nep-bec New Economics Papers
on Business Economics
Issue of 2016‒11‒27
seventeen papers chosen by
Vasileios Bougioukos
Bangor University

  2. Management Practices and Productivity in Germany By Broszeit, Sandra; Fritsch, Ursula; Görg, Holger; Laible, Marie-Christine
  3. Firm Size Distribution and Employment Fluctuations: Theory and Evidence By Görg, Holger; Henze, Philipp; Jienwatcharamongkhol, Viroj; Kopasker, Daniel; Molana, Hassan; Montagna, Catia; Sjöholm, Fredrik
  4. Innovation, creative destruction and structural change: Firm-level evidence from European Countries By Dachs, Bernhard; Hud, Martin; Koehler, Christian; Peters, Bettina
  5. Employment effects of innovations over the business cycle: Firm-level evidence from European countries By Dachs, Bernhard; Hud, Martin; Koehler, Christian; Peters, Bettina
  6. Distorted monopolistic competition By Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, Jens
  7. Taxation, infrastructure, and firm performance in developing countries By Lisa Chauvet; Marin Ferry
  8. The Impact of Emerging Market Competition on Innovation and Business Strategy By Lorenz Kueng; Nicholas Li; Mu-Jeung Yang
  9. Misallocation Cycles By Lars Kuehn; David Schreindorfer; Cedric Ehouarne
  10. Distorted monopolistic competition By Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Südekum, Jens
  11. Movements of Wages over the Business Cycle: An Intra-Firm View By Beth Anne Wilson
  12. Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation By Georgi Burlakov
  13. Corporate Leverage, Firm Characteristics and Financial Crisis By Jang-Shee Barry Lin
  14. Corporate Deleveraging By Harry DeAngelo; Andrei S. Gonçalves; René M. Stulz
  15. The origin of CEOs and its influence on microfinance performance and risk-taking By Daudi Pascal; Leif Atle Beisland; Roy Mersland
  16. Labor Unemployment Risk and CEO Incentive Compensation By Ellul, Andrew; Wang, Cong; Zhang, Kuo
  17. The Dynamics of Multinational Activity: Evidence from U.S. Firms By Natalia Ramondo; Lindsay Oldenski; Stefania Garetto

  1. By: Ayse Altiok-Yilmaz (Bahcesehir University); Elif Akben-Selcuk (Kadir Has University)
    Abstract: The impact of corporate performance on the likelihood of voluntary or disciplinary CEO turnover has been a central research topic in finance. To date, the majority of the studies in the area focused on developed countries and documented a negative relationship between the two variables. However, considering institution differences and different corporate governance mechanisms in emerging markets, the results could differ in other countries. The objective of the present study is to investigate the relationship between CEO turnover and financial performance in an emerging market, Turkey. The sample includes non-financial firms listed on Borsa Istanbul and the period of analysis covers the years 2005-2014. A firm-year is defined as a turnover year if there was a change in the name of the CEO as announced in the company news. The empirical results are consistent with prior literature and indicate that financial performance is negatively associated with the probability of CEO turnover. The effect size is stronger in the case of disciplinary turnovers and findings are robust to alternative performance measures. These results suggest that corporate governance mechanisms are not ineffective in Turkey.
    Keywords: CEO turnover, financial performance, Turkey.
  2. By: Broszeit, Sandra (Institute for Employment Research (IAB), Nuremberg); Fritsch, Ursula (Kiel Institute for the World Economy); Görg, Holger (Kiel Institute for the World Economy); Laible, Marie-Christine (Institute for Employment Research (IAB), Nuremberg)
    Abstract: Based on a novel dataset, the "German Management and Organizational Practices" (GMOP) Survey, we calculate establishment specific management scores following Bloom and van Reenen as indicators of management quality. We find substantial heterogeneity in management practices across establishments in Germany, with small firms having lower scores than large firms on average. We show a robust positive and economically important association between the management score and establishment level productivity in Germany. This association increases with firm size. Comparison to a similar survey in the US indicates that the average management score is lower in Germany than in the US. Overall, our results point towards lower management quality being at least in part to blame for the differences in aggregate productivity between Germany and the US.
    Keywords: management practices, firm performance, labor productivity, GMOP, MOPS
    JEL: D24 L2 M2
    Date: 2016–11
  3. By: Görg, Holger (University of Kiel); Henze, Philipp (University of Kiel); Jienwatcharamongkhol, Viroj (Nottingham University (Ningbo)); Kopasker, Daniel (University of Aberdeen); Molana, Hassan (University of Dundee); Montagna, Catia (University of Aberdeen); Sjöholm, Fredrik (Department of Economics, Lund University)
    Abstract: This paper studies the effect of the firm-size distribution on the relationship between employment and output. We construct a theoretical model, which predicts that changes in demand for industry output have larger effects on employment in industries characterised by a distribution that is more skewed towards smaller firms. Industry-specific shape parameters of the firm size distributions are estimated using firm-level data from Germany, Sweden and the UK, and used to augment a relationship between industry-level employment and output. Our empirical results align with the predictions of the theory and confirm that the size distribution of firms is an important determinant of the relationship between changes in output and employment.
    Keywords: Firm distribution; Firm size; Employment; Fluctuations
    JEL: E20 E23 L20
    Date: 2016–11–18
  4. By: Dachs, Bernhard; Hud, Martin; Koehler, Christian; Peters, Bettina
    Abstract: The shift of employment from lower to higher productive firms is an important driver for structural change and industry dynamics. We investigate this reallocation in terms of employment gains and losses from innovation. New employment created by product innovation may be offset by employment losses in related products, known as 'cannibalisation' or 'business stealing' effects in the literature, by employment losses from process and organisational innovation and by general productivity increases. The paper investigates this effect empirically with a large dataset from the European Community Innovation Survey (CIS). We find that employment gains and losses increase with technology intensity of the sector. High-technology manufacturing shows the strongest employment gains and losses from innovation, followed by knowledge-intensive services, low-technology manufacturing and less knowledge-intensive services. The net contribution of innovation to employment growth is mostly positive, an exception being manufacturing industries in recession periods.
    Keywords: innovation,employment,reallocation,technology intensity,compensation effect,displacement effect,cannibalisation effect
    JEL: O33 J23 C26 D2
    Date: 2016
  5. By: Dachs, Bernhard; Hud, Martin; Koehler, Christian; Peters, Bettina
    Abstract: A growing literature investigates how firms' innovation input reacts to changes in the business cycle. However, so far there is no evidence whether there is cyclicality in the effects of innovation on firm performance as well. In this paper, we investigate the employment effects of innovations over the business cycle. Our analysis employs a large data set of manufacturing firms from 26 European countries over the period from 1998 to 2010. Using the structural model of Harrison et al. (2014), our empirical analysis reveals four important findings: First, the net effect of product innovation on employment growth is pro-cyclical. It turns out to be positive in all business cycle phases except for the recession. Second, product innovators are more resilient to recessions than non-product innovators. Even during recessions they are able to substitute demand losses from old products by demand gains of new products to a substantial degree. As a result their net employment losses are significantly lower in recessions than those of non-product innovators. Third, we only find resilience for SMEs but not for large firms. Fourth, process and organizational innovations displace labor primarily during upturn and downturn periods.
    Keywords: innovation,employment,business cycle,resilience,Europe
    JEL: O33 J23 C26 D2
    Date: 2016
  6. By: Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, Jens
    Abstract: We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors is equivalent to the contribution of 68% of the total labor input.
    Keywords: monopolistic competition,welfare distortion,intersectoral distortions,intrasectoral distortions
    JEL: D43 D50 L13
    Date: 2016
  7. By: Lisa Chauvet; Marin Ferry
    Abstract: This paper investigates the relationship between taxation and firm performance in developing countries. Taking firm-level data from the World Bank Enterprise Surveys (WBES) and tax data from the Government Revenue Dataset (ICTD/UNU-WIDER), our results suggest that tax revenue benefits to firm growth in developing countries, especially in low-income countries and lower-middle income countries. These findings are robust to the inclusion of alternative covariates and specifications, and do not appear to be sample dependent. We also provide evidence that the positive effect of taxation on firm growth falls significantly when corruption is too pervasive, and when the origin of tax revenue origin reduces government accountability. Lastly, our paper finds that the positive effect of domestic revenue on firm performance could channel through the financing of public infrastructures vital to firms operating in lower-income countries. Keywords: taxation, firm growth, infrastructure, corruption
  8. By: Lorenz Kueng; Nicholas Li; Mu-Jeung Yang
    Abstract: How do firms in high-income countries adjust to emerging market competition? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports between 1999 and 2005. On average, process innovation declines more strongly than product innovation. In addition, initially more differentiated firms that survive the increase in competition have better performance ex-post, but are ex-ante more likely to exit. Differentiation therefore does not ensure insulation against competitive shocks but instead increases risk.
    JEL: F14 L2 O3
    Date: 2016–11
  9. By: Lars Kuehn (Carnegie Mellon University); David Schreindorfer (Arizona State University); Cedric Ehouarne (Carnegie Mellon University)
    Abstract: We estimate a general equilibrium model with firm heterogeneity and a representative household with Epstein-Zin preferences. Firms face investment frictions and permanent shocks, which feature time-variation in common idiosyncratic skewness. Quantitatively, the model replicates well the cyclical dynamics of the cross-sectional output growth and investment rate distributions. Economically, the model generates business cycles through inefficiencies in the allocation of capital across firms. These cycles arise because (i) permanent Gaussian shocks give rise to a power law distribution in firm size and (ii) rare negative Poisson shocks cause time-variation in common idiosyncratic skewness. Despite the absence of firm-level granularity, a power law in the firm size distribution implies that idiosyncratic Poisson shocks have a large effect on the dynamics of aggregate consumption and wealth. In addition, shocks to aggregate wealth spill over to all firms in the economy because of Epstein-Zin preferences.
    Date: 2016
  10. By: Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Südekum, Jens
    Abstract: We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion - due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors - is equivalent to the contribution of 6-8% of the total labor input.
    Keywords: intersectoral distortions; intrasectoral distortions; monopolistic competition; welfare distortion
    JEL: D43 D50 L13
    Date: 2016–11
  11. By: Beth Anne Wilson
    Abstract: This paper tests the hypothesis that firms adjust to the business cycle by altering employment through promotion and hiring and holding the salary structure and salaries assigned to jobs relatively constant. Two comprehensive firm-level panel datasets are used to examine salary setting and worker movement within firms. The salary structure is found to be rigid whereas promotion rates are cyclically sensitive. In contrast to the hypothesis, wage cyclicality in these two firms is driven by changes in salaries associated with jobs rather than by worker movement. An additional finding is that salaries in the two firms are countercyclical.
    Keywords: Wage cyclicality ; firm-level data
  12. By: Georgi Burlakov
    Abstract: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.
    Keywords: complementary goods; vertical product differentiation; market foreclosure;
    JEL: L11 L13 L15
    Date: 2016–08
  13. By: Jang-Shee Barry Lin (Khalifa University of Science, Technology and Research)
    Abstract: This paper investigates the leverage decision of Japanese firms in their corporate leverage choice by analyzing the multi-directional causal relationship among firm characteristics such as firm size, profitability, tangibility (ratio of fixed to total assets), and growth opportunity (as measured by market-to-book ratio) on firms’ choice of leverage. Using corporate finance data for a large sample of Japanese firms (25,698 firm-years) between 1980 and 2000, this paper finds a highly significant and positive size effect. Tangibility positively affects total debt, but Profitability negatively affects total debt. Market valuation also positively affects total debt. Finally, profitability is positively affected by operating cash flow, growth in sales, and change in earnings. The model is applied to sub-samples before and after the Asian financial crisis and results remain broadly similar before and after the financial crisis. Our findings support the hypothesis that the firm leverage choice is driven by firm characteristics.
    Keywords: Leverage, Profitability, Size effect, Market to book
    JEL: A10
  14. By: Harry DeAngelo; Andrei S. Gonçalves; René M. Stulz
    Abstract: Proactive deleveraging from all-time peak market leverage (ML) to near-zero ML and negative net debt is the norm among 4,476 nonfinancial firms with five or more years of post-peak data. ML is 0.543 at the historical peak and 0.026 at the later trough for the median firm in this sample, with a six-year median time from peak to trough. These deleveraging episodes are largely proactive, with debt repayment and earnings retention accounting for 93.7% of the peak-to-trough decline in ML for the median firm. Attenuated deleveraging, with ML staying well above zero, is the norm at 3,118 firms that are delisted due to financial distress within four years of peak. Leverage is path dependent, with the key to explaining whether ML is high or low at the post-peak trough being how high it was at the peak and prior trough and whether the firm has had only a short time to deleverage, e.g., due to distress-related delisting. The findings are consistent with proactive deleveraging to avoid distress and to restore financial flexibility, and are hard to reconcile with materially positive target leverage ratios.
    JEL: G31 G33 G35
    Date: 2016–11
  15. By: Daudi Pascal; Leif Atle Beisland; Roy Mersland
    Abstract: This study examines the relationships between the origin of chief executive officers (CEOs), and the performance and risk-taking levels of their companies. It is based on a sample of 353 microfinance institutions (MFIs) from 76 countries, with data covering the period 1996-2011. We use return on assets and operational costs as performance metrics, and the standard deviation of return on assets and operational costs as measures of risk. The results suggest that MFIs with an internally-recruited CEO achieve a significantly higher performance than MFIs with an externally-recruited CEO. More specifically, MFIs with an ‘insider CEO’ have a positive association with return on assets, but a negative association with operational costs. Moreover, internally-recruited CEOs appear to be associated with a lower level of risk. We believe that these results are important and have clear policy implications, in particular for an industry with such a thin labour market for CEOs and lack of managerial capacity. Our findings are consistent with the view that insider CEOs have firm-specific skills, experience and network resources that result in an enhanced MFIs performance and low-risk.
    Keywords: CEO; microfinance; performance; risk
    JEL: G21 G32 M12
    Date: 2016–11–21
  16. By: Ellul, Andrew; Wang, Cong; Zhang, Kuo
    Abstract: We investigate the impact of workers' exposure to unemployment risk on the design of CEO incentive compensation. Through its impact on risk-taking activities, option-based compensation is likely to also influence unemployment risk which is internalized by the firm. Exploiting state-level changes in unemployment benefits as a source of variation in workers' unemployment costs, we find that after unemployment insurance benefits become more generous boards increase the CEOs' convex payoff structure. This behavior is consistent with the view that CEO's risk-taking incentives are amplified by the board to take advantage of lower costs associated with unemployment risk. The increase in convexity payoff structures is stronger when CEO wealth is tied closely to firm performance, more pronounced in labor-intensive industries, and attenuated by the strength of unionization. Changes in the incentive structures are associated with riskier investment and financing strategies and better performance. Results suggest that executive compensation is one mechanism used by boards to internalize labor market frictions in firms' decisions.
    Keywords: Executive compensation; Human Capital; leverage; Risk Taking; unemployment risk
    JEL: G32 G34
    Date: 2016–11
  17. By: Natalia Ramondo (UCSD); Lindsay Oldenski (Georgetown University); Stefania Garetto (Boston University)
    Abstract: This paper examines how the activities performed by multinational firms change over time. Using a panel of US multinational firms over 25 years from the US Bureau of Economic Analysis, we classify affiliate sales as horizontal, vertical, or export platform based on their destination, and we trace the evolution of these three types of affiliate sales within firms over time. We establish two stylized facts. First, affiliate sales, both to the local market and to other countries, grow very little over the life cycle of the affiliate. Second, affiliates of U.S. multinational firms specialize in a core activity at birth, which persists as the main activity during the life cycle. Some diversification is observed later in life, particularly from horizontal to export activities. Informed by these facts, we propose a dynamic model of multinational production that is consistent with them. The model can be calibrated to shed light on the nature of the costs of multinational activity, which are essential ingredients to quantify the gains from openness arising from multinationals’ operations.
    Date: 2016

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