|
on Business Economics |
| By: | Brian Bell; John Van Reenen |
| Abstract: | Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this, we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders’ return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial “pay-for-luck” as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this “compensation effect” is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance. |
| Keywords: | CEO; pay; incentives; equity plans |
| JEL: | G30 J31 J33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67674&r=bec |
| By: | Emmanuele Bobbio (Banca d'Italia) |
| Abstract: | Italy's growth performance has been lacklustre in the last two decades. The economy has a low R&D intensity; firms are smaller and less likely to grow or exit than firms in other advanced countries; the shadow economy is large. I show how these features arise simultaneously in a Schumpeterian growth model with heterogeneous firms where the tax auditing probability increases with firm size. Tax evasion confers a cost advantage over competitors. In equilibrium, small firms invest less in innovation because growing entails a (shadow) cost of fiscal regularization. Unfair competition forces other firms to lower the mark-up they charge for their new products, reducing the incentive to innovate. Market selection is hampered, further lowering the aggregate growth rate along the extensive margin. I calibrate the model on Italian firm-level data for the period 1995-2006 and find that enforcing taxes would have increased the long-run growth rate from 0.9% to 1.1%. The market share of high type firms would have been 6 percentage points higher and average firm size 20% higher. Also, I find that lowering the tax burden can have a significant impact on growth when the shadow economy is large, while the effect is negligible when taxes are enforced. |
| Keywords: | growth, innovation, selection, firm dynamics, tax evasion, size dependent policies |
| JEL: | O30 O43 H26 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_357_16&r=bec |
| By: | Andrew B. Bernard; Andreas Moxnes; Yukiko U. Saito |
| Abstract: | This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. We develop a simple model where firms can outsource tasks and search for suppliers in different locations. Low search and outsourcing costs lead firms to search more and find better suppliers. This in turn drives down the firm’s marginal production costs. We test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms’ buyer-seller linkages, we find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model. |
| Keywords: | production networks; trade; productivity; infrastructure |
| JEL: | D85 F14 L10 L14 R12 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67664&r=bec |
| By: | António Brandão (CEF.UP and Faculdade de Economia do Porto.); Joana Pinho (CEF.UP and Faculdade de Economia do Porto. Toulouse School of Economics.) |
| Abstract: | We consider an industry where firms are asymmetric in terms of productivity. Wages and employment are determined at the firm-level and are the result of sequential bargaining between unions and firms, with wages being negotiated first. We characterise the equilibrium and compare the outcomes in the two firms (wages, employment and surplus of all economic agents). A productivity shock affecting the most efficient firm is socially desirable, by increasing the surplus of consumers, workers and firms. The same may not be true when the productivity shock affects the least efficient firm. In this case, the consumers’ gain may not be enough to outweigh the losses in aggregate worker surplus and in the industry profit. |
| Keywords: | Asymmetric productivity; Decentralised bargaining; Duopoly; Productivity shocks |
| JEL: | J53 L13 D60 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:576&r=bec |
| By: | Paul Gompers; William Gornall; Steven N. Kaplan; Ilya A. Strebulaev |
| Abstract: | We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment selection; valuation; deal structure; post-investment value-added; exits; internal firm organization; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment success or failure to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We also explore (and find) differences in practices across industry, stage, geography and past success. We compare our results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov forthcoming). |
| JEL: | G24 G3 L26 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22587&r=bec |
| By: | Tan, Yong |
| Abstract: | This paper extends the model of Antras et al.(2014) to disentangle the link between demand shocks and firm-level offshoring decisions. The model predicts that a positive demand shock increases the firm-level purchases of imported intermediates in both the extensive and intensive margins. Using a difference-in-difference approach, we examine the response of Chinese exporters to a quota removal on textile and clothing products, which is equivalent to a positive demand shock. The findings indicate that firms import more varieties and higher volumes of intermediates after the quota removal. The results are robust to different regression designs. |
| Keywords: | Intermediates Offshoring, Textile and Clothing, Demand Shock, Quota Removal |
| JEL: | F10 F14 L11 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73734&r=bec |
| By: | Guido Menzio (University of Pennsylvania); Mikhail Golosov (Princeton University) |
| Abstract: | We propose a new business cycle theory. Firms need to randomize over firing or keeping workers who have performed poorly in the past, in order to give them an ex-ante incentive to exert effort. Firms have an incentive to coordinate the outcome of their randomizations, as coordination allows them to load the firing probability on states of the world in which it is costlier for workers to become unemployed and, hence, allows them to reduce overall agency costs. In the unique robust equilibrium, firms use a sunspot to coordinate the randomization outcomes and the economy experiences endogenous, stochastic aggregate fluctuations. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:740&r=bec |
| By: | Jenifer Piesse (Bournemouth University and University of Stellenbosch); Dragana Radicic (University of Cambridge); Allan Webster (Bournemouth University, Executive Business Centre) |
| Abstract: | This empirical study examines the effect of EU accession on firm efficiency in a sample of 27 transitional countries using data from the 2005 and 2013 BEEPS surveys. Using stochastic frontier analysis and a separate propensity score matching approach it finds a statistically significant association between EU membership and firm performance in both cross-sections. Since EU membership involves more than the liberalisation required for the single market it also uses propensity score matching to find a statistically significant association between EU membership and the internationalisation of firms in transitional countries. Finally it uses inverse probability weighted regression adjustment (IPWRA) to test the proposition that stronger firm performance in transitional countries was associated with firms with higher levels of internationalisation (exports and foreign ownership). Our results support the view that EU membership enhanced firm efficiency in new members from transitional economies and that internationalisation was an important mechanism in that process. |
| Keywords: | firm efficiency; productivity; European Union; transition |
| JEL: | F14 F15 D22 I25 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bam:wpaper:bafes03&r=bec |
| By: | Thierry Mayer; Marc J. Melitz; Gianmarco I. P. Ottaviano |
| Abstract: | We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks, those French firms skew their export sales towards their best performing products; and also extend the range of products sold to that market. We develop a theoretical model of multi-product firms and derive the specific demand and cost conditions needed to generate these product-mix reallocations. Our theoretical model highlights how the increased competition from demand shocks in export markets .and the induced product mix reallocations - induce productivity changes within the firm. We then empirically test for this connection between the demand shocks and the productivity of multi-product firms exporting to those destinations. We find that the effect of those demand shocks on productivity are substantial .and explain an important share of aggregate productivity fluctuations for French manufacturing. |
| Keywords: | productivity; trade; competition |
| JEL: | R14 J01 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67678&r=bec |
| By: | Toshihiro Okubo (Faculty of Economics, Keio University); Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Eiichi Tomiura (Graduate School of Economics, Hitotsubashi University) |
| Abstract: | Cluster policy is designed to facilitate inter-firm networking. We examine industrial clusters in Japan based on firm-level transaction data. Firms in clusters expand transaction networks at a higher speed, but significantly only with firms in the agglomerated core Tokyo, not with local firms within the same region. We confirm the robustness by regional historical background as instruments. By disaggregating firms by their main bank types, we find that cluster firms expanding networks are mainly financed by regional banks, not by banks with nation-wide operations. This suggests the importance of intensive relationship with the main banks for inter-firm network formation. |
| Keywords: | cluster policy, transaction network |
| JEL: | O25 R11 R38 R58 |
| Date: | 2016–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2016-019&r=bec |
| By: | Andrea Linarello (Banca d'Italia); Andrea Petrella (Banca d'Italia) |
| Abstract: | This paper investigates the contribution of allocative efficiency to aggregate labor productivity growth in Italy between 2005 and 2013. Exploiting a unique dataset that covers the universe of active firms, we find that allocative efficiency accounted for 35 per cent of aggregate productivity in 2005 and its weight increased by almost 7 percentage points during the period of observation. We show that the dynamics of aggregate labor productivity benefited from the reallocation of resources among continuing firms and from the net effect of business demography. Among industries, we find that reallocation has been stronger in industries that are more exposed to import competition from developing countries. Moreover, we document that the observed adjustments have not evenly affected all firms across the productivity distribution: selection has become tougher for firms belonging to the lower tail, forcing the exit of the least productive firms and favoring the reallocation of the workforce to the best performing firms. |
| Keywords: | aggregate labor productivity, allocative efficiency |
| JEL: | L25 O47 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_353_16&r=bec |