nep-bec New Economics Papers
on Business Economics
Issue of 2022‒03‒28
eight papers chosen by
Vasileios Bougioukos
London South Bank University

  1. Consequences of zombie businesses: Australia’s experience By Joel Bowman
  2. Multi-product Firms in International Economics By Michael Irlacher
  3. The Dispersion of Mark-ups in an Open Economy By Stéphane Auray; Aurélien Eyquem
  4. Competition, profitability and financial leverage By Banal Estanol, Albert; Siciliani, Paolo; Yoon, Kyoungsoo
  5. Business investment, the user cost of capital and firm heterogeneity By Alari Paulus
  6. Which Investors Matter for Global Equity Valuations and Expected Returns? By Ralph S. J. Koijen; Robert J. Richmond; Motohiro Yogo
  7. Organizational Structure and Pricing: Evidence from a Large U.S. Airline By Ali Hortacsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
  8. The Effect of External Innovation on Firm Employment By Guillermo Arenas Díaz; Andrés Barge-Gil; Joost Heijs; Alberto Marzucchi

  1. By: Joel Bowman
    Abstract: This paper assesses the consequences of zombie businesses in Australia between 2001/02 to 2018/19. Zombie businesses are broadly defined as businesses whose ability to meet interest expenses from current profits is less compared with other firms operating within the same industry. This work finds that an increasing share of labour sunk into zombie businesses is correlated with weaker activity for viable businesses operating within the same industry. However, it does not find that zombie firms adversely affect the allocative efficiency of labour and capital and does not reduce the responsiveness of business exits to productivity. Further, the spillover effect of zombie firms does not appear to be propagated by the crowding out of financing or the imposition of additional entry barriers for firms operating within the same industry. Overall, the stable share of labour allocated to zombie firms at an aggregate level since 2007 suggests that it is unlikely that the adverse effects of zombie firms explain the slowdown in Australia’s economic activity since the mid 2000s.
    Keywords: Zombie Firms, Labour Productivity, Firm Dynamics, Resource Allocation
    JEL: D24 E22 G33 J24 L25
    Date: 2022–03
  2. By: Michael Irlacher
    Abstract: A striking pattern in transaction-level data is the concentration of international shipments in the hands of a few large firms. One common feature of dominating high-performance firms is that they produce multiple products and ship them to many destinations. Motivated by the emergence of highly detailed data at the firm-product-destination level, a series of theoretical and empirical papers studies the role of multi-product firms (MPFs) in international trade. This survey reviews the evidence on the importance of MPFs in international markets and highlights the key theoretical as well as empirical results that the literature has produced in the last decade.
    Keywords: Survey; Multi-product firms; International Economics; Theory; Empirics
    JEL: F10 F12 F14
    Date: 2022–02
  3. By: Stéphane Auray (CREST-Ensai and ULCO, France); Aurélien Eyquem (Université Lumière Lyon2, France)
    Abstract: We introduce heterogeneous mark-ups through Bertrand competition in a two-country model with endogenous firms' entry and tradability à la Ghironi and Melitz (2005). Bertrand competition generates a distribution of mark-ups according to which firms that are larger and more productive charge lower prices, attract larger market shares and extract larger mark-ups. First, we characterize first-best allocations and their implementation. We find that they are independent from the degree of mark-ups' heterogeneity, suppress the dispersion of mark-ups and imply zero distortions on labor as well as substantial subsidies to preserve firm's incentives to enter. Second, second-best alternative policies with a restricted number ofi nstruments and a balanced budget significantly reduce the potential welfare gains from fiscal policies. Third, the total welfare losses from passive policies are lower under heterogeneous mark-ups than under homogeneous mark-ups: while th edispersion of mark-ups has negative effects on the intensive margin, output per firm, it also raises expected profits for potential entrants and raises the extensive margin, the number of firms in both domestic and export markets, pushing them closer to their efficient levels. Fourth, we also investigate the dynamic properties of allocations under passive and optimal policies considering aggregate productivity shocks and trade liberalization experiments.
    Keywords: Heterogeneous firms, Endogenous Entry, Open economy, Strategic pricing, Optimal taxation
    JEL: D4 E20 E32
    Date: 2021–06–15
  4. By: Banal Estanol, Albert (Universitat Pompeu Fabra); Siciliani, Paolo (Bank of England); Yoon, Kyoungsoo (Bank of Korea)
    Abstract: We investigate the relationship between profitability and financial leverage for US listed non-financial corporations by taking into account the degree of product similarity among competing firms, which can drive intense pricing rivalry thus undermining the sustainability of high price-cost mark-ups. We find that in markets characterized by high price-cost mark-ups notwithstanding high product similarity, the relationship between profitability and financial leverage is negative. Instead, in the rest of the markets we find a positive relationship, consistent with the dynamic trade-off theory of corporate finance, whereby firms increase their degree of financial leverage in response to profitability improvements. Not only do firms exposed to comparatively higher degree of product substitutability make less use of financial leverage, but they also rely relatively less on long-term debt. The difference is especially attributable to the period after the great financial crisis.
    Keywords: Financial leverage; competition; profitability
    JEL: D21 G32 L13 L41
    Date: 2022–02–18
  5. By: Alari Paulus
    Abstract: The sensitivity of business fixed investment to one of its key determinants, the user cost of capital, has been little investigated with firm-level data that captures firm heterogeneity to the full extent. I study the determinants of business fixed investment in Estonia, using the universe of business statements for non-financial firms in 1994-2020 from administrative records. The results with various panel data models provide strong support for a theoretical long-term relationship between the gross investment rate, and changes in production output and the user cost of capital. I find that the capital stock is modestly responsive to changes in output and the user cost of capital, with elasticities less than 0.5 in absolute size, and that different estimation strategies yield broadly similar results. Elasticities differ by firm size, but sectoral variation is relatively limited. User cost elasticities also exhibit notable variation over time, while output elasticities are much more stable. I also find that investments in machinery and equipment are more elastic than investments in buildings and structures.
    Keywords: business investment, user cost of capital, corporate taxation, firm panel data
    JEL: D22 E22 H32
    Date: 2022–03–24
  6. By: Ralph S. J. Koijen (University of Chicago); Robert J. Richmond (New York University); Motohiro Yogo (Princeton University)
    Abstract: To understand why valuation ratios vary across firms and over time, a large literature in asset pricing decomposes these ratios into expected returns and expected growth rates of firm fundamentals. This literature leaves two fundamental questions unanswered: (i) what information do investors attend to in forming their demand beyond prices and (ii) how important are different investors in the price formation process? We use a demand system approach to answer both questions. We first show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an asset demand system using investor-level holdings data, allowing for flexible substitution patterns within and across countries. We use this framework to measure the relative importance of investors — differentiated by type, size, and active share — for connecting firm characteristics to prices and long-horizon expected returns.
    Keywords: price formation, investors
    JEL: G1
    Date: 2020–06
  7. By: Ali Hortacsu (University of Chicago and NBER); Olivia R. Natan (University of California, Berkeley); Hayden Parsley (University of Texas, Austin); Timothy Schwieg (University of Chicago, Booth); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Although typically modeled as a centralized firm decision, pricing often involves multiple organizational teams that have decision rights over specific pricing inputs. We study team input decisions using comprehensive data from a large U.S. airline. We document that pricing at a sophisticated firm is subject to miscoordination across teams, uses persistently biased forecasts, and does not account for cross-price elasticities. With structural demand estimates derived from sales and search data, we find that addressing one team’s biases in isolation has little impact on market outcomes. We show that teams do not optimally account for biases introduced by other teams. We estimate that corrected and coordinated inputs would lead to a significant reallocation of capacity. Leisure consumers would benefit from lower fares, and business customers would face significantly higher fares. Dead-weight loss would increase in the markets studied. Finally, we discuss likely mechanisms for the observed pricing biases.
    Keywords: Pricing, Organizational Structure, Revenue Management, Pricing Frictions, Behavioral IO
    JEL: C11 C53 D22 D42 L10 L93
    Date: 2021–11
  8. By: Guillermo Arenas Díaz (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore); Andrés Barge-Gil (Department of Economic Analysis, Complutense University of Madrid, ICAE and GRIPICO, Madrid, Spain); Joost Heijs (Department of Applied Economics, Structure and History, Complutense University of Madrid, Madrid, Spain); Alberto Marzucchi (Gran Sasso Science Institute, Social Sciences, L'Aquila, Italia)
    Abstract: This paper analyses the effects of product innovations introduced by firms in upstream and downstream sectors and firms in the same sector on firm employment. To this aim, we extend the Harrison et al. (2014) model to analyse the relationship between firm innovation and employment to account for innovation in the same and related sectors. We employ panel data for the innovation activities of Spanish firms together with input–output data. The results show that product innovation by firms in the same sector harms the firm's employment, which is consistent with a business-stealing mechanism. A negative effect on employment is found for the introduction of new products in upstream sectors, which results in the reduction of labour in the focal firm. The type of labour that is displaced by innovations introduced by both same-sector and upstream firms is predominantly low-skilled. No significant effects are found for innovations introduced in downstream industries.
    Keywords: same sector, downstream and upstream sectors, product innovation, employment growth
    JEL: J23 O31 O33 L6
    Date: 2022–02

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