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on Business Economics |
| By: | Vasco Carvalho; Basile Grassi |
| Abstract: | Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models – the firm size distribution – and show that the resulting closed form solutions for aggregate output and productivity dynamics display: (i) persistence, (ii) volatility and (iii) time-varying second moments. We explore the key role of moments of the firm size distribution – and, in particular, the role of large firm dynamics – in shaping aggregate fluctuations, theoretically, quantitatively and in the data. |
| Keywords: | Large Firm Dynamics; Firm Size Distribution; Random Growth; Aggregate Fluctuations. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1481&r=bec |
| By: | Stella, Andrea (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | What drives aggregate fluctuations? I test the granular hypothesis, according to which the largest firms in the economy drive aggregate dynamics, by estimating a dynamic factor model with firm-level data and controlling for the propagation of firm-level shocks using multi-firm growth model. Each time series, the growth rate of sales of a specific firm, is decomposed in an unobserved common macroeconomic component and in a residual that I interpret as an idiosyncratic firm-level component. The empirical results suggest that, once I control for aggregate shocks, idiosyncratic shocks do not explain much of U.S. GDP growth fluctuations. |
| Keywords: | Business Cycles; Firm Dynamics; Granular Residual; Dynamic Factor Models |
| JEL: | C30 D20 E32 |
| Date: | 2015–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1133&r=bec |
| By: | XU Peng |
| Abstract: | Using firm data from 2002-2012, we examine the relationship between capital structure and risk taking, and between risk taking and firm performance of small and medium-sized enterprises and large private firms. Domestically-owned entrepreneurial private firms are more risk averse than domestically-owned affiliated private firms. Foreign-owned affiliated private firms are much more risk taking than domestically-owned private firms. However, leverage is not strongly associated with less corporate risk taking, but it adversely influences corporate investment significantly. Risk taking has statistically and economically significant effects on corporate growth and corporate earnings. Furthermore, during the credit crisis, risk taking was positively related to corporate earnings, and thus higher risk-taking firms had smaller cash flow shortfalls. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15061&r=bec |
| By: | Thorsten Beck; Hans Degryse; Ralph De Haas; Neeltje van Horen |
| Abstract: | Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect credit constraints of small and medium-sized enterprises across emerging Europe. We link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the credit cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in a downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe. Additional evidence suggests that the reduction in credit constraints due to relationship lending helps to mitigate the adverse impact of an economic downturn on local firm growth and does not constitute evergreening of underperforming loans. |
| Keywords: | relationship banking; credit constraints; credit cycle |
| JEL: | F36 G21 O12 O16 |
| Date: | 2015–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:62005&r=bec |
| By: | Brahmana, Rayenda Khresna; Setiawan, Doddy; Hooy, Chee Wooi |
| Abstract: | There is a hot debate on whether internationally diversified and or industrially diversified strategy gains premium or discount on firm value. Most of the empirical studies on this topic were conducted in developed markets. However, Indonesia, as an emerging market, offers its unique characteristic in terms of ownership structure. For instance, Indonesia is dominated by family firms, but its SOEs perform better compared to family firms. This research aims to investigate the role of ownership concentration on the value of international and industrial diversification in Indonesia. We investigate how that relationship works in respect of different firm’s identity, such as different ownership level, or different owners (family, government, and foreign). We investigate the value of diversification and ownership structure of Indonesian listed firms over a panel of 2006-2010. We use robust panel regression where we report the probability values based on white robust standard errors that control for heteroscedasticity errors, as well as firm clustering, year clustering, period effect, and industry effect, which induce a within firm serial correlation error structure. To support the results, we also provide graphical evidence of the link between ownership structure, diversification strategy, and firm value. We find that ownership concentration has a prevalent and significant effect on the value of diversification. Further, we also find value discount in the industrial diversification of family firms, and value discount in the international diversification of foreign firms. Overall, our results are consistent with the conjecture that the value of diversification is adversely affected by the agency problem, suggesting that ownership concentration and firm identity play an important role in respect of the value of diversification. |
| Keywords: | diversification, ownership, firm value, family firms |
| JEL: | G15 G3 G32 |
| Date: | 2014–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64607&r=bec |
| By: | Ung, Lik-Jing; Brahmana, Rayenda; Puah, Chin-Hong |
| Abstract: | During the past three decades, many firms in developing market have embarked retrenchment strategy in order to defend firm going concern from economy turbulence. Yet, this strategy is rarely investigated compared to another strategy like diversification. This is not to mention limited research investigating whether companies might manipulate their earnings through the retrenchment costs across ownership expropriation. As Malaysia offers unique background earnings management, corporate strategy and ownership structure, this study aims to answer intriguing yet interesting question: Do Malaysia’s listed companies consider retrenchment costs when they manipulate earning across its ownership expropriation? Using 237 Malaysian listed companies over the period 2008-2013, this study found that retrenchment costs are used to manipulate earnings in companies. In addition, we find that ownership concentration do not significantly affects the earnings management of the firms. |
| Keywords: | Retrenchment; Ownership Expropriation; Earnings Management; Corporate Governance |
| JEL: | G30 G32 G34 |
| Date: | 2014–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63426&r=bec |
| By: | Barbara Fidanza (University of Macerata); Ottorino Morresi (Roma Tre University) |
| Abstract: | The Fama-French three-factor model (Fama and French, 1993) has been subject to extensive testing on samples of US and European non-financial firms over several time windows. The most accepted evidence is that size premium and value premium as well as market risk premium help explain time-series changes in stock returns. However, scholars have always paid little attention to the financial industry because of the intrinsic differences between financial and non-financial firms. The few studies that have tested the model on financial firms have found mixed evidence regarding the role of size and the book-to-market ratio in explaining stock returns. We find, on a sample of European banks, that size and book-to-market (B/M) ratio seem to be sources of undiversifiable risks and should therefore be included as risk premiums for estimating the expected returns of financial firms. Small and high-B/M banks seem to be more risky. Smaller banks are not systemically important financial institutions and therefore do not benefit from government protection. High-B/M banks are likely to be unprofitable, without growth opportunities, and close to financial distress. |
| Keywords: | Book-to-market ratio,Financial firm,Firm size,Asset pricing |
| JEL: | G12 G21 G3 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcr:wpaper:wpaper00047&r=bec |
| By: | Yuriy Gorodnichenko; Bohdan Kukharskyy; Gerard Roland |
| Abstract: | This paper develops a model of global sourcing with culturally dissimilar countries. Production of final goods requires the coordination of decisions between the headquarter of a multinational firm and managers of their component suppliers. Managers of both units are assumed to have strong beliefs about the right course of action and are reluctant to adjust their decisions. We characterize the optimal allocation of decision rights across firms when contracts are incomplete. Our theoretical model delivers two key predictions: the incentive of a firm to integrate (rather than outsource) its input supply is decreasing in the cultural distance between the home and the host country and decreasing in trade costs between the two countries. Combining data from the U.S. Census Bureau's Related Party Trade with various measures for cultural distance and trade cost, we find empirical evidence strongly supportive of these two predictions. |
| JEL: | F1 F14 F23 P14 P26 P48 Z1 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21198&r=bec |
| By: | Chauvet, Lisa; Jacolin, Luc |
| Abstract: | This study focuses on the impact financial development on the performance of firms in countries with low financial development. Previous studies focusing on financial depth alone find that financial development does not affect, or has a negative effect on, economic growth in developing countries with undersized financial systems. Using firm-level data in panel for a sample of 26 countries, we find that this hypothesis is invalidated if one takes into account not only financial depth but also financial inclusion, i.e. the distribution of access to financial services. Contrary to developed countries where financial inclusion is nearly universal, differences in access to credit among firms help explaining differences in firms perfor- mance. We measure financial inclusion as the share of firms who have access to bank overdraft facilities, or, alternatively, to any external source of financing, at the sectoral level. We find that whereas financial devel- opment does not affect firm performance on average, financial inclusion has a positive effect on firms growth. Where financial inclusion is low, financial development may create crowding out effects in favor of a minority of firms or government that phase out or reverse its expected positive effects of financial development on growth. Additional testing show that these effects affect all firms, irrespective of size, or whether they have access to bank credit or not. We interpret these results as showing that financial deepening increases firms growth only if it widely distributed among firms, i. e. financial inclusion is high. |
| Keywords: | Financial development; Financial inclusion; Firms peformance; |
| JEL: | G10 O16 O50 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/15070&r=bec |
| By: | Gianmarco I.P. Ottaviano; Giovanni Peri; Greg C. Wright |
| Abstract: | This paper explores the impact of immigrants on the imports, exports and productivity of service-producing firms in the U.K. Immigrants may substitute for imported intermediate inputs (offshore production) and they may impact the productivity of the firm as well as its export behavior. The first effect can be understood as the re-assignment of offshore productive tasks to immigrant workers. The second can be seen as a productivity or cost cutting effect due to immigration, and the third as the effect of immigrants on specific bilateral trade costs. We test the predictions of our model using differences in immigrant inflows across U.K. labor markets, instrumented with an enclave-based instrument that distinguishes between aggregate and bilateral immigration, as well as immigrant diversity. We find that immigrants increase overall productivity in service-producing firms, revealing a cost cutting impact on these firms. Immigrants also reduce the extent of country-specific offshoring, consistent with a reallocation of tasks and, finally, they increase country-specific exports, implying an important role in reducing communication and trade costs for services. |
| JEL: | F16 F22 F23 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21200&r=bec |
| By: | Håkanson, Christina (Sveriges riksbank); Lindqvist, Erik (Stockholm School of Economics); Vlachos, Jonas (Department of Economics, Stockholm University) |
| Abstract: | We document a significant increase in the sorting of workers by cognitive and non-cognitive skills across Swedish firms between 1986 and 2008. The weight of the evidence suggests that the increase in sorting is due to stronger complementarities between worker skills and technology. In particular, a large fraction of the increase can be explained by the expansion of the ICT sector and a reallocation of engineers across firms. We also find evidence of increasing assortative matching, in the sense that workers who are particularly skilled in their respective educational groups are more likely to work in the same firms. Changes in sorting pattens and skill gradients can account for a about half of their increase in between-firm dispersion. |
| Keywords: | Skill sorting; skilled-biased technological change; outsorcing; globalization; cognitive skills; non-cognitive skills; personality; employer-employee matched data |
| JEL: | J24 J62 L21 O33 |
| Date: | 2015–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ifauwp:2015_009&r=bec |
| By: | Ung, Lik-Jing; Brahmana, Rayenda; Puah, Chin Hong |
| Abstract: | Real estate values in Malaysia have climbed steadily over the years due to a combination of reasons giving companies a higher brokerage fee. In corporate governance literature, ownership expropriation is crucial in the relationship between income (brokerage fee) and earnings management. However, research investigating whether real estate companies might manipulate their earnings through the brokerage fee across ownership expropriation is limited. Therefore, this study uses real estate firms listed on the Kuala Lumpur Stock Exchange (KLSE) to investigate how the brokerage fee in the real estate industry might affect the earnings management of firms across its ownership expropriation. Using annual report data, we investigate the associations over a panel for the period 2008-2012. Robust panel regression is used to divulge the probability values with reference to robust White standard errors that regulate heteroscedasticity errors. Overall, our results show that high brokerage fees would drive more events of earnings management and that, generally, the ownership concentration among Malaysian real estate firms significantly affects the earnings management of the firms. |
| Keywords: | Brokerage Fee; Ownership Expropriation; Earnings Management; Corporate Governance |
| JEL: | G30 G32 G34 |
| Date: | 2014–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63427&r=bec |
| By: | Håkanson, Christina (Sveriges Riksbank); Lindqvist, Erik (Stockholm School of Economics, and IFN.); Vlachos, Jonas (Stockholm University and IFN.) |
| Abstract: | We document a significant increase in the sorting of workers by cognitive and non- cognitive skills across Swedish firms between 1986 and 2008. The weight of the evidence suggests that the increase in sorting is due to stronger complementarities between worker skills and technology. In particular, a large fraction of the increase can be explained by the expansion of the ICT sector and a reallocation of engineers across firms. We also find evidence of increasing assortative matching, in the sense that workers who are particularly skilled in their respective educational groups are more likely to work in the same firms. Changes in sorting pattens and skill gradients can account for a about half of the increase in between-firm wage dispersion. |
| Keywords: | Skill sorting; skilled-biased technological change; outsourcing; globalization; cognitive skills; non-cognitive skills; personality; employer-employee matched data. |
| JEL: | J24 J62 L21 O33 |
| Date: | 2015–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2015_0004&r=bec |
| By: | Morais, Bernardo (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows the model to better explain the relation between financial and economic development. |
| Keywords: | productivity; misallocation; financial frictions; learning |
| JEL: | O11 O40 |
| Date: | 2015–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1134&r=bec |
| By: | Jae Song; David J. Price; Fatih Guvenen; Nicholas Bloom |
| Abstract: | Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population. |
| JEL: | E24 E25 J31 L23 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21199&r=bec |