nep-bec New Economics Papers
on Business Economics
Issue of 2015‒09‒05
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Product Switching and the Business Cycle By Andrew B. BERNARD; OKUBO Toshihiro
  2. Family business: management effort and firm performance By Oriana Bandiera; Andrea Prat; Raffaella Sadun
  3. The Turnaround of Swedish Industry: Reforms, Firm Diversity and Job and Productivity Dynamics By Heyman, Fredrik; Norbäck, Pehr-Johan; Persson, Lars
  4. Are large firms born or made ? evidence from developing countries By Ayyagari,Meghana; Demirguc-Kunt,Asli; Maksimovic,Vojislav
  5. Health Insurance Benefit Mandates and the Firm-Size Distribution By Bailey, James; Webber, Douglas A.
  6. Technology Entry in the Presence of Patent Thickets By Bronwyn H. Hall; Christian Helmers; Georg von Graevenitz
  7. Are There Trade-offs between the Existing and New Foreign Activities? By ITO Yukiko
  8. Business Practices in Small Firms in Developing Countries By David McKenzie; Christopher Woodruff
  9. The Value of Corporate Citizenship: Protection By Dylan Minor
  10. Multiregional Firms and Region Switching in the US Manufacturing Sector By Antoine Gervais
  11. Was Sarbanes-Oxley Costly? Evidence from Optimal Contracting on CEO Compensation By Gayle, George-Levi; Li, Chen; Miller, Robert A.
  12. Tips and Tells from Managers: How Analysts and the Market Read between the Lines of Conference Calls By Druz, Marina; Wagner, Alexander F.; Zeckhauser, Richard
  13. Team incentives and performance: Evidence from a retail chain By Friebel, Guido; Heinz, Matthias; Krüger, Miriam; Zubanov, Nick
  14. Did the Reduction of ICT Investment Due to the 2008 Economic Crisis Affect the Innovation Performance of Firms? By Spyros Arvanitis; Euripidis Loukis
  15. Do U.S. Firms Hold More Cash? By Pinkowitz, Lee; Stulz, Rene M.; Williamson, Rohan

  1. By: Andrew B. BERNARD; OKUBO Toshihiro
    Abstract: This paper explores the role of product adding and dropping within manufacturing firms over the business cycle. While a substantial body of work has explored the importance of the extensive margins of firm entry and exit in employment and output flows, only recently has research begun to examine the adjustment across products within firms and its importance for firm and aggregate output and employment flows. Using a novel, annual firm-product data set covering all Japanese manufacturing firms with more than four employees from 1992 to 2006, we provide the first evidence on annual changes in product adding and dropping by continuing firms over the business cycle. We find very high rates of product adding and dropping by continuing firms between the last year of the recession and the first year of the subsequent expansion and offer an explanation and supporting evidence based on a "trapped factors" model of firm behavior.
    Date: 2015–08
  2. By: Oriana Bandiera; Andrea Prat; Raffaella Sadun
    Abstract: Might familyowned, familyrun firms be a serious obstacle to productivity growth in Europe? Oriana Bandiera, Andrea Prat and Raffaella Sadun have collected time use data on over 1,000 chief executive officers to explore differences in the hours worked by family and professional managers - and the impact on their firms' performance.
    Keywords: CEO, Time, Family firms, Competition, Productivity
    JEL: M12 L2 D24
    Date: 2015–07
  3. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper, we argue that fundamental reforms of the Swedish business sector can explain the remarkable productivity and employment growth that followed the deep economic crisis in Sweden in the early 1990s. In the 1970s and 1980s, Sweden had one of the most regulated business sectors in the developed world. In the 1990s, however, Sweden reformed its labour market, product market, and corporate tax system as well as removed barriers to foreign direct investment (FDI). Our main finding from our institutional and theoretical examination is that the removal of barriers to entry and growth for new and productive firms and the increased rewards for investments in human capital and effort in workplaces were crucial to the success of these reforms. We find support for our thesis using detailed matched plant-firm-worker data. In particular, we observe increased allocative efficiency, measured as increased market share for more productive firms. Moreover, we show that foreign firms substantially contributed to productivity and employment growth during this period, which suggests that the liberalization of FDI was an important factor in the success of the reforms. Finally, we discuss how other countries can benefit from the Swedish experience by examining factors that appear to be specific to Sweden and others that can be generalized to other countries.
    Keywords: Regulations; Allocative efficiency; Productivity; Job dynamics; Matched employer-employee data; Industrial structure and structural change
    JEL: D22 E23 J21 J23 K23 L11 L16 L51
    Date: 2015–09–01
  4. By: Ayyagari,Meghana; Demirguc-Kunt,Asli; Maksimovic,Vojislav
    Abstract: This paper uses survey data from 120 developing countries to compare the role of institutions with firm characteristics at the time of creation of the firm in explaining the size, growth, and productivity of firms over their lifecycle. The study finds that firm-level characteristics have comparable, and sometimes even larger, power than institutional factors in predicting size and growth, but not productivity. In particular, size at birth plays a key role in predicting variation in firm size and growth since birth over the firm lifecycle, whereas country factors dominate in predicting variation in labor productivity over the firm lifecycle. The study also finds that older firms are larger, partly because of the selection of more efficient firms. The findings point to the importance of initial founding conditions in explaining variations in size and growth over the firm lifecycle across countries.
    Keywords: Labor Markets,Science Education,Microfinance,Labor Policies,Scientific Research&Science Parks
    Date: 2015–08–27
  5. By: Bailey, James (Creighton University); Webber, Douglas A. (Temple University)
    Abstract: By 2010, the average US state had passed 37 health insurance benefit mandates (laws requiring health insurance plans to cover certain additional services). Previous work has shown that these mandates likely increase health insurance premiums, which in turn could make it more costly for firms to compensate employees. Using 1996–2010 data from the Quarterly Census of Employment and Wages and a novel instrumental variables strategy, we show that there is limited evidence that mandates reduce employment. However, we find that mandates lead to a distortion in firm size, benefiting larger firms that are able to self-insure and thus exempt themselves from these state-level health insurance regulations. This distortion in firm size away from small businesses may lead to substantial decreases in productivity and economic growth.
    Keywords: health insurance, benefit mandates, self-insurance, interest groups, employment, firm size
    JEL: L51 I13 I18 J32
    Date: 2015–08
  6. By: Bronwyn H. Hall; Christian Helmers; Georg von Graevenitz
    Abstract: We analyze the effect of patent thickets on entry into technology areas by firms in the UK. We present a model that describes incentives to enter technology areas characterized by varying technological opportunity, complexity of technology, and the potential for hold-up in patent thickets. We show empirically that our measure of patent thickets is associated with a reduction of first time patenting in a given technology area controlling for the level of technological complexity and opportunity. Technological areas characterized by more technological complexity and opportunity, in contrast, see more entry. Our evidence indicates that patent thickets raise entry costs, which leads to less entry into technologies regardless of a firm’s size.
    JEL: K11 L20 O31 O34
    Date: 2015–08
  7. By: ITO Yukiko
    Abstract: For each multinational firm, designing a new foreign activity is a sequential choice. In some cases, new foreign businesses complement existing entities. In other cases, new foreign businesses substitute for old entities. These intra-firm changes in allocations of corporate resources are not deeply considered in the literature. In our model, a multinational enterprise (MNE) determines a new location, if any, either as an addition to its existing ones, or as a replacement of an old one. The location is considered under hub-spoke spatial relations. Firms maximize the worldwide corporate profit, taking into account both trade costs and fixed costs. In the empirical analysis, we use a panel data on Japanese-owned foreign affiliates and their parents (Basic Survey of Overseas Business Activities from 1996 to 2012, by METI), supplemented by the Survey of Trends in Business Activities of Foreign Affiliates of the same periods. We measure some key factors to an event of entry and exit, given the network of existing foreign locations. We compare our results with Yeaple (2008), which analyzes "hub and spokes" (central and peripheral locations) of intra-firm networks for U.S. manufacturing. We show some differences between the U.S. MNEs and Japanese MNEs. We also discuss the difference in trade-offs of intra-firm network between manufacturing and the service sectors.
    Date: 2015–08
  8. By: David McKenzie; Christopher Woodruff
    Abstract: Management has a large effect on the productivity of large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? We develop 26 questions that measure business practices in marketing, stock-keeping, record-keeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka. We show that variation in business practices explains as much of the variation in outcomes – sales, profits and labor productivity and TFP – in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The effect of business practices is robust to including numerous measures of the owner’s human capital. We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. Competition has less robust effects.
    JEL: L26 M20 O12
    Date: 2015–08
  9. By: Dylan Minor (Harvard Business School, Strategy Unit)
    Abstract: We explore the notion that corporate citizenship, as obtained through Corporate Social Responsibility (CSR), is used by managers to protect firm value, helping their firm better withstand negative business shocks. We formally explore two parallel mechanisms for such protection .one of building moral capital (CSR Contributions) and another of improving investor posteriors (CSR Investments). We find some theoretical and empirical support for both of these, but in different settings. In particular, we find that firms with higher CSR Investments enjoy an average of $1 billion of saved firm value upon an adverse event. In contrast, CSR Contribution firms lose value (on average) upon an event, possibly due to disingenuous contributions. Meanwhile, due to managerial moral hazard, firms with high levels of CSR Contributions face adverse events more often, whereas those with high levels of CSR Investments face them less often.
    JEL: G30 G32 G39
    Date: 2015–08
  10. By: Antoine Gervais
    Abstract: This paper uses data on US manufacturing firms to study a new extensive margin, the reallocation of resources that takes place within surviving firms as they open and close establishments in different regions. To motivate the empirical analysis, I extend existing models of industry dynamics to include production-location decisions within firms. The empirical results provide support for the mechanisms emphasized by the theoretical model. In the data, only about 3 percent of firms make the same product in more than one region, but these multiregional firms are more productive on average compared to single-region firms, and they account for about two-thirds of output. The results also show that "region-switching" is pervasive among multiregional firms, is correlated with changes in firm characteristics, and leads to a more efficient allocation of resources within firms.
    Keywords: Multiregional firms, firm heterogeneity, industry dynamics, monopolistic competition, proximity-concentration tradeoff.
    JEL: L2
    Date: 2015–01
  11. By: Gayle, George-Levi (Federal Reserve Bank of St. Louis); Li, Chen (Zicklin School of Business, Baruch College, CUNY); Miller, Robert A. (Tepper School of Business, Carnegie Mellon University)
    Abstract: This paper develops measures of the costs and benefits of governance regulations within a dynamic principal agent model of hidden information and moral hazard following the passage of the Sarbanes-Oxley Act (SOX). We estimate the effects of changes in CEO compensation for S&P 1500 firms and find SOX increased total compensation in the primary sector, increasing both its agency and administrative components. The net effect was mainly insignificant in the consumer and service sectors, with agency costs rising (falling) but administrative costs falling (rising) in larger (smaller) firms.
    JEL: C10 C12 C13 J30 J33 M50 M52 M55
    Date: 2015–08–20
  12. By: Druz, Marina (Swiss Finance Institute); Wagner, Alexander F. (Swiss Finance Institute); Zeckhauser, Richard (Harvard University)
    Abstract: Stock prices react significantly to the tone (negativity of words) managers use on earnings conference calls. This reaction reflects reasonably rational use of information. "Tone surprise"--the residual when negativity in managerial tone is regressed on the firm's recent economic performance and CEO fixed effects--predicts future earnings and analyst uncertainty. Prices move more, as hypothesized, in firms where tone surprise predicts more strongly. Experienced analysts respond appropriately in revising their forecasts; inexperienced analysts overreact (underreact) to tone surprises in presentations (answers). Post-call price drift, like post-earnings announcement drift, suggests less-than-full-use of information embedded in managerial tone.
    Date: 2015–02
  13. By: Friebel, Guido; Heinz, Matthias; Krüger, Miriam; Zubanov, Nick
    Abstract: We test the effectiveness of team incentives by running a natural field experiment in a retail chain of 193 shops and 1,300 employees. As a response to intensified product market competition, the firm offered a bonus to shop teams for surpassing sales targets. A bonus to teams rather than individuals was a natural choice because the firm does not measure individual performance and relies on flexible task allocation among employees. On average, the team bonus increases sales and customer visits in the treated shops by around 3%, and wages by 2.3%. The bonus is highly profitable for the firm, generating for each bonus dollar an extra $3.80 of sales, and $2.10 of operational profit. The results show the importance of complementarities within teams and suggest that improved operational efficiency is the main mechanism behind the treatment effect. Our analysis of heterogeneous treatment effects offers a number of insights about the anatomy of teamwork. The firm decided to roll out the bonus to all of its shops, and the performance of treatment and control shops converged after the roll-out.
    Keywords: insider econometrics; management practices; natural field experiment; randomized controlled trial (RCT)
    JEL: J3 L2 M5
    Date: 2015–08
  14. By: Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Euripidis Loukis (University of Aegean, Samos, Greece)
    Abstract: In this paper we investigate empirically, first, the characteristics of the firms that reduced their ICT investment due to the 2008 crisis, particularly the firms’ ICT-related characteristics in terms of ICT budget, skills and applications used. The analysis of the ICT characteristics that may influence the likelihood of having reduced ICT investment as a consequence of the crisis is primarily explorative, thus driven by available data and economic intuition. The second research question we examine empirically refers to the possibility that an economic crisis could affect innovation performance through the ICT investment channel. In connection with this, it is also interesting to analyze the ICT characteristics that are associated with ICT-enabled innovation performance. This is the third research question of this paper. Our study is based on firm data from the glass/ceramics/cement industry in six European countries. We find that ICT-related crisis vulnerability correlates positively with decreasing ICT budgets (pro-cyclical investment behaviour), the existence of skill deficits in ICT, the awareness of and interest in novel ICT applications that presumably request much additional ICT investment, the exposure to strong price competition and the strong presence in international markets, in which activities have significantly decreased due to the crisis. Further, statistically significant negative relationship between ICT-enabled product innovation and crisis vulnerability (pro-cyclical behaviour) is found only for new products or services that contain ICT components, and are therefore directly affected by crisis-related decreasing product demand. Employment of specialized ICT personnel, ICT outsourcing (only for process innovation), competition (only for product innovation), and the use of some ICT applications specific to the kind of innovation pursued are ICT characteristics that positively correlate with ICT-enabled innovation.
    Keywords: economic crisis, information and communication technologies (ICT), innovation, ICT-enabled innovation
    JEL: O31
    Date: 2015–08
  15. By: Pinkowitz, Lee (Georgetown University); Stulz, Rene M. (OH State University and ECGI, Brussels); Williamson, Rohan (Georgetown University)
    Abstract: Using medians, U.S. firms do not hold more cash than similar foreign firms, irrespective of whether the foreign firms come from countries with good investor protection or not. With means, they do. The means, in contrast to the medians, are affected by U.S. multinationals. U.S. multinationals with high R&D expenditures hold 38.7% more cash than comparable foreign firms, but there is evidence that these high cash holdings may result more from high R&D expenditures than from multinationality. The crisis leaves only small traces in the recent cash holdings of firms. Firms throughout the world decreased their cash holdings during the crisis and replenished their cash holdings afterwards as expected with the precautionary motive for cash holdings. However, U.S. firms hold more cash than firms from countries where the stock market fell less during the crisis. There is no evidence that the determinants of cash holdings changed from before the crisis to after the crisis.
    JEL: F23 G32
    Date: 2014–04

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