New Economics Papers
on Law and Economics
Issue of 2007‒09‒09
four papers chosen by
Jeong-Joon Lee, Towson University

  1. Accounting for the Rise in Consumer Bankruptcies By Igor Livshits; James MacGee; Michèle Tertilt
  2. Board Committees, CEO Compensation, and Earnings Management By Christian Laux; Volker Laux
  3. Institutional Owners and the Return on Investments By Bjuggren, Per-Olof; Eklund, Johan E.; Wiberg, Daniel
  4. Corporate Governance and Investments in Scandinavia - ownership concentration and dual-class equity structure By Eklund, Johan E.

  1. By: Igor Livshits; James MacGee; Michèle Tertilt
    Abstract: Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
    JEL: E21 E44 G18 K35
    Date: 2007–09
  2. By: Christian Laux; Volker Laux
    Abstract: We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of performance-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.
    Keywords: Corporate Governance, Executive Compensation, Earnings Management, Board Oversight
    JEL: M41 D23 D73 G34 K22 L29
    Date: 2007–03
  3. By: Bjuggren, Per-Olof (JIBS and CESIS); Eklund, Johan E. (JIBS and CESIS); Wiberg, Daniel (JIBS and CESIS)
    Abstract: Examining a large number of Swedish listed firms, this paper analyses how institutional owners affects the investment decisions and firm performance. During the last decades the ownership structure of Swedish firms has undergone dramatic changes: institutional and foreign investors have been increasing their stakes, whereas Swedish households have decreased in importance. Controlling owners, often founding families, remain in control by resorting to an extensive use of dual-class shares. To measure investment performance Mueller and Reardon’s (1993) marginal q is used. Marginal q measures the ratio of the return on investments to the cost of capital. We find that institutional and foreign owners positively influence the performance of firms. Furthermore a non-liner relation between ownership concentration and performance is found. This is consistent with positive incentive effects and negative entrenchment effects. The practice of dual-class shares which separate cash-flow rights and control rights is also found to be an important determinant of firm performance.
    Keywords: marginal q; investment returns; institutional owners
    JEL: C23 G30 K22 L25
    Date: 2007–09–06
  4. By: Eklund, Johan E. (JIBS and CESIS)
    Abstract: Juridical-political theories suggest that legal origin (La Porta et al. (1997)) and political factors (Roe (2003)) matters for firm performance. In Scandinavia there are a number of legal practices, with common political roots, that impinge on the distribution of corporate control, which accordingly may affect firm performance. This paper examines the return on investments and the effects of ownership concentration in a large sample of listed Scandinavian firms. As a performance measure marginal q developed by Mueller and Reardon (1993) is used. Marginal q measures the marginal return on capital relative its cost of capital. This is a more appropriate measure of performance than Tobin’s average q. The question of how ownership concentration affects managerial investment decisions is examined. A Scandinavian corporate governance feature is the wide spread use of vote-differentiation. How deviations from the one-share-one-vote principle affects this ownership-performance relationship is analyzed.
    Keywords: Investments; Marginal q; Corporate Governance; Ownership Concentration; Dual-Class Shares
    JEL: C23 G30 K22 L25
    Date: 2007–09–06

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