nep-bec New Economics Papers
on Business Economics
Issue of 2013‒06‒04
twelve papers chosen by
Vasileios Bougioukos
Bangor University

  1. CEO Pay and Firm Size: an Update after the Crisis By Xavier Gabaix; Augustin Landier; Julien Sauvagnat
  2. Capital Structure, Product Market Competition and Firm Performance: Evidence from South Africa By Samuel Fosu
  3. Controlling Shareholders and Firm Value By Borja Larraín; Matías Tapia
  4. “Firm exports, innovation, … and regions” By Enrique López-Bazo; Elisabet Motellón
  5. Firms as Persons By Richard Adelstein
  6. Corporate Profit, Entrepreneurship Theory and Business Ethics By Vranceanu , Radu
  7. Has Europe been catching up? An industry level analysis of venture capital success over 1985 - 2009 By Kräussl, Roman; Krause, Stefan
  8. Monopolistic Competition: A Dual Approach with an Application to Trade By Paolo Bertoletti; Federico Etro
  9. Academic inventions outside the university: A result of industry sponsorship or entrepreneurial activities? By Lawson, Cornelia
  10. FDI and firm level export competitiveness in the Indian machinery industry By Keshari, Pradeep Kumar
  11. Measuring U.S. Business Cycles: A Comparison of Two Methods and Two Indicators of Economic Activities By Francis W. Ahking
  12. A firm level study of the determinants of export performance in machinery and transport equipment industry of India By Keshari, Pradeep Kumar; Saggar, Mridul

  1. By: Xavier Gabaix; Augustin Landier; Julien Sauvagnat
    Abstract: In the "size of stakes" view quantitatively formalized in Gabaix and Landier (2008), CEO compensation is determined in a competitive talent market, and reflects the size of firms affected by talent. This paper offers an empirical update on this view. The years 2004-2011, which include the recent crisis, were not part of the initial study and offer a laboratory to examine the theory as they include new positive and negative shocks to the size of large firms. Executive compensation at the top (ex ante) did closely track the evolution of average firm value during those years. During the crisis (2007 - 2009), average total firm value decreased by 17%, and CEO pay decreased by 28%. During 2009-2011, we observe a rebound of firm value by 19% and of CEO pay increased by 22%. These fairly proportional changes provide a validity check in favor of the "size of stakes" view.
    JEL: G3 J2
    Date: 2013–05
  2. By: Samuel Fosu
    Abstract: This paper investigates the relationship between capital structure and firm performance, paying particular attention to the degree of industry competition. The paper applies a novel measure of competition, the Boone indicator, to the leverage performance relationship. Using panel data consisting of 257 South African firms over the period 1998 to 2009, this paper examines the effect of capital structure on firm performance and investigates the extent to which the relationship depends on the level of product market competition. The results suggest that financial leverage has a positive and significant effect on firm performance. It is also found that product market competition enhances the performance effect of leverage. The results are robust to alternative measures of competition and leverage.
    Keywords: Capital structure; Product market competition; Firm performance
    JEL: G32 L11 L25
    Date: 2013–05
  3. By: Borja Larraín; Matías Tapia
    Abstract: We study the relationship between firm value and ownership concentration in a market where firms are controlled by large shareholders. We set up an equilibrium model with private benefits of control and bargaining between large shareholders. With simulated data from the model we are able to match approximately the value-concentration relationship observed among Chilean firms in 1990-2009. The model also delivers novel predictions regarding the relationship between investor protection and: (1) the identity of the controlling shareholder (e.g., founder or outside investor), (2) the frequency of productivity-decreasing transfers of control, and (3) the separation between direct ownership and cash-flow ownership.
    Date: 2012
  4. By: Enrique López-Bazo (Faculty of Economics, University of Barcelona); Elisabet Motellón (Faculty of Economics, University of Barcelona)
    Abstract: This paper uses firm-level data for each of the Spanish NUTS2 regions to estimate the effect of product and process innovations on firm’s export performance. It shows that the firm’s propensity to innovate and its export activity vary substantially across regions. Remarkably, results prove that the effect of innovation on exports is far from regionally uniform. The gap in the propensity to export between innovative and non-innovative firms, conditional to other sources of firm heterogeneity, is shown to be particularly wide in regions with high extensive margin of exports. However, differences in the propensity to innovate do not originate regional disparities in the share of sales abroad by exporting firms. Consequently, stimulate firm’s innovation in the less innovative regions can be an effective tool to increase the share of exporting firms.
    Keywords: export propensity, export intensity, product and process innovations, Spanish regions, firm heterogeneity. JEL classification: F14, R10.
    Date: 2013–05
  5. By: Richard Adelstein (Department of Economics, Wesleyan University)
    Abstract: This essay asks whether business firms should be treated as moral or legal persons, capable of bearing rights and duties as distinct entities. Building on earlier work describing firms as relational contracts in performance (Adelstein 2010), it considers the nature of legal and moral personality, whether and when rights and duties can be assigned independently without a balancing symmetry, and what qualifies a subject for personhood, and thus for rights and duties. It argues for an asymmetric view of the rights and duties of firms. On the one hand, because the purposeful acts of firms typically cannot be reduced to the purposeful acts of any individual participant, there is a residual responsibility for the acts of the firm after the responsibility of each participant has been properly reckoned that can only be attributed to the firm. But on the other, while it may be convenient for participants and others that firms hold rights to ordinary property, because firms are never more than instruments created by living people for their own purposes, they have no right to life or liberty. In the absence of these rights, there is no basis for granting firms political rights to such things as free speech, free association or privacy. A concluding section considers the granting of constitutional rights to business corporations in the United States in light of these arguments.
    Keywords: theories of the firm, contracts in performance, Kantian personhood, collective rights and duties
    JEL: A12 B40 D23 K20
    Date: 2013–05
  6. By: Vranceanu , Radu (ESSECBusiness School)
    Abstract: Economic profit is produced by entrepreneurs, those special individuals able to detect and seize as yet unexploited market opportunities. In general capitalist firms manage to deliver positive profits even in the most competitive environments. They can do so thanks to internal entrepreneurs, a subset of their employees able to drive change and develop innovation in the workplace. This paper argues that the goal of profit maximization is fully consistent with the corporation doing good for society. However, there is little justification for corporations to transfer the whole economic profit to shareholders. Economic agents entitled to receive the economic profit are precisely those who create this profit, namely the internal entrepreneurs.
    Keywords: Corporate Goal; Entrepreneurship Theory of the Firm; Internal Entrepreneurs; Profit; Social Role of Business; Virtue Ethics
    JEL: A11 A13 L26 M14 P20
    Date: 2013–05
  7. By: Kräussl, Roman; Krause, Stefan
    Abstract: After nearly two decades of US leadership during the 1980s and 1990s, are Europe's venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit - if any - each particular firm's investors choose for the venture. --
    Keywords: Venture Capital,Private Equity,Entrepreneurial Activity,Performance Gap
    JEL: G24 G3
    Date: 2012
  8. By: Paolo Bertoletti (Department of Economics and Management, University Of Pavia); Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. Finally, we provide an application to trade.
    Keywords: Monopolistic competition, Indirect additivity, Dixit-Stiglitz model, Endogenous entry
    JEL: D11 D43 L11 F12
    Date: 2012
  9. By: Lawson, Cornelia (University of Turin)
    Abstract: This paper investigates the link between firms and academic inventors on firm-assigned academic patents for a sample of UK academics. The first descriptive results show that 43% of firm assigned patents are in fact owned by a university spin-off. The empirical analysis finds that a strong appropriation regime at a university encourages patents owned by the university or its spin-offs. Public research funds and technology transfer grants are also associated with university or spin-off owned patent s. Government incentives and funding regulations thus are a successful strategy to encourage and maintain university ownership of patents. Industry sponsorship on the other hand encourages firm ownership of patents, whether these are private firms or university spin-offs. A more detailed analysis of funding links shows that 41% of non-spin-off firms also have funding agreements with the university; however, the remaining 59% of firms have no apparent link to researchers that could explain ownership of university inventions.
    Date: 2012–09
  10. By: Keshari, Pradeep Kumar
    Abstract: The paper examines the effect of FDI on firm-level export competitiveness by comparing the export behaviour of foreign controlled and domestic firms in Indian machinery industry. It defines the firm-level export competitiveness involving two aspects of export behaviour: i) the export itself or a firm’s decision to export and ii) the exporting firm’s decision on the portion of output to export (export intensity). Findings of the study reveals that the foreign controlled firms have greater likelihood of exporting, even after controlling for the large number of additional factors influencing export activity. However,the export intensity of exporting firms is not affected by FDI but affected favourably by a host of other firm-specific factors such as arms length import of disembodied technology, import of raw material and capital goods, use of labour intensive technology, larger size and years of experience.
    Keywords: FDI, Export Competitiveness, Indian Machinery Industry
    JEL: L25
    Date: 2012–12
  11. By: Francis W. Ahking (University of Connecticut)
    Abstract: In this paper, we examine two issues concerning business cycle research. First, a number of studies have demonstrated that more complicated non-linear models do not replicate business cycle features better than simpler linear models. In Harding and Pagan (2003), they showed that a random walk with drift model of real GDP for the U.S., U.K., and Australia can capture the main business cycle features of the respective countries quite well. Adding non-linear structure, such as Hamilton’s (1989) Markov-switching model produced cycles that are too extreme, especially with respect to the cumulative movements of the cycles, where cumulative movements are a measure of cumulated output losses from peak to trough of a business cycle. Furthermore, Harding and Pagan (2003a) argued that based on criteria, such as simplicity, transparency, robustness, and replicability, the non-parametric Bry and Boschan algorithm (1971) is in fact superior to the Markov-switching model in determining turning points in business cycles. Similarly, Hess and Iwata (1997) showed that a non-linear models such as the Markov-switching models are no better than a simple ARIMA(1,1,0) model in replicating business cycle features. <p> We start by comparing how well the Hamilton’s Markov-switching model and the Bry and Boschan algorithm can replicate the U.S. business cycle features. One interesting finding that has not been shown before is that we are unable to replicate Hamilton’s original result for the same sample period using real GDP rather than real GNP as Hamilton did. Furthermore, we also found that Hamilton’s Markov-switching model is not robust with respect to different sample periods. The Bry and Boschan algorithm, on the hand, replicated business cycle features consistently. <p> Second, Burns and Mitchell (1946) and NBER’s Business Cycle Dating Committee suggested that a variety of time series representing economic activities should be used for the purpose of dating business cycle. Nevertheless, real GDP is by far the most popular and frequently used single series to represent aggregate economic activities in business cycle research. We compared the ability of the U.S. real GDP and a coincident index published by the Federal Reserve Bank of Philadelphia in replicating features of the U.S. business cycle. We found that a constructed quarterly version of the coincident index is slightly preferred over the real GDP, suggesting that the coincident index may be a better indicator than the commonly used real GDP as an overall indicator of U.S. economic activities.
    JEL: E32 E37
    Date: 2013–05
  12. By: Keshari, Pradeep Kumar; Saggar, Mridul
    Abstract: The paper seeks to analyse the determinants of export performance for large firms operating in the machinery and transpoprt equipment Industry of India. The study follows the neo-factor proportion and neo-technology approaches relevant for firm level export. The study establishes the importance of skill factors and technological collaborations in explaining the export performance of firms operating in the Indian machinery and transport equipment Industry. Skilled workers, whether they are employed for product innovation/adaptation, production engineering, or export marketing have contributed immensely to improved export performance in this industry.
    Keywords: neo-factor proportions, neo-technology theory, firm level export, machinery and transport equipment, India
    JEL: F12 F14 O3
    Date: 2013–05–21

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