nep-bec New Economics Papers
on Business Economics
Issue of 2016‒01‒03
twelve papers chosen by
Vasileios Bougioukos
Bangor University

  1. Firm Life Cycle and Real-Activity Based Earnings Management By Nagar, Neerav; Radhakrishnan, Suresh
  2. Learning Entrepreneurship From Other Entrepreneurs? By Guiso, Luigi; Pistaferri, Luigi; Schivardi, Fabiano
  3. Bursting into life: Firm growth and growth persistence by age By Coad, Alex; Daunfeldt, Sven-Olov; Halvarsson, Daniel
  4. The Effect of Trade Liberalization on Firm-Level Profits: An Event-Study Approach By Breinlich, Holger
  5. OPEC’s market power: An Empirical Dominant Firm Model for the Oil Market By Golombek, Rolf; Irarrazabal, Alfonso A.; Ma, Lin
  6. The Effect of Trade Protection on Productivity in Uruguay By Carlos Casacuberta; Dayna Zaclicever
  7. Growth in first- and second-generation immigrant firms in Sweden By Efendic, Nedim; Andersson, Fredrik W.; Wennberg, Karl
  8. How does easing liquidity constraints affect aggregate employment? By Vicente Bermejo; Rodolfo G. Campos; José M. Abad
  9. High-growth firms: Not so vital after all? By Daunfeldt, Sven-Olov; Halvarsson, Daniel; Mihaescu, Oana
  10. What Matters More for Economic Development, the Amount of Funding or the Number of Projects Funded? Evidence from the Community Development Financial Investment Fund By Kaitlyn R. Harger; Amanda Ross; Heather M. Stephens
  11. Corporate Governance Effects on Innovation when both Agency Costs and Asset Specificity Matter By Filippo Belloc; Eleonora laurenza; Maria Alessandra Rossi
  12. Managers and Productivity Differences By Guner, Nezih; Parkhomenko, Andrii; Ventura, Gustavo

  1. By: Nagar, Neerav; Radhakrishnan, Suresh
    Abstract: We examine real-activity based earnings management, i.e., cuts in discretionary innovation/marketing spending and overproduction for meeting the earnings benchmark of avoiding losses across firms’ life cycle. We use the cash flow components to classify a firm’s life cycle. We hypothesize and find that firms in the growth and mature stages exhibit real-activity based earnings management to meet earnings target of avoiding losses; but firms in the introductory stage do not. We also hypothesize and find that such real-activity based earnings management to meet the earnings benchmark of avoiding losses is associated with future performance for mature firms, but not so for growth firms. Collectively, our evidence shows the importance of considering firm’s life cycle when examining real-activity based earnings management.
  2. By: Guiso, Luigi; Pistaferri, Luigi; Schivardi, Fabiano
    Abstract: We document that individuals who grew up in areas with high density of firms are more likely, as adults, to become entrepreneurs, controlling for the density of firms in their current location. Conditional on becoming entrepreneurs, the same individuals are also more likely to be successful entrepreneurs, as measured by business income or firm productivity. Strikingly, firm density at entrepreneur’s young age is more important than current firm density for business performance. These results are not driven by better access to external finance or intergenerational occupation choices. They are instead consistent with entrepreneurial capabilities being at least partly learnable through social contacts. In keeping with this interpretation, we find that entrepreneurs who at the age of 18 lived in areas with a higher firm density tend to adopt better managerial practices (enhancing productivity) later in life.
    Keywords: entrepreneurship; learning; spillovers
    JEL: J24 M13 R11
    Date: 2015–12
  3. By: Coad, Alex (University of Sussex); Daunfeldt, Sven-Olov (HUI Research and Dalarna University); Halvarsson, Daniel (The Ratio institute)
    Abstract: Is firm growth more persistent for young or old firms? Theory gives us no clear answer, and previous empirical investigations have been hampered by a lack of detailed data on firm age, as well as a non-representative coverage of young firms. We overcome these shortcomings using a rich dataset on all limited liability firms in Sweden during 1997-2010, covering firms of all ages and information on registered start year. We find that sales growth for new ventures is characterized by positive persistence, whereas it quickly turns negative and remains negative as firms get older. It thus seems that the growth paths of older firms are buffeted around by environmental turbulence, and that older firms may have challenges in adapting their strategies to changing market conditions, whereas new firms experience an early burst of sustained growth.
    Keywords: Firm age; growth rate autocorrelation; sales growth; learning-bydoing; minimum efficient scale
    JEL: D22 L25 L26
    Date: 2015–12–23
  4. By: Breinlich, Holger
    Abstract: I use an event study approach to present novel evidence on the impact of trade liberalization on firm-level profits. Using the uncertainty surrounding the negotiation and ratification process of the Canada-United States Free Trade Agreement of 1989 (CUSFTA), I estimate the impact of different types of tariff reductions on the abnormal returns of Canadian manufacturing firms. I find that Canadian import tariff reductions lead to lower, and reductions in Canadian intermediate input tariffs to higher abnormal returns. The impact of U.S. tariff reductions is less clear and depends on the size of the affected firms. I also calculate the total profit increase implied by my estimates. Overall, CUSFTA increased per-period profits by around 1.2%. This was mainly driven by intermediate input tariff reductions which more than offset the negative effect of Canadian import tariff reductions.
    Keywords: Canada-U.S. Free Trade Agreement; profitability; stock market event studies; trade liberalization
    JEL: F12 F14 G14
    Date: 2015–12
  5. By: Golombek, Rolf (Ragnar Frisch Centre for Economic Research.); Irarrazabal, Alfonso A. (BI Norwegian Business School); Ma, Lin (School of Economics and Business, Norwegian University of Life Sciences)
    Abstract: We estimate a dominant firm-competitive fringe model for the crude oil market using quarterly data on oil prices for the 1986-2009 period. All estimated structural parameters have the expected sign and are significant. We find that OPEC exercised market power during the sample period. Counterfactual experiments indicate that world GDP is the main driver of long-run oil prices, however, supply (depletion) factors have become more important in recent years.
    Keywords: Oil; dominant firm; market power; OPEC; Lerner index; oil demand elasticity; oil supply elasticity
    JEL: L13 L22 Q31
    Date: 2015–12–17
  6. By: Carlos Casacuberta (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Dayna Zaclicever (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: We analyze the effect of trade protection on firm’s performance using a panel of firms from the Annual Manufacturing Surveys of Uruguay from 1988 to 2005. We estimate total factor productivity using Levinsohn and Petrin (2003) methodology and relate such measures to protection. Firm-specific protection is measured as the average tariff within the four-digit harmonized system classes containing the firm’s products (rather than the usual four-digit ISIC averages), tracking more closely the relevant markets, both for firm’s product and input baskets, and separate indices are calculated. We find a positive effect of reduction in output protection on total factor productivity, while the effect of lower input protection, when significant, is negative, which we find related to the overall change in effective protection. Reductions in bilateral tariffs with Uruguay’s large neighbors in the context of MERCOSUR are not found to have a significant productivity enhancing effect. The results are robust to alternative protection measures, specification and controls.
    Keywords: Total factor productivity; Trade protection.
    JEL: D24 F14
    Date: 2015–04
  7. By: Efendic, Nedim (Stockholm School of Economics); Andersson, Fredrik W. (Statistics Sweden); Wennberg, Karl (Institute for Analytical Sociology (IAS) & Department of Management and Engineering Linköping University, Sweden and Ratio Institute)
    Abstract: Despite the burgeoning literature on immigrant entrepreneurship, there is a dearth of research on the social and economic factors shaping the performance of immigrant-run firms. Drawing upon human and social capital theory and assimilation theory, we investigate differences in performance measured as revenue growth in a comparative study of native and immigrant CEOs. Following 50,002 small firms in Sweden over four years, we find distinct patterns in both firm size and revenue growth between firms managed by immigrants and by natives. While firms run by second-generation immigrants from OECD countries exhibit higher growth rates than natives, the reverse is true for second generation immigrants from non-OECD countries, suggesting that economic integration in terms of immigrants’ small business growth in Sweden is characterized by segmented rather than universal assimilation.
    Keywords: Immigrant entrepreneurship; intergenerational differences; firm growth; Sweden
    JEL: J61 M13 O18
    Date: 2015–12–23
  8. By: Vicente Bermejo; Rodolfo G. Campos; José M. Abad
    Abstract: We measure the impact of removing liquidity constraints on aggregate employment by focusing on a sudden and unexpected large liquidity injection to Spanish firms in early 2012, when the Spanish central government paid all invoices of firms to regional and municipal governments that were in arrears. We identify the effect on employment from the cross-sectional variation in the size of the liquidity injection received by Spanish municipalities. Our preliminary finding sindicate that labor market responses can be detected both in the municipality where the liquidity injection occurs and in the municipality where firms are headquartered. We find evidence that the effect on unemployment is stronger where the liquidity injection originates whereas the effect on employment is stronger where the firms are located.
    Keywords: Liquidity injection , Financial constraints , Employment , Unemployment , Spain
    JEL: J64 H11
    Date: 2015–07
  9. By: Daunfeldt, Sven-Olov (HUI Research and Dalarna University); Halvarsson, Daniel (The Ratio Institute); Mihaescu, Oana (HUI Research and Dalarna University)
    Abstract: High-growth firms have received considerable interest recently since they create most of the new jobs in the economy. The purpose of our paper is to investigate the characteristics of high-growth firms prior to their growth period, and whether these characteristics differ across industries. Using data on a large sample of limited liability firms in Sweden for the period 2007-2010, we find that high-growth firms do not have the characteristics that we typically associate with successful firms. On the contrary, our results indicate that high-growth firms have low profits and a weak financial position. This might explain why studies have found that high-growth firms are seldom capable of sustaining their high growth rates in subsequent periods, and thus question policies that are targeted towards these companies.
    Keywords: Entrepreneurship; Firm growth; Gazelles; High-growth firms; High-impact firms; Innovation
    JEL: L11 L25
    Date: 2015–12–23
  10. By: Kaitlyn R. Harger (Florida Gulf Coast University, Department of Economics); Amanda Ross (West Virginia University, Department of Economics); Heather M. Stephens (West Virginia University, Agricultural and Resource Economics)
    Abstract: Governments try to attract entrepreneurs to specific areas by providing incentives to new businesses that locate within their jurisdiction. However, there is a debate over how best to allocate these funds. Using establishment-level data from the National Establishment Time Series (NETS) database for California, and data on the location of disbursements from the Community Development Financial Institutions (CDFI) and New Market Tax Credit (NMTC) programs, we consider the effectiveness of these two programs in attracting new businesses to disadvantaged areas. Investors are eligible to receive funding through these programs if the census tract where they are located has a median family income less than or equal to 80% of the state’s median family income. Using this plausibly exogenous eligibility threshold, we find that higher levels of funding per project through the NMTC program result in an increase in the number of new establishments in that area. However, we find that the number of NMTC projects funded has no effect on attracting new firms to eligible tracts, and there is little evidence of a consistent effect of the CDFI program. The amounts of funding through the CDFI program are relatively small, though more projects were funded through this program than the NMTC. Thus, our findings suggest that the amount of funding allocated to these areas matters more for economic development than does the number of projects funded. In addition, we find that there are heterogenous effects with regard to the impact of these programs, specifically across different firm sizes and industries, suggesting that these policies may cause firms to reallocate and sort across census tracts.
    Keywords: economic development, funding, projects, community development, financial investment fund
    Date: 2015–12
  11. By: Filippo Belloc; Eleonora laurenza; Maria Alessandra Rossi
    Abstract: The paper explores the question whether the relationship between corporate governance and innovation is affected by the extent to which the firm is exposed to agency problems and asset specificity issues. In particular, we argue that different combinations of asset specificity and agency costs are associated to firm age and sector of activity and predict heterogenous effects of ownership concentration on innovation across different types of firms. We use a unique dataset on about 35.000 Italian manufacturing corporations over the 2002-2007 period and run a hurdle model, distinguishing four sub-groups of firms on the basis of their age (greater or lower than 15 years) and of whether they belong to a high technology or low technology sector. We find that the effects of ownership concentration on innovation are coherent with the predictions of so-called "shareholder theory" when agency cost effects dominate over asset specificity effects and that they are coherent with the predictions of so-called "stakeholder theory" when asset specificity effects dominate over agency cost effects. These findings are robust to a number of identification issues, including the possible endogeneity of corporate ownership structures. Our results may allow to make sense of the contradictory findings of the literature on corporate governance and innovation, especially as regards the role played by ownership concentration, and may help policy-makers to define more effective type-specific initiatives to stimulate firm innovation.
    Keywords: corporate governance, innovation, Italian manufacturing sectors, hurdle models
    JEL: C30 G30 L60 O30
    Date: 2015–11
  12. By: Guner, Nezih; Parkhomenko, Andrii; Ventura, Gustavo
    Abstract: We document that for a group of high-income countries (i) mean earnings of managers tend to grow faster than for non managers over the life cycle; (ii) the earnings growth of managers relative to non managers over the life cycle is positively correlated with output per worker. We interpret this evidence through the lens of an equilibrium life-cycle, span-of-control model where managers invest in their skills. We parameterize this model with U.S. observations on managerial earnings, the size-distribution of plants and macroeconomic aggregates. We then quantify the relative importance of exogenous productivity differences, and the size-dependent distortions emphasized in the misallocation literature. Our findings indicate that such distortions are critical to generate the observed differences in the growth of relative managerial earnings across countries. Thus, observations on the relative earnings growth of managers become natural targets to discipline the level of distortions. Distortions that halve the growth of relative managerial earnings (a move from the U.S. to Italy in our data), lead to a reduction in managerial quality of 27% and to a reduction in output of about 7% – more than half of the observed gap between the U.S. and Italy. We find that crosscountry variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.
    Keywords: distortions; management practices; managers; productivity differences; size; skill investments
    JEL: E23 E24 J24 M11 O43 O47
    Date: 2015–12

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