New Economics Papers
on Law and Economics
Issue of 2007‒11‒17
six papers chosen by
Jeong-Joon Lee, Towson University

  1. The Cost of Banking Regulation By Luigi Guiso; Paola Sapienza; Luigi Zingales
  2. The Market for Lawyers: The Value of Information on the Quality of Legal Services. By IOSSA, Elisabetta; JULLIEN, Bruno
  3. Financial Risk in the Biotechnology Industry By Joseph H. Golec; John A. Vernon
  4. Tax Motivated Takings By Thomas J. Miceli; Kathleen Segerson; C. F. Sirmans
  5. Food Markets in Russia. Dynamics of Their Integration By Gluschenko, Konstantin; Khimich, Alexandra
  6. The Italian Chamber of Lords Sits on Listed Company Boards An Empirical Analysis of Italian Listed Company Boards from 1998 to 2006 By Santella, Paolo; Drago, Carlo; Polo, Andrea

  1. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations - access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rate spreads and an increased access to credit at the cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalization
    Keywords: banking regulation, financial development, finance
    JEL: G0 G2 K2
    Date: 2007
  2. By: IOSSA, Elisabetta; JULLIEN, Bruno
    Date: 2007–11
  3. By: Joseph H. Golec; John A. Vernon
    Abstract: The biotechnology industry has been an engine of innovation for the U.S. healthcare system and, more generally, the U.S. economy. It is by far the most research intensive industry in the U.S. In our analyses in the current paper, for example, we find that, over the past 25 years, average R&D intensity (R&D spending to total firm assets) for this industry was 38 percent. Consider that over this same period average R&D intensity for all industries was only about 3 percent. In the current paper we examine this industry along a number of dimensions and estimate its average financial risk. Specifically, we use Compustat and Center for Research in Securities Prices (CRSP) data from 1982 to 2005 for firms defined by the North American Industry Classification System (NAICS) as biotechnology firms to estimate several Fama-French three factor return models. The finance literature has established this model as the gold standard. Single factor models like the Capital Asset Pricing Model (CAPM) do not capture all of the types of systematic risk that influence firm cost of capital. In particular, the CAPM does not reflect the empirical evidence that supports both a size-related and a book-to-market related systematic risk factor . Both of these factors, based on biotech industry characteristics, will exert a greater influence on biotech firms, on average. Another implication is, of course, that cost of capital estimates for the industry will be underestimated when a single factor model, like the CAPM, is used. This also implies that the cost estimates of bringing a new drug and/or biologic to market will be understated if financial risk and cost of capital are measured using a single-factor model. In the current study we find that biotechnology firms are exposed to greater financial risk than other industries and are also more sensitive to policy shocks that affect, or could affect, industry profitability. Average nominal costs of capital over the 1982-2005 time period were 16.25 percent for biotechnology firms. Of course, these average estimates obscure significant variation in financial risk at the firm level, but nonetheless shed light on some interesting aggregate differences in risk. In the current paper we discuss the theoretical links between financial risk, stock prices and returns, and R&D spending. Several caveats are also discussed.
    JEL: G18 G32 I0 I18 K23 L0 L2 L21 L5 L65
    Date: 2007–11
  4. By: Thomas J. Miceli (University of Connecticut); Kathleen Segerson (University of Connecticut); C. F. Sirmans (University of Connecticut)
    Abstract: Tax motivated takings are takings by a local government aimed purely at increasing its tax base. Such an action was justified by the Supreme Court's ruling in Kelo v. New London, which allowed the use of eminent domain for a private redevelopment project on the grounds that the project promised spillover public benefits in the form of jobs and taxes. This paper argues that tax motivated takings can lead to inefficient transfers of land for the simple reason that assessed values understate owners' true values. We therefore propose a reassessment scheme that greatly reduces the risk of this sort of inefficiency.
    Keywords: Eminent domain, holdout problem, property taxes, takings, urban redevelopment
    JEL: H71 K11 R51
    Date: 2007–11
  5. By: Gluschenko, Konstantin (Institute of Economics and Industrial Engineering, Siberian Branch of the Russian Academy of Sciences, Novosibirsk, Russia); Khimich, Alexandra (Higher School of Economics, Moscow, Russia)
    Abstract: In the context of integrated market, a price of any product in regions depends on its demand in a national market rather than in a regional one. Applying the econometric model based on this theoretical statement, the paper assesses to degree the markets of some food products are integrated. The fact that since nearly 1994 the growth of segmentation in such markets changes to the tendency of their integration has been observed. We conclude that there is an integrated food market in Russia; and its integration has been just the same as that one in the countries of developed market economy.
    Keywords: Price dispersion, Market integration, Food markets, Russia, Russian regions
    JEL: K49 P22 P37 R19
    Date: 2007–11
  6. By: Santella, Paolo; Drago, Carlo; Polo, Andrea
    Abstract: The purpose of the present paper is to contribute to the literature on country interlocks by illustrating and analysing the interlocking directorships in the Italian listed companies from 1998 to 2006. We find that over the entire period a high percentage of the Italian listed companies are connected with each other through a very small minority of directors. Such group of interlocking (overwhelmingly male) directors shows a remarkable stability over time with very few entrants and very few exits mainly related to the passing away of the director. We define them for brevity the Lords of the Italian stockmarket. Lords tend to belong to families of directors, with the first five families having more than 100 directorships in nine years. The highest level of connectivity concerns those companies that belong to the MIB 30/S&P-MIB 40 index, the Italian Blue Chips. In particular, practically all the financial Blue Chips are connected with each other through a web of directors continuously from 1998 to 2006. The extent, depth, and stability of the connections among the Italian listed companies, and in particular the main Italian financial companies, raise doubts on the extent of their competitive behaviour.
    Keywords: corporate governance; interlocking directorships; board turnover; antitrust; competition; social network analysis (SNA); exploratory data analysis (EDA); empirical corporate finance
    JEL: K0 C0 G3 M2 L4 L1
    Date: 2007–11–07

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