nep-bec New Economics Papers
on Business Economics
Issue of 2015‒04‒02
thirteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives By Stefania Albanesi; Claudia Olivetti; Maria Jose Prados
  2. Inside the Virtuous Cycle between Productivity, Profitability, Investment and Corporate Growth: An Anatomy of China Industrialization By Xiaodan Yu; Giovanni Dosi; Marco Grazzi; Jiasu Lei
  3. Firm heterogeneity in productivity across Europe. What explains what? By Aiello, Francesco; Ricotta, Fernanda
  4. Self-Fulfilling Credit Cycles By Costas Azariadis; Leo Kaas; Yi Wen
  5. Bribery Environment and Firm Performance: Evidence from Central and Eastern European Countries By Hanousek, Jan; Kochanova, Anna
  6. Corporate Governance and Cartel formation By Suha Alawi
  7. Demand learning and firm dynamics: evidence from exporters By Berman, Nicolas; Rebeyrol, Vincent; Vicard, Vincent
  8. Entry barriers to international trade: product versus firm fixed costs. By W. Steingress
  9. Firm Efficiency and Input Market Integration: Trade versus FDI By Michele Imbruno
  10. Firm Heterogeneity and Location Choice of European Multinationals By Marti, Josep; Alguacil, Maite; Orts, Vicente
  11. Relative profit maximization and the choice of strategic variables in duopoly By Satoh, Atsuhiro; Tanaka, Yasuhito
  12. Organisational Routines may not be Effective for the Emerging Market Firms By Meltem Yavuz; Rıfat Kamaşak
  13. Productivity and Export Market Participation: Evidence from Colombia By Camila Casas; Federico J. Díez; Alejandra González

  1. By: Stefania Albanesi (Federal Reserve Bank of New York); Claudia Olivetti (Boston University and NBER); Maria Jose Prados (University of Southern California)
    Abstract: We document three new facts about gender differences in executive compensation. First, female executives receive lower share of incentive pay in total compensation relative to males. This difference accounts for 93% of the gender gap in total pay. Second, the compensation of female executives displays lower pay-performance sensitivity. A $1 million dollar increase in firm value generates a $17,150 increase in firm-specific wealth for male executives and a $1,670 increase for females. Third, female executives' compensation is more sensitive to bad firm performance and less sensitive to good firm performance. We find no link between firm performance and the gender of top executives. We discuss evidence on differences in preferences and the cost of managerial effort by gender and examine the resulting predictions for the structure of compensation. We consider two paradigms for the pay-setting process, the efficient contracting model and the "managerial power" or skimming view. The efficient contracting model can explain the first two facts. Only the skimming view is consistent with the third fact. This suggests that the gender differentials in executive compensation may be inefficient.
    Keywords: sensitivity, performance incentives, managerial power, skimming, efficient contracts
    JEL: J31 M12 J41
    Date: 2015–03
  2. By: Xiaodan Yu; Giovanni Dosi; Marco Grazzi; Jiasu Lei
    Abstract: This article explores the dynamics of market selection by investigating of the relationships linking productivity, profitability, investment and growth, based on China's manufacturing firm-level dataset over the period 1998-2007. First, we find that productivity variations, rather than relative levels, are the dominant productivity-related determinant of firm growth, and account for 15%-20% of the variance in firms' growth rates. The direct relation between profitability and firm growth is much weaker as it contributes for less than 5% to explain the different patterns of firm growth. On the other hand, the profitability-growth relationship is mediated via investment. Firm's contemporaneous and lagged profitabilities display positive and significant effect on the probability to report an investment spike, and, in turn, investment activity is related to higher firm growth.
    Keywords: Productivity, Market selection, Profitability, Investment spike, Firm growth, Chinese economy
    Date: 2015–03–27
  3. By: Aiello, Francesco; Ricotta, Fernanda
    Abstract: This paper analyses the TFP heterogeneity of a sample of manufacturing firms operating in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and UK). TFP data refer to 2008. The empirical setting is based on the multilevel modelling which provides two main results. Firstly, we show that TFP heterogeneity is largely due to firm-specific features (85% of TFP variability in the empty-model). Interestingly, we find that some key-drivers of TFP (size, family-management, group membership, innovations and human capital) influence heterogeneity in productivity with the expect sign, but do not, on the whole, absorb much of firm-TFP variance, implying that differences in productivity are due to sizable yet unobservable firm characteristics. Secondly, as far the role of localization is concerned, we demonstrate that country-effect is more influential than region-effect in explaining individual productivity. Net of the country-effect, the localisation in different European regions explains about 5% of TFP firm heterogeneity. When considering the case of three individual countries (France, Italy and Spain), location in different regions explains 5.3% of TFP heterogeneity in Italy, while this proportion is lower (3.6%) in France and higher (9.9%) in Spain.
    Keywords: TFP heterogeneity, firm-behavior, localization, European countries, multilevel model
    JEL: C30 D22 D24 L60 R11 R15
    Date: 2014–05–26
  4. By: Costas Azariadis (Washington University in St. Louis and Federal Reserve Bank of St. Louis, USA); Leo Kaas (Department of Economics, University of Konstanz, Germany); Yi Wen (Federal Reserve Bank of St. Louis and Tsinghua University)
    Abstract: In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.
    Keywords: Unsecured firm credit; Credit cycles; Sunspots ∗
    JEL: D92 E32
    Date: 2015–03–23
  5. By: Hanousek, Jan; Kochanova, Anna
    Abstract: We examine the relation between bureaucratic corruption and firm performance in CEE countries. While previous research uses data from BEEPS, which suffers from excessive non-reporting of corporate performance, we combine reliable firm financials from the Amadeus database with information on bribery practices from BEEPS. We show that differing consequences of corruption found in previous studies could be explained by the corruption environment in which a firm operates. Basically, higher mean bribery is associated with lower performance, while higher dispersion of individual firm bribes appears to facilitate firm performance. A detailed analysis is conducted by firm sector and size, and countries’ institutional environments.
    Keywords: bureaucratic corruption; CEE countries; firm bribing behavior; firm performance
    JEL: D22 D73 O12 P37
    Date: 2015–03
  6. By: Suha Alawi (King Abdulaziz university)
    Abstract: This paper examines the relationship between corporate governance and cartel formation, A firm’s participation in cartel depends upon the potential problems that may arise due to price fixing and the incentives provided to the management. The top levels of management such as the board of directors and the CEO are responsible for deciding if the firm will participate in the cartel and manage the corporate governance activities of collusive price fixing agreements. The study is focused on UK cartel firms which has the highest representation in the sample. A total number of 150 cartel firms in 52 cases from all around the world between the years 1990 to 2008 are involved in this study, of which 114 are UK firms. Therefore, this study is dominated by UK firms. The study concludes that UK-based cartel firms characterised by having larger board size compared to non-cartel firms; lower percentage of independent directors (non-executive); higher average of board remuneration; less likely that cartel is formed by family-owned and controlled firm (large shareholders); having older CEOs represented on the board; having CEO who served a less number of years as a director; less likely to have a female CEO represented; more likely to have CEOs who’s combined CEO-chairman position; and a higher average of CEOs bonuses and compensation packages.
    Keywords: Cartels; Antitrust agreements; Corporate governance; Competition; Agency theory.
    JEL: G34 L40
    Date: 2014–07
  7. By: Berman, Nicolas; Rebeyrol, Vincent; Vicard, Vincent
    Abstract: This paper provides evidence that learning about demand is an important driver of firms' dynamics. We present a simple model with Bayesian learning in which firms are uncertain about their idiosyncratic demand parameter in each of the markets they serve, and update their beliefs as noisy information arrives in each period. The model predicts that firms update more their beliefs following a new demand shock, the younger they are. To test this learning mechanism, we make use of a specific feature of exporter-level data which contains both the values and the quantities sold by a given firm for the same product in different destination markets. This allows us to derive a methodology that identifies separately the demand shocks faced by the firms and their beliefs about future demand. We find strong support for our main prediction: The updating process appears especially strong in the first years after entry. However, the bulk of accumulated knowledge is lost during short periods of exit. Second, we consider implications of this prediction for firm growth rates and survival. Consistent with the learning model, we find that: (i) the absolute value of the mean growth rate for firms' beliefs decreases with age, as does the variance within cohorts; (ii) exit probability decreases with firms' beliefs and the demand shock the firm faces. Further, demand shocks trigger more exit in younger cohorts.
    Keywords: demand; firm growth; learning; uncertainty
    JEL: F12 F14 L11 L25
    Date: 2015–03
  8. By: W. Steingress
    Abstract: Market size matters for exporters if firms must recover fixed costs. This paper uses the relationship between the extensive margins of exports and destination market size to evaluate whether fixed costs operate at the firm or at the product level. If fixed costs are at the firm level, multi-product firms have a cost advantage and dominate international trade. If fixed costs are at the product level, many firms export different varieties of the same product. Using detailed product level data from 40 exporting countries to 180 destination markets, the results indicate that entry barriers operate at the product level. Looking at firm entry within products across time and destinations, I find evidence of spillover effects that reduce fixed costs for product market rivals, increase firm en- try and augment export revenues. The efficiency gains in production through lower product fixed costs outweigh the competition effects from more firm entry. Trade policies encouraging product entry, such as advertising products in destination markets through export promotion agencies, would result in more firm entry and generate higher export revenues.
    Keywords: Fixed costs, spillovers, market size.
    JEL: F12 F14 F23
    Date: 2015
  9. By: Michele Imbruno
    Abstract: This paper highlights the crucial role played by international access to intermediate inputs to explain firm-level performance, via two channels simultaneously: trade and FDI. We develop a simple theoretical model showing that trade integration of input market entails an efficiency improvement within firms able to import (gains from input switching) and an efficiency decline within other firms (losses from domestic input availability). At the same time, FDI integration of input market implies non-importers’ efficiency enhancement (gains from input switching) and some ambiguous effects on importers’ efficiency (due to additional losses from foreign input availability). Using firm-level data from the Chinese manufacturing sector over the period 2002-2006, we find some results coherent with our theoretical predictions.
    Keywords: Heterogeneous firms, Trade liberalization, FDI, Intermediate inputs, Productivity JEL Classification: F12, F14, F23
    Date: 2015
  10. By: Marti, Josep; Alguacil, Maite; Orts, Vicente
    Abstract: In this paper we investigate how the different characteristics of European multinational firms affect their decision to locate in different foreign markets. Considering the existence of n geographically separated markets with different attributes, in terms of entry or fixed costs, variable production costs and the market potential, our theoretical model shows that both firm and country characteristics determine the location of multinational firms. The model reveals that given the characteristics of the countries, the decision to enter a specific country in order to serve all markets globally will depend on all the sources of a firm’s heterogeneity. In the empirical analysis, we drawn on a dataset comprised of harmonized and detailed firm-level data across European countries for 2008 (EFIGE dataset). The results obtained confirm that firms’ international location decision reflects the underlying dissimilarities of European multinational firms, including the specific industry in which they operate. More specifically, our estimations show that among European firms investing in non-European countries, only the most productive firms invest in Latin America and those that decide to enter North America are more productive than firms that locate in China and India. However, we find that this ranking may vary across industries, depending not only on TFP, but also on the years of establishment and the firms’ human capital and R&D intensity.
    Keywords: multinational firms, firm heterogeneity, location choices, European FDI
    JEL: D24 F14 F21 F23
    Date: 2015–03–05
  11. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: We study implications of the choice of strategic variables, price or quantity, by firms in a duopoly with differentiated goods in which each firm maximizes its relative profit. We consider general demand and cost functions, and show that the choice of strategic variables is irrelevant in the sense that the conditions of relative profit maximization for the firms are the same in all situations, and so any combination of strategy choice by the firms constitutes a sub-game perfect equilibrium in a two stage game such that in the first stage the firms choose their strategic variables and in the second stage they determine the values of their strategic variables. We define the relative profit of a firm as the ratio of its profit over the total profit. But, even if we define the relative profit of a firm as the difference between the profits of firms, we can show the same result.
    Keywords: relative profit maximization, choice of strategic variables, duopoly
    JEL: D43 L13
    Date: 2015–03–17
  12. By: Meltem Yavuz (Istanbul University School of Transportation and Logistics); Rıfat Kamaşak (Yeditepe University)
    Abstract: Understanding the internal dynamics of an organisation’s routines makes it possible to learn more about the organisation, observe the operation of power dynamics, and foresee the potential conflicts that are likely to emerge (Pentland & Feldman, 2005). Eisenhardt and Martin (2000, p. 1106) identify routines as “complex and analytic processes that extensively rely on existing knowledge, linear execution, and repetition to produce predictable outcomes at different organisational levelsâ€. Routines facilitate the learning in the organisations about “what the firm does and how it does†through being transmitted to firm’s culture and employees (Zollo & Winter, 2002). Some theorists (e.g., Zollo & Winter, 2002; Ray et al., 2004; Salvato & Rerup, 2011) emphasise the other important contribution of routines which is the execution of codified procedures (such as the standard procedures for the fulfilment of customer orders, creation and execution of marketing campaigns, and launch or development of new products) that serves as a driving force of the firm’s whole organisational productivity. Although organisational routine literature based on the research that was mostly conducted in developed countries suggests a strong association between routinisation and firm performance and sustained competitive advantage, this may not always be true especially for the emerging market firms. Hence, strategic flexibility which “allows firms to respond quickly to dynamic and unstable environmental changes by committing resources to new courses of action, and recognise and act promptly when it is time to halt or reverse existing resource commitments†(Liu et al., 2013, p. 82) is particularly important for the firms operating in emerging markets. Therefore, repetitive and stable routines may not address the context and environment-specific problems of the firms and high strategic flexibility requirement of emerging market firms may discharge routinisation for their strategic operations.As a support to this argument, a recent research (Kamasak, 2013) that was conducted on a multi-industry sample of 176 Turkish firms revealed some noteworthy results. In the study, whilst no relationship between organisational routines and organisational performance was found business processes were significantly associated with performance. In fact, this finding is consistent with the high strategic flexibility requirements of the Turkish firms. Therefore, the suggestion about the ineffectiveness of organisational routines for emerging market firms may be explained within the context of high strategic flexibility requirements of them as a consequence of the country-specific hyperchanging social, economic, and political environments that were highly observed in most emerging markets.
    Keywords: organisational routines, strategic flexibility, firm performance, emerging market firms
    JEL: M10
    Date: 2014–06
  13. By: Camila Casas (Banco de la República de Colombia); Federico J. Díez (Federal Reserve Bank of Boston); Alejandra González (Banco de la República de Colombia)
    Abstract: We study the relationship between total factor productivity (TFP) and exporting decisions for Colombian manufacturing firms during 2005-2013. We find that productivity increases a firm's probability of being an exporter, and that exporters have higher productivity, with a premium as high as 85 percent. These findings are robust to several TFP measures. Moreover, we find that not all exporters are equal: firms that export continuously, that export a greater number of products, and/or that export to a larger number of destinations tend to be more productive. We do not find, however, any relationship between productivity and the type of destination or exported product. Finally, we find evidence that future exporters have an ex ante productivity advantage, and (weaker) evidence of TFP increasing after a firm becomes an exporter. Classification JEL: F14, L22, L60.
    Keywords: Productivity, exporters, productivity premium, openness.
    Date: 2015–03

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