nep-bec New Economics Papers
on Business Economics
Issue of 2020‒08‒10
seventeen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Earnings Dynamics and Firm-Level Shocks By Friedrich, Benjamin; Laun, Lisa; Meghir, Costas; Pistaferri, Luigi
  2. One Size Does Not Fit All: TFP in the Aftermath of Financial Crises in Three European Countries By Christian Abele; Agnès Bénassy-Quéré; Lionel Fontagné
  3. The age distribution of business firms By Flavio Calvino; Daniele Giachini; Mattia Guerini
  4. Identifying financial constraints By Ferrando, Annalisa; Mulier, Klaas; Verschelde, Marijn; Cherchye, Laurens; De Rock, Bram
  5. Nominal Wage Adjustments and the Composition of Pay: New Evidence from Payroll Data By Daniel Schäfer; Carl Singleton
  6. Job Search and Hiring with Two-sided Limited Information about Workseekers’ Skills By Kate Orkin; Eliana Carranza; Robert Garlick; Neil Rankin
  7. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  8. Firm Size, Life Cycle Dynamics and Growth Constraints: Evidence from Mexico By Christian Saborowski; Florian Misch
  9. The Aggregate Consequences of Default Risk: Evidence from Firm-level Data By Besley, T.; Roland, I.; Van Reenen, J.
  10. The Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms By Thomas Chemmanur; Jie (Jack) He; Xiao (Shaun) Ren; Tao Shu
  11. Does the supply network shape the firm size distribution? The Japanese case By Corrado Di Guilmi; Yoshi Fujiwara
  12. The effect of appraisal interviews and target agreements on employee effort - New evidence using representative data By Kampkötter, Patrick; Maier, Patrick
  13. Networks, start-up capital and women's entrepreneurial performance in Africa: Evidence from Eswatini By Zuzana Brixiová; Thierry Kangoye
  14. Audit fees and corporate innovation: Auditors' response to corporate innovation By Kim, Hyung-Tae; Lee, Seungwon; Park, Sung-Jin; Lee, Brandon
  15. Regulations and technology gap in Europe: the role of firm dynamics By Sara Amoroso; Roberto Martino
  16. Firms’ Sustainability Performance and Market Longevity By Fafaliou, Irene; Giaka, Maria; Konstantios, Dimitrios; Polemis, Michael
  17. Human Capitalists and the Global Division of Labor By Jan Schymik

  1. By: Friedrich, Benjamin; Laun, Lisa; Meghir, Costas; Pistaferri, Luigi
    Abstract: We use matched employer-employee data from Sweden to study the role of the firm in affecting the stochastic properties of wages. Our model accounts for endogenous participation and mobility decisions. We find that firm-specific permanent productivity shocks transmit to individual wages, but the effect is mostly concentrated among the high-skilled workers; firm-specific temporary shocks mostly affect the low-skilled. The updates to worker-firm specific match effects over the life of a firm-worker relationship are small. Substantial growth in earnings variance over the life cycle for high-skilled workers is driven by firms accounting for 44% of cross-sectional variance by age 55.
    Keywords: Matched Employer Employee Data
    JEL: H51 H55 I18 J26
    Date: 2019–12
  2. By: Christian Abele (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Lionel Fontagné (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We analyse the impact of both the Global Financial Crisis of 2008 and the European sovereign and banking crisis of 2011-13 on firm-level productivity in France, Italy and Spain. We firstly show that relying on a single break date in 2008 misses both the euro crisis and countries' institutional speci_cities. Secondly, although leverage and financial constraints affect firm-level productivity negatively, high-leverage firms su_er more from financial constraints only in Italy, when they are relatively small or when their debt is of short maturity. These results, which are robust to a series of alternative explanations, call for approaches taking into consideration country-level characteristics of financial institutions and time varying _nancing constraints of the firms, instead of pooling data and adopting a common break date. One size does not fit all when it comes to identifying the impact of financial crises on firm level productivity.
    Keywords: total factor productivity,firm-level data,financial constraints,crises
    Date: 2020–06
  3. By: Flavio Calvino; Daniele Giachini; Mattia Guerini
    Abstract: We investigate upon the shape and the determinants of the age distribution of business firms. By employing a novel dataset covering the population of French businesses, we highlight that a geometric law provides a reasonable approximation for the age distribution. However, relevant systematic deviations and sectoral heterogeneity appear. We develop a stochastic model of firm dynamics to explain the mechanisms behind this evidence and relate them to business dynamism. Results reveal a long-term decline in entry rates and lower survival probabilities of young firms. Our findings bear important implications for aggregate outcomes, notably employment growth.
    Keywords: Firm demographics; age distribution; business dynamism.
    Date: 2020–07–26
  4. By: Ferrando, Annalisa; Mulier, Klaas; Verschelde, Marijn; Cherchye, Laurens; De Rock, Bram
    Abstract: We propose a new methodology to recover firm-time varying financial constraints from firms’ production behavior. We model financial constraints as the profitability that firms forgo when budget constraints on production inputs bind, impeding them from using the optimal level of inputs and technology. We estimate and validate our measure using unique data combining firms’ balance sheets with survey information on self-reported financial constraints, like loan rejections. In contrast to three popular indices of financial constraints, our measure recovers financial constraints beyond observable firm characteristics, recovers cross-sectional and time-varying stylized facts of financial constraints, and is applicable to both public and private firms. JEL Classification: E44, G00, G30, G32
    Keywords: access to finance, financial constraints, identification, indicators, production function
    Date: 2020–06
  5. By: Daniel Schäfer (Economics Department at Johannes Kepler University); Carl Singleton
    Abstract: TWe use representative payroll data from Great Britain to document novel facts about nominal wage adjustments, focusing on workers who stayed in the same firm and job from one year to the next. The richness of these data allows us to analyse basic pay and the other components of earnings, such as overtime and incentive pay, while accounting for hours worked. Weekly and hourly basic pay show signs of downward nominal rigidity, but non-basic pay components adjust more commonly. Unusually, these payroll-based data also report the wage rates of hourly-paid employees. A quarter of these workers typically see no change in their wage rates from one year to the next in the same job, and very few experience wage cuts. We exploit the employer-employee link in the data and find evidence of state-dependent pay setting, depending on the business cycle and whether firms are shrinking or expanding. Finally, we show that the basic and non-basic wages of new hires and existing employees are similarly flexible.
    Keywords: downward nominal wage rigidity, components of pay, hourly pay rates, hiring wages, allocative wages
    JEL: E24 E32 J31 J33
    Date: 2020–06
  6. By: Kate Orkin; Eliana Carranza; Robert Garlick; Neil Rankin
    Abstract: We present field experimental evidence that limited information about workseekers’ skills distorts both firm and workseeker behavior. Assessing workseekers’ skills, giving workseekers their assessment results, and helping them to credibly share the results with firms increases workseekers’ employment and earnings. It also aligns their beliefs and search strategies more closely with their skills. Giving assessment results only to workseekers has similar effects on beliefs and search, but smaller effects on employment and earnings. Giving assessment results only to firms increases callbacks. These patterns are consistent with two-sided information frictions, a new finding that can inform design of information-provision mechanisms.
    JEL: J23 J24 J31 J41 O15 O17
    Date: 2020
  7. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a "fresh start" for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.
    Keywords: Corporate bankruptcy; Capital structure; Firm dynamics; Capital misallocation
    JEL: G30 G33 E22
    Date: 2020–07–28
  8. By: Christian Saborowski; Florian Misch
    Abstract: This paper examines the variation in life cycle growth across the universe of Mexican firms. We establish two stylized facts to motivate our analysis: first, we show that firm size matters for development by illustrating a close correlation with state-level per capita incomes. Second, we show that few firms grow as much as their U.S. peers while the majority stagnates at less than twice their initial size. To gain insights into the distinguishing characteristics of the two groups, we then econometrically decompose life cycle growth across firms. We find that firms that have financial access and multiple establishments and that are formal, part of diversified industries and located in population centers can grow at sizeable rates.
    Keywords: Social security;Economic growth;Development;Services industry;Manufacturing sector;Firm size,Firm growth,Life cycle dynamics,Distortions,Klenow,initial size,Mexican firm,Hsieh,Saborowski
    Date: 2019–05–02
  9. By: Besley, T.; Roland, I.; Van Reenen, J.
    Abstract: This paper studies the implications of perceived default risk for aggregate output and productivity. Using a model of credit contracts with moral hazard, we show that a firm’s probability of default is a sufficient statistic for capital allocation. The theoretical framework suggests an aggregate measure of the impact of credit market frictions based on firm-level probabilities of default which can be applied using data on firm-level employment and default risk. We obtain direct estimates of firm-level default probabilities using Standard and Poor’s PD Model to capture the expectations that lenders were forming based on their historical information sets. We implement the method on the UK, an economy that was strongly exposed to the global financial crisis and where we can match default probabilities to administrative data on the population of 1.5 million firms per year. As expected, we find a strong correlation between default risk and a firm’s future performance. We estimate that credit frictions (i) cause an output loss of around 28% per year on average; (ii) are much larger for firms with under 250 employees and (iii) that losses are overwhelmingly due to a lower overall capital stock rather than a misallocation of credit across firms with heterogeneous productivity. Further, we find that these losses accounted for over half of the productivity fall between 2008 and 2009, and persisted for smaller (although not larger) firms.
    Keywords: productivity, default risk, credit frictions, misallocation
    JEL: D24 E32 L11 O47
    Date: 2019–12–02
  10. By: Thomas Chemmanur; Jie (Jack) He; Xiao (Shaun) Ren; Tao Shu
    Abstract: The U.S. equity markets have experienced a remarkable decline in IPOs since 2000, both in terms of smaller IPO volume and entrepreneurial firms’ greater tendency to exit through acquisitions rather than IPOs. Using proprietary U.S. Census data on private firms, we conduct a comprehensive analysis of the above two notable trends and provide several new insights. First, we find that the dramatic reduction in U.S. IPOs is not due to a weaker economy that is unable to produce enough “exit eligible” private firms: in fact, the average total factor productivity (TFP) of private firms is slightly higher post-2000 compared to pre-2000. Second, we do not find evidence supporting the conventional wisdom that the disappearing IPO puzzle is mainly driven by the decline in IPO propensity among small private firms. Third, we do not find a significant change in the characteristics of private firms exiting through acquisitions from pre- to post-2000. Fourth, the decline in IPO propensity persists even after we account for the changing characteristics of private firms over time. Fifth, we show that the difference in TFP between IPO firms and acquired firms (and between IPO firms and firms remaining private) went up considerably post-2000 compared to pre-2000. Finally, venture-capital-backed (VC-backed) IPO firms have significantly lower postexit long-term TFP than matched VC-backed private firms in the post-2000 era relative to the pre- 2000 era, while this pattern is absent among IPO and matched private firms without VC backing. Overall, our results strongly support the explanations based on standalone public firms’ greater sensitivity to product market competition and entrepreneurial firms’ access to more abundant private equity financing in the post-2000 era. We find mixed evidence regarding the explanations based on the smaller net financial benefits of being standalone public firms or the increased need for confidentiality after 2000.
    Keywords: IPOs, Exit Choices, Disappearing IPOs, Private Equity, Weak Economy, Product Market Competition
    JEL: G32 G34 G24
    Date: 2020–06
  11. By: Corrado Di Guilmi; Yoshi Fujiwara
    Abstract: The relationship between firms’ growth rates and firm size distribution has been extensively analyzed in the literature. In particular, the breakdown of Gibrat law for medium and small firms has been identified as the reason for the emergence of a power law only in right tail of the size distribution. However, the growth rates of firms are not mutually independent, since firms are connected in the supply network and idiosyncratic shocks are transmitted through the networks links. This paper presents a stylized empirical and theoretical investigation on the Japanese supply network to shed light on the effects of demand shock on the growth of firms in the different layers of the network. We find that the growth rates are more volatile for small firms, which tend to be located upstream in the supply network, leading to the breakdown of the Gibrat law. The difference in growth volatility depends on the fact that downstream shocks are amplified as they are transmitted upward in the supply chain. The extent of the amplification depends on the level of connectivity of the network and, more precisely, it is larger in more dense networks. Further, the level to which a firm is affected depends on its relative position within the network.
    Date: 2020–07
  12. By: Kampkötter, Patrick; Maier, Patrick
    Abstract: Performance measurement and evaluation systems are among the most common management instruments. An integral element of this process is the use of targets, typically set in appraisal interviews and formalized via written target agreements. In this paper, we investigate the relationship between performance management and evaluation systems and individual effort, proxied by the commonly used concept of work engagement. Using four waves of a new representative, linked employer-employee data set, the Linked Personnel Panel (LPP), we apply fixed effects estimations to account for unobserved heterogeneity. Our results show positive and statistically significant relationships between the presence of a performance management and evaluation process and employee engagement on the individual level. We are further able to differentiate between appraisal interviews and written target agreements which allows us to show a positive effect of appraisal interviews and an additional positive effect of target agreements. In addition, we find first evidence that these direct relationships are partially mediated by goal clarity and procedural fairness.
    Keywords: Target Agreements,Performance Appraisals,Work Engagement,Goal Clarity,Procedural Fairness
    JEL: D23 J01 J33 M41 M52
    Date: 2020
  13. By: Zuzana Brixiová (University of Economics in Prague and VSB – Technical University of Ostrava, SALDRU Research Affiliate, University of Cape Town); Thierry Kangoye (African Development Bank)
    Abstract: This paper analyzes the role of networks in the access of female entrepreneurs to start-up capital and firm performance in Eswatini, a country with one of the highest female unemployment rates in Africa. The paper first shows that higher initial capital is associated with better sales performance for both men and women entrepreneurs. Women entrepreneurs start their firms with smaller start-up capital than men and are more likely to fund it from their own sources, which reduces the size of their firm and sales level. However, women with higher education start their firms with more capital than their less educated counterparts. Moreover, women who receive support from professional networks have higher initial capital, while those trained in financial literacy more often access external funding sources, including through their networks.
    Keywords: Networks, start-up capital, women's entrepreneurship, multivariate analysis, Africa
    Date: 2019
  14. By: Kim, Hyung-Tae; Lee, Seungwon; Park, Sung-Jin; Lee, Brandon
    Abstract: We investigate the extent to which a client’s innovative effort affects the level of audit effort and whether the innovative-effort efficiency can attenuate the demand for greater audit effort associated with a client’s risky research-and-development (R&D) investments. We find that a client firm’s strategic emphasis on corporate innovations may require greater audit effort, but the efficiency of a firm’s innovative effort can attenuate the demand for heightened audit effort against risky, innovative efforts. Findings suggest that the external auditor does not always discourage corporate innovation as the efficiency of a firm’s innovation may lower the client business risk perceived by an auditor.
    Keywords: Corporate innovation; Auditors; Research and development; Risk management
    JEL: M42 O32
    Date: 2019–05–27
  15. By: Sara Amoroso (European Commission - JRC); Roberto Martino (European Commission - RTD)
    Abstract: In this paper, we develop a new firm-level measure of distance to the productivity frontier that accounts for international technology spillovers stemming from the use of imported intermediate goods. The trade-weighted technological distance to frontier is matched with sector- and country-level data on regulation and firm dynamics (entry and exit rates) of 16 European countries. Using our measure of trade-adjusted technology gap, we investigate the role of labour, capital, and product market regulatory frameworks in the technology catch-up process, gauging the effect of firms' dynamics in mediating and moderating the impact of regulation on the technology gap. Our study offers a novel perspective and insights to the analysis of the link between framework conditions and technological distance to frontier. While most scholars argue that less regulation always favours productivity growth and the diffusion of technology, our results provide a more nuanced picture. Deregulation is not a one-size-fits-all solution that leads to faster technology diffusion, instead heterogeneity in business dynamism and countries' regulatory structures need to be considered.
    Keywords: Innovation diffusion, Framework conditions, Business dynamics, Technological frontier
    JEL: L16 L50 M21 O33
    Date: 2020–07
  16. By: Fafaliou, Irene; Giaka, Maria; Konstantios, Dimitrios; Polemis, Michael
    Abstract: This study examines the impact of sustainability (ESG) on US listed firms’ exit decision. Using a recent dataset of a large number of US firms over the period 2007- 2016, we perform a dynamic empirical analysis of the relation between ESG and firms’ exiting mechanism by measuring environmental, social and governance issues. We provide evidence that corporate sustainability is a tool that can reduce risks and enable companies to boost surviving mechanisms and face less probability of failure. Finally, we perform several statistical tests for robustness purposes
    Keywords: Sustainability; Longevity, Corporate Sustainability Performance
    JEL: G1 G3 L2 M14 O1
    Date: 2020–06
  17. By: Jan Schymik
    Abstract: Many corporate top earners are compensated with equity claims on firms’ profits. This paper investigates the consequences of trade-induced economic reallocation on the compensation structure of top earners. I introduce managerial equity ownership into a model of heterogeneous firms to show that reallocation of economic activity towards large, import intensive firms raises the prevalence of equity ownership within these firms. Calibrating the model suggests that equity ownership responds more elastically to globalization than labor incomes such that focusing on the income skill premium fundamentally underestimates the returns to globalization for top earners. I then combine data on equity ownership and income streams for British and U.S. top managers with international I-O tables and firm level data to study this relation empirically. Using a shift-share instrumentation strategy, I find that improved access to global input markets raises the value of equity ownership for managers of large and importing firms altering the compensation structure towards lower labor income shares. This suggests that intra-industry reallocation can raise top inequality and the prevalence of capital incomes for top earners.
    Keywords: Top Inequality, Offshoring, Equity Ownership
    JEL: F14 F16 J33 L22
    Date: 2020–01

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