nep-bec New Economics Papers
on Business Economics
Issue of 2018‒05‒28
thirteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Does the Stock Market Make Firms More Productive? By Bennett, Benjamin; Stulz, Rene M.; Wang, Zexi
  2. The career dynamics of high-skilled women and men: Evidence from Sweden By Albrecht, James; Bronson, Mary Ann; Skogman Thoursie, Peter; Vroman, Susan
  3. Why Has Idiosyncratic Risk Been Historically Low in Recent Years? By Bartram, Sohnke M.; Brown, Gregory W.; Stulz, Rene M.
  4. The Macrodynamics of Sorting between Workers and Firms By Jeremy Lise; Jean-Marc Robin
  5. What Is the Impact of Successful Cyberattacks on Target Firms? By Kamiya, Shinichi; Kang, Jun-Koo; Kim, Jungmin; Milidonis, Andreas; Stulz, Rene M.
  6. Do CEOs Make Their Own Luck? Relative Versus Absolute Performance Evaluation and Firm Risk By Wruck, Karen H.; Wu, YiLin
  7. Aggregation, Capital Heterogeneity, and the Investment CAPM By Goncalves, Andrei; Xue, Chen; Zhang, Lu
  8. Selecting Directors Using Machine Learning By Erel, Isil; Stern, Lea Henny; Tan, Chenhao; Weisbach, Michael S.
  9. How Do Firms Utilize the Deferred Patent Examination System? Evidence from Korea By Junbyoung Oh; Zhen Lei; Siwei Cao
  10. Lending Relationships and the Collateral Channel By Gareth Anderson; Saleem Bahaj; Matthieu Chavaz; Angus Foulis; Gabor Pinter
  11. Accounting-Based Compensation and Debt Contracts By Li, Zhi; Wang, Lingling; Wruck, Karen H.
  12. CEO Overconfidence in Real Estate Markets: A Curse or A Blessing? By Helen Bao; Haotong Li
  13. Sales Performance and Social Preferences By Essl, Andrea; Kosfeld, Michael; Kröll, Markus; Von Bieberstein, Frauke

  1. By: Bennett, Benjamin (Ohio State University); Stulz, Rene M. (Ohio State University); Wang, Zexi (University of Bern)
    Abstract: We test the hypothesis that greater stock price informativeness (SPI) leads to higher firm-level productivity (TFP). Management, directly or indirectly, learns more from more informative stock prices, so that more informative stock prices should make firms more productive. We find a positive relation between SPI and TFP. The relation is stronger for smaller, younger, riskier, less capital-intensive, and financially-constrained firms. Product market competition and better governance amplify the relation, while diversification weakens it. We address endogeneity concerns with fixed effects, instrumental variables, and the use of brokerage house research department closures and S&P 500 additions as plausibly exogenous events.
    JEL: D22 G14 G31
    Date: 2017–11
  2. By: Albrecht, James (Department of Economics, Georgetown University); Bronson, Mary Ann (Department of Economics, Georgetown University); Skogman Thoursie, Peter (Department of Economics, Stockholm University); Vroman, Susan (Department of Economics, Georgetown University)
    Abstract: In this paper, we use matched worker-firm register data from Sweden to examine the career dynamics of high-skill women and men. Specifically, we track wages for up to 20 years among women and men born in the years 1960 - 70 who completed a university degree in business or economics. These women and men have similar wages and earnings at the start of their careers, but their career paths diverge substantially as they age. These men and women also have substantial differences in wage paths associated with becoming a parent. We look at whether firm effects account for the differences we observe between women's and men's wage profiles. We document differences between the firms where men work and those where women work. However, a wage decomposition suggests that these differences in firm characteristics play only a small role in explaining the gender log wage gap among these workers. We then examine whether gender differences in firm-to-firm mobility help explain the patterns in wages that we see. Men and women both exhibit greater mobility early in their careers, but there is little gender difference in this firm-to-firm mobility. We find that the main driver of the gender difference in log wage profiles are that men experience higher wage gains than women do both as "switchers" and as "stayers".
    Keywords: Wages; Earnings; Gender gaps; Firms
    JEL: J16 J31
    Date: 2018–05–22
  3. By: Bartram, Sohnke M. (University of Warwick); Brown, Gregory W. (University of North Carolina); Stulz, Rene M. (Ohio State University)
    Abstract: Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds.
    JEL: G10 G11 G12
    Date: 2018–01
  4. By: Jeremy Lise (University College of London); Jean-Marc Robin (Département d'économie)
    Abstract: We develop an equilibrium model of on-the-job search with ex ante heterogeneous workers and firms, aggregate uncertainty, and vacancy creation. The model produces rich dynamics in which the distributions of unemployed workers, vacancies, and worker-firm matches evolve stochastically over time. We prove that the surplus function, which fully characterizes the match value and the mobility decision of workers, does not depend on these distributions. This result means the model is tractable and can be estimated. We illustrate the quantitative implications of the model by fitting to US aggregate labor market data from 1951-2012. The model has rich implications for the cyclical dynamics of the distribution of skills of the unemployed, the distribution of types of vacancies posted, and sorting between heterogeneous workers and firms.
    JEL: E24 E32 J24 J63 J64
    Date: 2017–04
  5. By: Kamiya, Shinichi (Nanyang Technological University); Kang, Jun-Koo (Nanyang Technological University); Kim, Jungmin (Hong Kong Polytechnic University); Milidonis, Andreas (University of Cyprus); Stulz, Rene M. (Ohio State University)
    Abstract: We examine which firms are targets of successful cyberattacks and how they are affected. We find that cyberattacks are more likely to occur at larger and more visible firms, more highly valued firms, firms with more intangible assets, and firms with less board attention to risk management. These attacks affect firms adversely when consumer financial information is appropriated, but seem to have little impact otherwise. Attacks where consumer financial information is appropriated are associated with a significant negative stock market reaction, an increase in leverage following greater debt issuance, a deterioration in credit ratings, and an increase in cash flow volatility. These attacks also affect sales growth adversely for large firms and firms in retail industries, and there is evidence that they decrease investment in the short run. Affected firms respond to such attacks by cutting the CEO's bonus as a fraction of total compensation, by reducing the risk-taking incentives of management, and by taking actions to strengthen their risk management. The evidence is consistent with cyberattacks increasing boards' assessment of target firm risk exposures and decreasing their risk appetite.
    JEL: G14 G32 G34 G35
    Date: 2018–03
  6. By: Wruck, Karen H. (Ohio State University); Wu, YiLin (National Taiwan University)
    Abstract: Influenced by their compensation plans, CEOs make their own luck through decisions that affect future firm risk. After adopting a relative performance evaluation (RPE) plan, total and idiosyncratic risk are higher, and the correlation between firm and industry performance is lower. The opposite is true for firms that adopt absolute performance evaluation (APE) plans. Plans including accounting-based performance metrics and/or cash payouts have weaker risk-related incentives. The higher idiosyncratic risk associated with RPE increases a firm's exposure to downside stock return risk and lowers credit quality. Our findings are economically consistent with observed differences in firms' financial and investment policies.
    JEL: D22 G12 G32 G34 J33 J41 O31
    Date: 2017–10
  7. By: Goncalves, Andrei (Ohio State University); Xue, Chen (University of Cincinnati); Zhang, Lu (Ohio State University)
    Abstract: This paper provides a careful treatment of aggregation, and to a lesser extent, capital heterogeneity in the investment CAPM. Firm-level investment returns are constructed from firm-level variables, and then aggregated to the portfolio level to match with portfolio-level stock returns. Current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously, and partially explains the positive stock-investment return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
    JEL: D21 D92 E22 E44 G12 G14 G31 G32 G34
    Date: 2017–12
  8. By: Erel, Isil (Ohio State University); Stern, Lea Henny (University of Washington); Tan, Chenhao (University of Colorado); Weisbach, Michael S. (Ohio State University)
    Abstract: Can an algorithm assist firms in their hiring decisions of corporate directors? This paper proposes a method of selecting boards of directors that relies on machine learning. We develop algorithms with the goal of selecting directors that would be preferred by the shareholders of a particular firm. Using shareholder support for individual directors in subsequent elections and firm profitability as performance measures, we construct algorithms to make out-of-sample predictions of these measures of director performance. We then run tests of the quality of these predictions and show that, when compared with a realistic pool of potential candidates, directors predicted to do poorly by our algorithms indeed rank much lower in performance than directors who were predicted to do well. Deviations from the benchmark provided by the algorithms suggest that firm-selected directors are more likely to be male, have previously held more directorships, have fewer qualifications and larger networks. Machine learning holds promise for understanding the process by which existing governance structures are chosen, and has potential to help real world firms improve their governance.
    JEL: G34 M12 M51
    Date: 2018–03
  9. By: Junbyoung Oh (Inha University); Zhen Lei (Pennsylvania State University); Siwei Cao (Beijing Normal University)
    Abstract: This paper investigates firm behaviors on examination request under the deferred patent examination system in Korea. We examine firm decisions on whether and when to request patent examinations when they face both uncertainty about inven- tion¡¯s value and market competition. We find that the examination request in Korea has an interesting bi-polar distribution, and both uncertainty about an invention¡¯s value and market competition have significant impacts on firm¡¯s decision for exam- ination request. Applicants tend to utilize option value of waiting when uncertainty is high, but market competition attenuates the option value: the higher the com- petition, the less likely applicants are to delay or forego examination. Our study extends the empirical literature on deferred examination system but also provides a more comprehensive understanding on the irreversible investment decision under both uncertainty and competition.
    Keywords: deferred patent examination system, uncertainty, competition, real options, irreversible investment
    JEL: D22 L19 O30 O34
    Date: 2018–05
  10. By: Gareth Anderson (Centre for Macroeconomics (CFM); University of Oxford); Saleem Bahaj (Bank of England; Centre for Macroeconomics (CFM)); Matthieu Chavaz (Bank of England); Angus Foulis (Bank of England; Centre for Macroeconomics (CFM)); Gabor Pinter (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: This paper shows that lending relationships insulate corporate investment from shocks to collateral values. We construct a novel database covering the banking relationships of UK firms, as well as those of their board members and executives. We find that the sensitivity of corporate investment to shocks to real estate collateral value is halved when the length of the bank-firm relationship increases from the 25th to the 75th percentile. This effect is substantially reduced for firms whose executives have a personal mortgage relationship with their firm’s bank. Our findings provide support for theories where collateral and private information are substitutes in mitigating credit frictions over the cycle.
    Date: 2018–05
  11. By: Li, Zhi (Chapman University); Wang, Lingling (University of Connecticut); Wruck, Karen H. (Ohio State University)
    Abstract: Adding accounting-based performance plans to management compensation packages influences borrowing costs and structure of corporate debt contracts. After granting long-term accounting-based incentive plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new loans. Lenders impose fewer earnings-based covenants after firms adopt earnings-based LTAPs. Results are stronger for firms with high leverage or bankruptcy risk, and that are difficult for lenders to monitor. Results are robust to alternative borrowing cost measures, including new public bond spreads, credit ratings, and CDS spreads. Overall, evidence suggests that adding LTAPs to compensation packages helps align debtholder and shareholder interests.
    JEL: G30 J33 M41 M52
    Date: 2018–02
  12. By: Helen Bao; Haotong Li
    Abstract: This paper studies the influence of CEO overconfidence on firms’ financial performance and corporate social responsibility (CSR) in the US real estate investment trust (REIT) market. CEO overconfidence has been shown to have both negative and positive influences on firms. This paper is the first to combine the two sides in a single framework. We find that firms with overconfident CEOs tend to have better CSR performance. In addition, better CSR performance can increase firms’ financial performance, but this positive relationship is undermined by the existence of overconfident CEOs. Our results not only shed light on the two sides of CEO overconfidence in the real estate sector, but also provide a new prospective for research on the CSR–financial performance relationship.
    Keywords: CEO overconfidence; Corporate Social Responsibility; Financial Performance; REIT
    JEL: R3
    Date: 2017–07–01
  13. By: Essl, Andrea; Kosfeld, Michael; Kröll, Markus; Von Bieberstein, Frauke
    Abstract: We use an incentivized experimental game to uncover heterogeneity in other-regarding preferences among salespeople in a large Austrian retail chain. Our results show that the majority of agents take the welfare of others into account but a significant fraction reveals self-regarding behavior. Matching individual behavior in the game with firm data on sales performance shows that higher concern for others is significantly associated with higher revenue per customer. At the same time, it is also associated with fewer sales per day. Both effects offset each other, so that the overall association with total sales revenue becomes insignificant. Our findings highlight the nuanced role of self- vs. other-regarding concerns in sales contexts with important implications for management and marketing research.
    Keywords: experimental games; other-regarding preferences; sales performance
    JEL: C91 D91 M31
    Date: 2018–05

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