nep-bec New Economics Papers
on Business Economics
Issue of 2022‒01‒31
nine papers chosen by
Vasileios Bougioukos
London South Bank University

  1. Collusive Compensation Schemes Aided by Algorithms By Simon Martin; Wolfgang Benedikt Schmal
  2. Financial Frictions, Firm Dynamics and the Aggregate Economy: Insights from Richer Productivity Processes By Ruiz-García, J. C.
  3. Impact of Corporate Governance on Performance: A Study of Listed Firms in Pakistan By Ali, Amjad; Alim, Wajid; Ahmed, Jawad; Nisar, Sabahat
  4. A Long View of Employment Growth and Firm Dynamics in the United States: Importers vs. Exporters vs. Non-Traders By Kyle Handley; Fariha Kamal; Wei Ouyang
  5. Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach By Wenting Song; Samuel Stern
  6. The Cultural Origins of Family Firms By Yuan, Song; Xie, Jian
  7. Building bridges: Bilateral manager connections and international trade By Hoch, Felix; Rudsinske, Jonas
  8. Do Well Managed Firms Make Better Forecasts? By Nicholas Bloom; Takafumi Kawakubo; Charlotte Meng; Paul Mizen; Rebecca Riley; Tatsuro Senga; John Van Reenen
  9. Does boardroom diversity impact the financial performance of FTSE 350 firms? By Corniciuc, Iarina

  1. By: Simon Martin; Wolfgang Benedikt Schmal
    Abstract: Sophisticated collusive compensation schemes such as assigning future market shares or direct transfers are frequently observed in detected cartels. We show formally why these schemes are useful for dampening deviation incentives when colluding firms are temporary asymmetric. The relative attractiveness of each of these schemes is shaped by firms’ ability to predict future market conditions, possibly aided by algorithms. Prices and profits are inverse u-shaped in prediction ability. Assigning future market shares is optimal when prediction ability is intermediate, and otherwise direct transfers are optimal. Competition authority's limited resources should be utilized to respond to these changing market conditions.
    Keywords: algorithmic collusion, market forecasting, prediction ability, firm asymmetry, compensation schemes
    JEL: D21 L41 L51
    Date: 2021
  2. By: Ruiz-García, J. C.
    Abstract: How do financial frictions affect firm dynamics, allocation of resources across firms, and aggregate productivity and output? Is the nature of productivity shocks that firms face primary for the effects of financial frictions? I first use a comprehensive dataset of Spanish firms from 1999 to 2014 to estimate non-parametrically the firm productivity dynamics. I find that the productivity process is non-linear, as persistence and shock variability depend on past productivity, and productivity shocks are non-Gaussian. These dynamics differ from the ones implied by a standard AR(1) process, commonly used in the firm dynamics literature. I then build a model of firm dynamics with financial frictions in which productivity shocks are non-linear and non-Gaussian. The model is consistent with a host of evidence on firm dynamics, financial frictions, and firms’ financial behaviour. In the model economy, financial frictions affect the firm life cycle. Without financial frictions, the size of an entrant firm will be three times larger. Furthermore, profit accumulation, which allows firms to overcome financial frictions, is slow, and it only speeds up when firms are mature. As a consequence, the average exiting firm is smaller than it would be without financial frictions. The aggregate consequences of financial frictions are significant. They result in misallocation of capital and reduce aggregate productivity by 16%. This figure is only 8% if productivity dynamics evolve according to a standard AR(1) process.
    Keywords: Firm Dynamics, Non-Linear Productivity Process, Financial Frictions, Misallocation
    JEL: E22 G32 O16
    Date: 2021–08–03
  3. By: Ali, Amjad; Alim, Wajid; Ahmed, Jawad; Nisar, Sabahat
    Abstract: The objective of this exploration is to show the relationships among corporate governance tools (Board size, board independence, CEO status, Board Education, and Established Years of the firm) and firm performance which is determined by Return on Asset (ROA). Quantitative data is used to discover the association between the variables. The top seventy-five companies registered on the Pakistan Stock Exchange involving the period from 2010 to 2019 are taken as a sample. The research found that there is a connection between the performance of the firm with the overall extent of directors, board independence, and average education of board representatives. Insignificant results came for CEO duality and established years of the firm. The result predicted that an increase in total board members and average education of board members will increase firm performance (ROA) whereas a reduction in board independence will reduce firm performance (ROA) which explains the importance of corporate governance for the success of firm performance. Unlike previous studies, this study tried to find a long-term influence of corporate governance on firm performance by analyzing five different variables for the listed firms of Pakistan. The study provides the importance of corporate governance tools and their effectiveness for the success of organizations, especially in Pakistan.
    Keywords: Corporate Governance; Firm Performance; Pakistan; ROA; CEO Duality; Board Size; Board Independence; Board Education
    JEL: G3 G30
    Date: 2021
  4. By: Kyle Handley; Fariha Kamal; Wei Ouyang
    Abstract: The first experimental product from the U.S. Census Bureau's Business Dynamics Statistics (BDS) program -- BDS-Goods Traders -- provides annual, public-use measures of business dynamics by four mutually exclusive goods-trading classifications: exporter only, importer only, exporter and importer, and non-trader. The BDS-Goods Traders offers a comprehensive view of employment growth at firms associated with goods trading activities in the United States from 1992-2019. We highlight three patterns. First, employment is skewed towards goods traders in several ways. Only 6% of all U.S. firms are goods traders but they account for half of total employment. Moreover, 80% of large firms and 70% of older firms are goods traders. Second, exporter-importer firms represent 70% of manufacturing employment and over half of employment in services-producing industries (management, retail, transportation, utilities, and wholesale). Third, goods-traders exhibit higher net job creation rates than non-traders controlling for firm size, age, and sector. Goods traders contribution to total job creation grows over time, rising to more than half after 2008.
    Keywords: exporters, importers, job creation, job destruction, entry, exit
    JEL: F10 F14 F23
    Date: 2021–12
  5. By: Wenting Song; Samuel Stern
    Abstract: This paper provides direct evidence of the importance of firm attention to macro-economic dynamics. We construct a text-based measure of firm attention to macro-economic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. We use the measure to calibrate a quantitative model of rationally inattentive firms with hetero-geneous costs of information. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.
    Keywords: Business fluctuations and cycles; Inflation and prices, Monetary policy
    JEL: D83 E44 E52
    Date: 2022–01
  6. By: Yuan, Song; Xie, Jian
    Abstract: What determines the prevalence of family firms? In this project, we investigate the role of historical family culture in the spatial distribution of family firms. Using detailed firm-level data from China, we find that there is a larger share of family firms in regions with a stronger historical family culture, as measured by genealogy density. The results are further confirmed by an instrumental variable approach and the nearest neighbor matching method. Examining the mechanisms, we find that entrepreneurs in regions with a stronger historical family culture: i) tend to have family members engage more in firms; ii) are more likely to raise initial capital from family members; iii) are more willing to pass on the firms to their children. Historical family culture predicts better firm performance due to a lower leverage ratio.
    Keywords: Family Culture; Family Firms; Genealogy; Cultural Origins; Firm Performance
    JEL: D02 D2 G3 L2 M1 Z1
    Date: 2021–12
  7. By: Hoch, Felix; Rudsinske, Jonas
    Abstract: We investigate whether top managers with personal ties to a foreign country facilitate trade with that country by overcoming bilateral trade barriers that obstruct international business relationships. Using individual managers' nationality, we construct a novel database of bilateral top manager connections. We analyze the trade effects of these bilateral manager connections both on the firm and on the country level. On the country level, we provide evidence for a positive effect on both bilateral exports and imports. On the firm level, we find positive effects on destination-specific foreign sales. We show that this firm-level effect is especially pronounced for institutionally distant destinations, which we interpret as bridging the gap between institutionally dissimilar countries. Furthermore, the effect is stronger for destinations with less developed institutions indicating that manager connections help overcoming trade barriers created by low institutional quality. Moreover, we show that the strength of this effect also depends on characteristics of the individual manager. Namely, the effect differs between connections of male and female managers. Gender discriminating institutions in the destination country severely downsize the pro-trade effect of female managers' connections, which could give rise to an unintended importing of gender inequality regarding management positions.
    Keywords: International trade,gravity,international business,board composition,institutions,gender equality
    JEL: F14 F22 F23 J16 J61 K38 M16
    Date: 2021
  8. By: Nicholas Bloom; Takafumi Kawakubo; Charlotte Meng; Paul Mizen; Rebecca Riley; Tatsuro Senga; John Van Reenen
    Abstract: We link a new UK management survey covering 8,000 firms to panel data on productivity in manufacturing and services. There is a large variation in management practices, which are highly correlated with productivity, profitability and size. Uniquely, the survey collects firms’ micro forecasts of their own sales and also macro forecasts of GDP. We find that better managed firms make more accurate micro and macro forecasts, even after controlling for their size, age, industry and many other factors. We also show better managed firms appear aware that their forecasts are more accurate, with lower subjective uncertainty around central values. These stylized facts suggest that one reason for the superior performance of better managed firms is that they knowingly make more accurate forecasts, enabling them to make superior operational and strategic choices.
    JEL: J0
    Date: 2021–12
  9. By: Corniciuc, Iarina (University of Warwick)
    Abstract: This paper examines the impact of diversity on a firm's financial performance, a topic which requires more research due to the fast changes in boardroom composition and the inconclusive previous literature. The main analysis utilises panel data with a fixed effect model to examine FTSE 350 UK firms between 2001 and 2020. Results show that the percent of females is positively and significantly correlated with the two firm performance variables, Tobin's Q and ROA. Initial results also show that a higher count of nationalities have a positive and significant impact on firm performance. These results are in line with various theories which state that diverse groups are found to be more innovative as they cover a wider range of knowledge. The paper provides empirical proof of token theory, which states that gender diversity below a threshold of 15% has a negative impact on a firm's performance. This could be due to being perceived as a minority causing isolation, which in turn impacts performance. Results also show that the critical mass point, where most benefits are reaped in the relationship, lies at 40% and above female directors. This is in line with the proposed EU directive of a quota of 40% female directors.Â
    Keywords: G34 ; G38 ; J15 ; J16 ; J48 JEL Classification: Corporate Governance ; Board Diversity ; Critical Mass Theory ; Token Theory ; Performance
    Date: 2021

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