nep-bec New Economics Papers
on Business Economics
Issue of 2015‒11‒15
twelve papers chosen by
Vasileios Bougioukos
Bangor University

  1. Firms’economic crisis and firm exit: do intangibles matters? By A. Arrighetti; F. Landini; A. Lasagni
  2. The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity By Johannes Boehm
  3. Preaching water but drinking wine? Relative performance evaluation in international banking By Dragan Ilić; Sonja Pisarov; Peter S. Schmidt
  4. Managing Base of the Pyramid as a Business Opportunity : A Longitudinal Field Study By Thomas André; Jean-Pierre Ponssard
  5. Job Creation, Small vs. Large vs. Young, and the SBA By Brown, J. David; Earle, John S.; Morgulis, Yana
  6. Environmental investment and firm performance: A panel VAR approach By Zhang, Shanshan; Lundgren, Tommy; Zhou, Wenchao
  7. Export Decision under Risk By Carl Gaigne; Anne-Celia Disdier; Jose de Sousa
  8. FDI, Intermediate Inputs and Firm Performance: Theory and Evidence from Italy By Michele Imbruno; Rosanna Pittiglio; Filippo Reganati
  9. Selling Information to Competitive Firmstion By Jakub Kastl; Marco Pagnozzi; Salvatore Piccolo
  10. Quality and Competition between Public and Private Firms By Liisa Laine; Ching-To Albert Ma
  11. European Commission merger control: combining competition and the creation of larger European firms By Mark Thatcher
  12. Fluctuations in uncertainty, efficient borrowing constraints and firm dynamics By Sebastian Dyrda

  1. By: A. Arrighetti; F. Landini; A. Lasagni
    Abstract: The crisis regarding the Euro area has caused several business closures, especially in the periphery of the EMU. In this paper, we use an original Italian firm-level dataset to determine why firms exit the market during times of economic crisis, paying particular attention to the role of intangibles. We argue that intangibles strengthen a firm’s resilience, which improves the firm’s ability to cope with adverse events and unexpected shocks. We obtain two main results: first, we show that the presence of intangibles significantly reduces the probability of firm exit, especially during the initial phase of the crisis; second, we find that financial constraints become more relevant than intangibles in explaining firm exit during the later stages of the crisis. Thus, the process of firm selection during the crisis has undergone a rapid transformation, with distortions that may lead even skilled firms to exit. Implications of these findings for EU recovery policies are discussed.
    Keywords: intangibles, firm exit, EU crisis, industry dynamics
    JEL: D22 L21 L25 O32
    Date: 2015
  2. By: Johannes Boehm (Department of Economics Sciences économiques Sciences Po; Centre for Economic Performance (CEP) London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium closed-economy Eaton-Kortum-type model. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to identify the effect of contracting frictions on industry structure. I then proceed to structurally estimate the key parameters of my macro-model. Using a set of counterfactual experiments, I investigate the role of contracting frictions in shaping productivity and income per capita across countries. Setting enforcement costs to US levels would increase real income by an average of 7.5 percent across all countries, and by an average of 15.3 percent across low-income countries. Hence, transaction costs and the determinants of firm boundaries are important for countries' aggregate level of development.
    Keywords: Contract enforcement costs, contracting frictions, transaction sosts, outsourcing, aggregate productivity
    JEL: D23 F11 L22 O43
    Date: 2015–10
  3. By: Dragan Ilić; Sonja Pisarov; Peter S. Schmidt
    Abstract: Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.
    Keywords: Relative performance evaluation, executive compensation, peers, banks, disclosure
    JEL: J33 D86 G3 G21
    Date: 2015–10
  4. By: Thomas André (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS); Jean-Pierre Ponssard (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS, CNRS)
    Abstract: In the last decade a growing articulation of the business strategy of the firms with some specific global societal challenge in line with its core activities has been observed. This change provides both a need and an opportunity for Base of the Pyramid (BoP) activities to migrate from their preserved status within the Corporate Social responsibility (CSR) department to business operations. We explore the successive steps associated with this change at Schneider Electric through a longitudinal case study. The newly adopted business strategy of the firm clearly facilitates the change in the mindsets all through the company. Still the need for adapting the management systems remains pending. A key finding that emerges from our analysis is to instill interactive processes through an organizational change and a strong commitment on the commercial purpose of the BoP activities. We also highlight that BoP activities cannot be directly transferred to operational entities without simultaneously identifying which of the functional department will be in charge of providing the corresponding management systems and support such longer-term investments.
    Keywords: Management Control Systems, Strategy Implementation, Base of the Pyramid, Business Case,Corporate Social responsibility
    Date: 2015–10
  5. By: Brown, J. David (U.S. Census Bureau); Earle, John S. (George Mason University); Morgulis, Yana (University of California, San Diego)
    Abstract: Analyzing a list of all Small Business Administration (SBA) loans in 1991 to 2009 linked with annual information on all U.S. employers from 1976 to 2012, we apply detailed matching and regression methods to estimate the variation in SBA loan effects on job creation and firm survival across firm age and size groups. The number of jobs created per million dollars of loans generally increases with size and decreases in age. The results imply that fast-growing firms ("gazelles") experience the greatest financial constraints to growth, while the growth of small, mature firms is least financially constrained. The estimated association between survival and loan amount is larger for younger and smaller firms facing the "valley of death".
    Keywords: job creation, firm survival, credit constraints, small businesses, government loan guarantees
    JEL: H81
    Date: 2015–11
  6. By: Zhang, Shanshan (CERE, SLU); Lundgren, Tommy (CERE, Umeå University, SLU); Zhou, Wenchao (CERUM, Umeå University)
    Abstract: This paper analyzes the relation between three dimensions of firm performance – productivity, energy efficiency, and environmental performance – and shed light on the role of environmental investment. Data from Swedish industry between 2002 and 2008 is utilized to generate the three performance measures at the firm level. Environmental investments are efforts to reduce environmental impact, which may also affect firm competitiveness, in terms of changes in productivity, and spur more (or less) efficient use of energy. A panel vector auto-regression (VAR) methodology is utilized to investigate the causal relationship between the three dimensions of performance and environmental investment. Results show that energy efficiency and environmental performance are integrated. Improved environmental performance and energy efficiency - induced by external or internal policy - boosts next period productivity, which would corroborate the Porter hypothesis and the notion of strategic corporate social responsibility (CSR). An increase in productivity constrains next period environmental performance and energy efficiency, while increasing environmental investments. This is indicative of “managerial opportunism” or the “available funds” hypothesis. The former suggesting in good times managers allocate resources to e.g. managerial perks rather than improving environmental and/or energy performance, while still, to avoid regulatory penalty, uphold some level of environmental investment. The latter explanation argues that managers invest in environmental capital in order to reduce environmental impacts and boost goodwill for their business, but this investment requires resources and, in the short-term, harms energy and environmental performance. Finally, an increase in environmental investment improves next period environmental performance, which would suggest that environmental investments have the intended and expected effect; it reduces the environmental burden caused by the firm. As a consequence, in a second step, the increased environmental performance will tend to increase productivity in the next period, which suggests that environmental investments can boost productivity channeled via enhanced environmental performance.
    Keywords: Energy Efficiency; Environmental Performance; Panel VAR; Malmquist Index; Investment
    JEL: D22 D24 M14 Q40 Q41
    Date: 2015–11–09
  7. By: Carl Gaigne (INRA); Anne-Celia Disdier (Paris School of Economics-INRA); Jose de Sousa (University of Paris-Sud)
    Abstract: Does demand volatility matter for exports? How do exporting firms deal with skewed demand? A simple model of risk aversion shows that exporters react to an increase in demand volatility in destination markets by increasing their export prices and decreasing their export volumes. In sharp contrast, exporters decrease prices and increase volumes when demand skewness rises. We also show that the moments of the distribution of demand affect the extensive margin of trade. These theoretical predictions are put to the test by using French firm-level exports across destination markets with different levels of demand volatility and skewness. The firm-level results, over the period 2000-2009, are broadly consistent with our predictions.
    Date: 2015
  8. By: Michele Imbruno; Rosanna Pittiglio; Filippo Reganati
    Abstract: This paper theoretically and empirically studies – using data from Italian manufacturing firms – how the foreign presence in the intermediate good sector (i.e. input FDI) affects firm efficiency and aggregate productivity within final good sector. We show that an important role is played by the absorptive capacity. More specifically, if all firms are able to use intermediate inputs from foreign-owned suppliers, then all of them will enjoy productivity gains from input FDI without any reallocation effect. Conversely, if only the most productive firms can use intermediate inputs from foreign-owned suppliers, while these firms can enhance further their efficiency, the other firms might suffer productivity losses from input FDI, causing some reallocation effects within final good sector.
    Keywords: Heterogeneous firms, multinationals, FDI, intermediate inputs, productivity
    Date: 2015
  9. By: Jakub Kastl (Princeton University); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF)
    Abstract: A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agent’s production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals’ willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling the experiment to some of the principals.
    Keywords: Adverse Selection, Information Acquisition, Experiments, Competitive Markets
    JEL: D40 D82 D83 L11
    Date: 2015–11–04
  10. By: Liisa Laine (Boston University and Dand School of Business and Economics, University of Jyvaskyla); Ching-To Albert Ma (Boston University)
    Abstract: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have different quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame perfect equilibria for general consumer valuation distributions and quality cost functions, and provide conditions for first-best equilibrium qualities. Various policy implications are drawn.
    Keywords: price-quality competition, quality, public firm, private firm
    JEL: D4 L1 L2 L3
    Date: 2015–06
  11. By: Mark Thatcher
    Abstract: The article examines the European Commission's use of its legal powers over mergers. It discusses and tests two views. One is that the 'neoliberal' Commission has ended previous industrial policies of aiding 'national champion' firms to grow through mergers and instead pursues a 'merger-constraining' policy of vigorously using its legal powers to block mergers. The other is that the Commission follows an 'integrationist policy' of seeking the development of larger European firms to deepen economic integration. It examines Commission decisions under the 1989 EC Merger Regulation between 1990 and 2009. It selects three major sectors that are 'likely' for the 'merger-constraining' view - banking, energy and telecommunications - and analyses a dataset of almost 600 Commission decisions and then individual merger cases. It finds that the Commission has approved almost all mergers, including by former 'national champion' firms. There have been only two prohibitions over 20 years in the three sectors and the outcome has been the creation of larger European firms through mergers. It explains how the Commission can pursue an integrationist policy through the application of competition processes and criteria. The wider implication is that the Commission can combine competition policy with achieving the 'industrial policy' aim of aiding the development of larger European firms.
    Keywords: European Commission; mergers; national champions; neoliberalism
    JEL: F00
    Date: 2014–11–10
  12. By: Sebastian Dyrda (University of Minnesota)
    Abstract: In this paper, I quantify the importance of microeconomic uncertainty shocks for the firm dynamics over the business cycle in an economy with frictional financial markets. To begin, I document facts on asymmetric response across age and size groups of firms in the U.S. to the changes in aggregate economic conditions. I argue that age rather than size is a relevant margin for the magnitude of employment volatility over the cycle; in particular total employment of young firms varies 2.6 times more relative to the old firms. Then I propose a theory that, contrary to the existing studies, generates endogenously a link between firm's age and size and its ability to obtain financing, and induces an asymmetric response to shocks. A key element of my theory is a financial friction originating from the presence of the firm's private information and long-term, efficient lending contract between a risk averse entrepreneur and financial intermediary, which manifests itself as a borrowing constraint. I argue that, for any given expected return on project, young firms are more constrained in borrowing and they grow out of the constraint as they age up to the optimal, unconstrained size. Next I establish that, for any given age, firm's financing increases in line with the average return on a project. In times of high idiosyncratic uncertainty the financial contract calls for tightening of the borrowing constraint transmitting the initial impulse into a decline in demand for production inputs and further, including general equilibrium effects, into an economic downturn. This mechanism affects disproportionally young firms. Not only are they more constrained in borrowing but also they start smaller due to a reduced level of initial financing. A quantitative version of the model accounts for the fall of the aggregate output, employment and investment, decline of credit to GDP ratio and asymmetric employment dynamics of different groups of firms observed in the US data in recessions.
    Date: 2015

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