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on Business Economics |
| By: | Alvaro Remesal (CUNEF) |
| Abstract: | I estimate a dynamic agency model to quantify the importance of dismissals in CEO incentives vis-à-vis pecuniary compensation. The model features endogenous dynamics in deferred and ow compensation, as well as exogenous departures, and endogenous dismissals after poor firm performance. Thus, the model functions as a classification device for CEO turnover events that exploits information from all the departures in the data. I estimate the model via the Simulated Method of Moments, using data for CEOs in U.S. public firms appointed from 1993 to 2013. The estimated CEO dismissal rate is 1.2 percent, and the CEO replacement cost represents 3.4 percent of firm assets, 64 million in 2015 U.S. dollars for the median firm. Poor governance, proxied by director independence, increases the replacement costs in big firms. The relationship reverses in small firms, so board independence must also capture better hiring policies or career concerns of directors. The results confirm that CEO dismissals are infrequent. However, changes in the cost of replacements that generate small increases in the underlying dismissal rate lead to substantial reductions in the size of incentive compensation. |
| Keywords: | Executives, CEO turnover, CEO compensation, governance, dismissal, SMM. |
| JEL: | G34 J33 J63 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2018_1809&r=bec |
| By: | Amador, José; Sazedj, Sharmin; Tavares, José |
| Abstract: | A firm's optimal choice of a CEO involves a trade-off between hiring newcomers - who take time to profit from learning by doing - and avoiding CEO turnover or opting for internal successions - risking that the old guard fall prey to an experience trap, repeating the same old business practices. When firms are hit by an aggregate economic shock, exogenous, unexpected, and unprecedented in nature, reach, magnitude and persistence, conducting 'business as usual' no longer applies and having in office a newcomer - a CEO hired recently from another firm - may turn out to be particularly valuable to efficiently abandon old management practices. We use a unique matched firm-employee dataset for Portuguese firms in the wake of the last economic crisis, to estimate the value of a newcomer CEO, who is by nature prone to avoid the experience trap. During the crisis, firms run by newcomer CEOs outperform those run by high tenured and/or internally promoted CEOs in terms of both value added (GVA) and sales. We estimate a performance gap of approximately 18%, and confirm that no such gap exists prior to the crisis. Firms managed by newcomers are also less likely to fail during the crisis. Propensity core matching confirms our difference-in-differences results. Our findings are robust to different measures of firm performance, across different samples and specifications, and to the inclusion of several CEO and firm controls, including fixed effects. Finally, we show that newcomer CEOs make different decisions in terms of personnel, expenditure, investment and international trade, attaining higher productivity levels. |
| Keywords: | CEO tenure; firm performance; great recession |
| JEL: | G34 J24 L25 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13294&r=bec |
| By: | Fischer, Christian; Rasch, Alexander |
| Abstract: | We analyze a situation in which two horizontally differentiated firms compete in two-part tariffs (i.e., a linear and fixed price), and some consumers are not informed about the linear per-unit price. We show that there is a non-monotone relationship between the degree of consumer-side transparency and firm profits. Moreover, different from a situation without uninformed consumers, firms may make higher profits under two-part tariffs than under fixed fees only. There is also a non-monotone relationship between transparency and consumer surplus. Our model can explain why firms are against the abolishment of roaming fees and why the European Commission (EC) promotes it. |
| Keywords: | fixed fee,linear price,roaming,transparency,two-part tariff |
| JEL: | D43 L13 L42 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc18:181642&r=bec |
| By: | Alvaro Remesal (CUNEF) |
| Abstract: | Clawback provisions allow shareholders to recover previously-awarded compensation from managers involved in accounting manipulation or misconduct. I assess theoretically and empirically the effects of clawback provisions on the structure of managerial compensation and the frequency of accounting manipulation. In a principal-agent model I show how, in the presence of clawback enforcement frictions, clawback adoption can tilt the optimal compensation schedule towards the long-term. I test the empirical relevance of the theoretical implication using data from U.S. public firms in the 2002-2016 period. The identification deals with the endogenous timing of adoption and measurement error by exploiting variation in clawback adoption across a firm's board interlock. I find that, in those firms with fewer pre-adoption independent directors, clawback adoption increases the wealthperformance sensitivity of unvested (long-term) compensation, while reduces the frequency of earnings manipulation. The results suggest that enforcement frictions are relevant, particularly for firms where managers face weak monitoring by shareholders. |
| Keywords: | Clawback, executives, governance, compensation, accounting manipulation. |
| JEL: | D86 G34 J33 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2018_1808&r=bec |
| By: | Giovanni Dosi (Laboratory of Economics and Management); Mauro Napoletano (Observatoire français des conjonctures économiques); Andrea Roventini (Laboratory of Economics and Management (LEM)); Tania Treibich (Observatoire français des conjonctures économiques) |
| Abstract: | In this work we study the granular origins of business cycles and their possible underlying drivers. As shown by Gabaix (2011), the skewed nature of firm size distributions implies that idiosyncratic (and independent) firm-level shocks may account for a significant portion of aggregate volatility. Yet, we question the original view grounded on “supply granularity”, as proxied by productivity growth shocks – in line with the Real Business Cycle framework–, and we provide empirical evidence of a “demand granularity”, based on investment growth shocks instead. The role of demand in explaining aggregate fluctuations is further corroborated by means of a macroeconomic Agent-Based Model of the “Schumpeter meeting Keynes” family (Dosi et al., 2015). Indeed, the investigation of the possible microfoundation of RBC has led us to the identification of a sort of microfounded Keynesian multiplier. |
| Keywords: | Business cycles; Granular residual; Granularity hypothesis; Agent-based model; Firm dynamics; Productivity growth; Investment growth |
| JEL: | C63 E12 E22 E32 O4 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/21q7rlmakq8ca9c6o2imhini9d&r=bec |
| By: | Guillaume Plantin (Département d'économie); Jean Tirole (Toulouse School of Economics) |
| Abstract: | Building on the idea that accounting matters for corporate governance, this paper studies the equilibrium interaction between the measurement rules that firms find privately optimal, firms’ governance, and the liquidity in the secondary market for their assets. This equilibrium approach reveals an excessive use of market-value accounting: corporate performance measures rely excessively on the information generated by other firms’ asset sales and insufficiently on the realization of a firm’s own capital gains. This dries up market liquidity and reduces the informativeness of price signals, thereby making it more costly for firms to overcome their agency problems. |
| Keywords: | Cost and market value accounting; Agency; Gains trading; Equilibrium accounting rules |
| JEL: | D21 D82 G34 G38 M41 M48 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/4mmob120cl8g9ph8aisjq72u3h&r=bec |
| By: | Sarah Bana; Kelly Bedard; Maya Rossin-Slater; Jenna Stearns |
| Abstract: | California's Disability Insurance (DI) and Paid Family Leave (PFL) programs have become important sources of social insurance, with benefit payments now exceeding those of the state's Unemployment Insurance program. However, there is considerable inequality in program take-up. While existing research shows that firm-specific factors explain a significant part of the growing earnings inequality in the U.S., little is known about the role of firms in determining the use of public leave-taking benefits. Using administrative data from California, we find strong evidence that DI and PFL program take-up is substantially higher in firms with high earnings premiums. A one standard deviation increase in the firm premium is associated with a 57 percent higher claim rate incidence. Our results suggest that changes in firm behavior have the potential to impact social insurance use and thus reduce an important dimension of inequality in America. |
| JEL: | J31 J32 J38 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25163&r=bec |
| By: | Tanel Rebane |
| Abstract: | This paper examines the complementary relationship between product innovation, marketing innovation and cooperation with clients, based on data from Estonian firms. The author evaluated complementary relationship in terms of its effect on the firm’s total factor productivity. This study uses the Community Innovation Survey (CIS) and Estonian Business Register data from the years 2002–2012 and the Heckman selection model to research the complementarity effect between studied innovation activities using the supermodularity approach. The results show that product innovation and marketing innovation are complementary in the service industry, but in manufacturing industry there is lack of evidence for the effect of complementarity. Cooperation with clients showed inconclusive complementarity test results involving both innovation types in both industries. Using panel data as a robustness test showed more insights into the complementary effects between cooperation with clients and the studied forms of innovation. However, the results show a weak complementarity effect between cooperation and innovation and suggest that there is still no clear complementarity effect. |
| Keywords: | Product innovation, Marketing innovation, Cooperation with clients, Complementarity, Performance |
| JEL: | C13 D24 L25 O30 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mtk:febawb:113&r=bec |
| By: | Akcigit, Ufuk; Baslandze, Salomé; Lotti, Francesca |
| Abstract: | Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity - a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. |
| Keywords: | creative destruction; Firm Dynamics; Innovation; Political Connections; productivity |
| JEL: | D7 O3 O4 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13216&r=bec |
| By: | Moscarini, Giuseppe (Yale University); Postel-Vinay, Fabien (University College London) |
| Abstract: | We propose a highly tractable way of analyzing business cycles in an environment with random job search both off- and and on-the-job (OJS). Ex post heterogeneity in productivity across jobs generates a job ladder. Firms Bertrand-compete for employed workers, as in the Sequential Auctions protocol of Postel-Vinay and Robin (2002). We identify three channels through which OJS amplifies and propagates aggregate shocks: (i) a higher estimated elasticity of the matching function, when recognizing that at least half of all hires are from other employers; (ii) the differential returns to hiring employed and unemployed job applicants, whose proportions naturally vary over the business cycle; (iii) within employment, the slow reallocation of workers through OJS across rungs of the job ladder, generating endogenous, slowly evolving opportunities for further poaching, which feed back on job creation incentives. Endogenous job destruction, due to either aggregate or idiosyncratic shocks, is countercyclical and thus raises the cyclical volatility of unemployment, closer to its empirical value; but it also stimulates job creation in recessions, to take advantage of the fresh batch of unemployed, and tilts the Beveridge curve up. OJS corrects this tendency and restores a vacancy-unemployment trade-off more in line with empirical observations. |
| Keywords: | labor reallocation, business cycles, search frictions |
| JEL: | E24 E32 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11853&r=bec |
| By: | Ana M. Fernandes; Peter J. Klenow; Sergii Meleshchuk; Denisse Pierola; Andrés Rodríguez-Clare |
| Abstract: | The Melitz model highlights the importance of the extensive margin (the number of firms exporting) for trade flows. Using the World Bank's Exporter Dynamics Database (EDD) featuring firm-level exports from 50 countries, we find that around 50% of variation in exports is along the extensive margin --- a quantitative victory for the Melitz framework. The remaining 50% on the intensive margin (exports per exporting firm) contradicts a special case of Melitz with Pareto-distributed firm productivity, which has become a tractable benchmark. This benchmark model predicts that, conditional on the fixed costs of exporting, all variation in exports across trading partners should occur on the extensive margin. We find that moving from a Pareto to a lognormal distribution allows the Melitz model to match the role of the intensive margin in the EDD. We use likelihood methods and the EDD to estimate a generalized Melitz model with a joint lognormal distribution for firm-level productivity, fixed costs and demand shifters, and use "exact hat algebra" to quantify the effects of a decline in trade costs on trade flows and welfare in the estimated model. The welfare effects turn out to be quite close to those in the standard Melitz-Pareto model when we choose the Pareto shape parameter to fit the average trade elasticity implied by our estimated Melitz-lognormal model, although there are significant differences regarding the effects on trade flows. |
| JEL: | F00 F14 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25195&r=bec |
| By: | Negrete Garcia, Ana Karen |
| Abstract: | This paper investigates the existence and nature of constraints prevailing among Mexican microenterprises. It provides inter-temporal insights by relying on firm-level data spanning from 1994 to 2012. A performance index is defined based on firm levels of capital stock and monthly profits, and is used to estimate the empirical probability of a business's success. The predicted values are used to classify every microenterprise into one of three categories: upper, middle, or lower segment. Overall, the study provides evidence of constrained productivity and capital misallocation. Specifically, middle-segment firms exhibit entrepreneurial features and their average marginal returns are 15 percent. Because this segment faces mainly external constraints, cost-effective interventions are plausible. Regarding the lower-segment firms, it is estimated that their average monthly marginal returns are 30 per cent, compared to 1 per cent for the upper segment. It is also shown that, over time, the share that middle-segment firms represent relative to all microenterprises increased from 16 to 22 percent. Lastly, the sources of variation in monthly profits among segments are explored using the Oaxaca-Blinder decomposition method. |
| Keywords: | microenterprises,returns to capital,constrained productivity,Mexico,decomposition method,empirical probability |
| JEL: | C25 D22 D24 N86 O12 O17 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gigawp:309&r=bec |
| By: | Galvani, Valentina (University of Alberta, Department of Economics); Li, Lifang (University of Alberta, Department of Economics) |
| Abstract: | We show that firm-level cross-asset predictability for bonds with a high incidence of informed trading is mostly driven by information diffusion. In contrast, the activities of uninformed investors dominate in originating predictability for the remaining bonds in the firm-level cross-section. Capitalizing on these results, we explore the role of informed and uninformed trading in determining the momentum effect. We find that gradual information diffusion is the main driver of short-term momentum. However, the effect of uninformed trading may outweigh that of information in generating large momentum returns, as it is the case for private-issuer bonds. |
| Keywords: | asymmetric information; informed trading; uninformed trading; predictability; momentum; corporate bonds |
| JEL: | G10 G14 |
| Date: | 2018–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2018_017&r=bec |
| By: | Anqi Li; Ming Yang |
| Abstract: | Recent technology advances have given firms the flexibility to process and analyze sophisticated employee performance data at a reduced and yet significant cost. We develop a theory of optimal incentive contracting where the monitoring technology that governs the above described procedure is part of the designer's strategic planning. In otherwise standard principal-agent models with moral hazard, we allow the principal to partition agents' performance data into any finite categories and to pay for the amount of information that the output signal carries. Through analysis of the trade-off between giving incentives to agents and saving the cost of data processing and analysis, we obtain characterizations of optimal monitoring technologies such as information aggregation, strict MLRP, likelihood ratio-convex performance classification, group evaluation in response to high monitoring costs, and assessing the various task performances according to agents' endogenous tendencies to shirk. We examine the implications of these results for workforce management and firms' internal organizations. |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1810.11471&r=bec |
| By: | M. Bürker; I. Mammi; G. A. Minerva |
| Abstract: | This paper studies whether civic capital (those persistent shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities) acts an effective restraint against opportunistic behavior in transactions by looking at the firm-level degree of service outsourcing in Italy. Our results show that firms tend to outsource more services in areas where civic capital is higher. We claim that the rise in the propensity to engage in transactions with outside service suppliers stems from the decrease in opportunism between the parties involved. We consider a dynamic specification which allows to disentangle state dependence of service out- sourcing from firm-level heterogeneity, and we use historical instruments to address the potential endogeneity of civic capital. |
| JEL: | A13 L20 L24 R12 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1125&r=bec |
| By: | Max Gillman; Tamas Csabafi; Ruthira Naraidoo |
| Abstract: | The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. The paper contributes an explanation for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It shows a type of financial retrenchment for the US relative to both Europe and China following a negative bank productivity shock, such as during the 2008 crisis. After 2008, results suggest the Euro-area has been more financially integrated with the US, and China less financially integrated. |
| Date: | 2018–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:ceu:econwp:2018_7&r=bec |