Van Assche; Galina A. Schwartz
  4. Why agents need discretion: The business judgment rule as optimal standard of care By Engert, Andreas; Goldlücke, Susanne
  5. Price setting with menu cost for multi-product firms By Fernando Alvarez; Francesco Lippi
  6. Corporate governance, value and performance of firms: New empirical results on convergence from a large international database By Jackie Krafft; Yiping Qu; Francesco Quatraro; Jacques-Laurent Ravix
  7. Exchange Rate Transmission and Export Activity at the Firm Level By Andrea Lassmann
  8. On the theory of firm in nonlinear dynamic financial and economic systems By Dimitri O. Ledenyov; Viktor O. Ledenyov

  1. By: Hvide, Hans K. (University of Bergen); Panos, Georgios A. (University of Stirling)
    Abstract: A tradition from Knight (1921) argues that more risk tolerant individuals are more likely to become entrepreneurs, but perform worse. We test these predictions with two risk tolerance proxies: stock market participation and personal leverage. Using investment data for 400,000 individuals, we find that common stock investors are around 50 percent more likely to subsequently start up a firm. Firms started up by stock market investors have about 25 percent lower sales and 15 percent lower return on assets. The results are similar using personal leverage as risk tolerance proxy. We consider alternative explanations including unobserved wealth and behavioral effects.
    Keywords: entrepreneurial entry, entrepreneurial performance, firm entry, firm performance, firm productivity, firm survival, overconfidence, risk aversion, risk tolerance, stock market participation
    JEL: L26
    Date: 2013–02
  2. By: M. Grazzi; N. Jacoby; T. Treibich
    Abstract: If the relation between investment and economic growth is well established in the macroeconomic literature, the existence of a similar link at the level of the firm has been challenged by empirical work. This paper investigates the channels linking investment and firm performance in the French and Italian manufacturing industries. It does so by putting forth a novel methodology to identify investment spikes that corrects for size dependence. While maintaining the desired properties of a spike measure, our chosen proxy retrieves the expected relation between investment and firm performance. Ex-ante, more efficient and fast growing firms display a higher probability to invest; in turn, after an investment spike has taken place the group of investing firms shows further gains in performance. Finally, expansionary investment episodes, as proxied by the opening of new plants, have a negative effect on profitability while they are associated with higher sales and employment levels.
    JEL: C14 D22 D24 D92 E22 L11 L23 L60
    Date: 2013–02
  3. By: Ari Van Assche; Galina A. Schwartz
    Abstract: This paper examines the role of contracting institutions on a multinational firm's optimal ownership strategy. We develop a model in which both a multinational firm and its local joint venture partner can ex post engage in costly rent-seeking actions to increase their ex ante agreed upon revenue share. We show that the host country's level of contract enforcement and level of judicial favoritism affect the parties' incentives to contribute to the international joint venture. The model allows us to identify testable hypotheses relating these institutional features with the performance and optimal ownership structure of international joint ventures. <P>
    Keywords: international joint venture, ownership structure, institutions, contract enforcement, judicial favoritism,
    JEL: F23 L14 L24
    Date: 2013–02–01
  4. By: Engert, Andreas; Goldlücke, Susanne
    Abstract: Should managers be liable for ill-conceived business decisions? One answer is given by U.S. courts, which almost never hold managers liable for their mistakes. In this paper, we address the question in a theoretical model of delegated decision making. We find that courts should indeed be lenient as long as contracts are restricted to be linear. With more general compensation schemes, the answer depends on the precision of the court’s signal. If courts make many mistakes in evaluating decisions, they should not impose liability for poor business judgment.
    Keywords: business judgment rule , manager liability , delegated decision-making
    JEL: K13 K22 M53
    Date: 2013
  5. By: Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari and EIEF)
    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.
    Date: 2013
  6. By: Jackie Krafft (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS)); Yiping Qu (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS)); Francesco Quatraro (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS)); Jacques-Laurent Ravix (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS))
    Abstract: This paper aims to revisit the link between corporate governance, value, and firm performance by focusing on convergence, understood as the way that non-US firms are adopting US best practice in terms of corporate governance, and the implications of this adoption. We examine theoretical questions related to conventional models (agency theory, transaction cost economics, new property rights theory),which tend to suggest rational adoption of best practice, and contributions that alternatively consider country- and firm-level differences as possible barriers to convergence. We contribute to the empirical literature by using a large international database to show how non-US firms' adoption of US best practice is having an impact on performance.
    Keywords: Corporate governance; governance metrics, ratings, rankings and scoring; firm value; firm performance
    Date: 2013
  7. By: Andrea Lassmann (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses how exchange rate shocks are transmitted at the firm level and establishes a nexus to firm-level export activity. Using precise survey data from a sample of Swiss firms, I find that an appreciation increases the probability of a decrease in firm-level costs, prices and profits. Exchange rate movements are passed through to import prices, absorbed in firm selling prices and lead to adjustments in firm profits. The pattern is non-linear across firms with a varying degree of international exposure. The likelihood of adjustments is increasing in firm-level export share in total turnover. I also show that exchange rate variability affects adjustment probabilities. The analysis suggests that Swiss firms take prices as given. Exchange rate shocks are absorbed through a reduction in both costs and prices, however, these adjustments are not proportional such that overall profits decline during appreciation periods.
    Keywords: exchange rate, exchange rate pass-through, market structure, firm-level data, costs, local prices, profits, exports
    JEL: D22 D4 E31 F14 F31
    Date: 2013–02
  8. By: Dimitri O. Ledenyov; Viktor O. Ledenyov
    Abstract: The new business paradigms originate a strong necessity to re-think the theory of the firm with the aim to get a better understanding on the organizational and functional principles of the firm, operating in the investment economies in the prosperous societies. In this connection, we make the innovative research to advance our scientific knowledge on the theory of firm in the conditions of the nonlinear dynamic financial and economic systems. We propose that the nonlinearities have to be taken to the consideration and the nonlinear differential equation have to be used to model the firm in the modern theories of the firm in the nonlinear dynamic financial and economic systems. We apply the econophysical approach with the dynamic regimes modeling on the bifurcation diagram as in the dynamic chaos theory with the purpose to accurately characterize the nonlinearities in the economic theory of the firm. We introduce the Ledenyov firm stability theorem, based on the Lyapunov stability criteria, to precisely characterize the stability of the firm in the nonlinear dynamic financial and economic systems in the time of globalization.
    Date: 2013–02

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