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on Business Economics |
| By: | Enrico Santarelli (University of Bologna, Max Planck Institute of Economics Jena, ENCORE Amsterdam, and IZA Bonn); Marco Vivarelli (Università Cattolica Piacenza, CSGR Warwick, Max Planck Institute of Economics Jena, and IZA Bonn) |
| Abstract: | This survey paper aims at critically discussing the recent literature on firm formation and survival and the growth of new-born firms. The basic purpose is to single out the microeconomic entrepreneurial foundations of industrial dynamics (entry and exit) and to characterise the founder’s ex-ante features in terms of likely ex-post business performance. The main conclusion is that entry of new firms is heterogeneous with innovative entrepreneurs being found together with passive followers, over-optimist gamblers and even escapees from unemployment. Since founders are heterogeneous and may make "entry mistakes", policy incentives should be highly selective, favouring nascent entrepreneurs endowed with progressive motivation and promising predictors of better business performance. This would lead to the least distortion in the post-entry market selection of efficient entrepreneurs. |
| Keywords: | entrepreneurship, new firm, survival, post-entry performance |
| JEL: | L10 M13 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2475&r=bec |
| By: | Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer |
| Abstract: | We study the relation between corporate governance and opportunistic timing of CEO option grants via backdating or otherwise. Our methodology focuses on how grant date prices rank within the price distribution of the grant month. During 1996-2005, about 12% of firms provided one or more lucky grant -- defined as grants given at the lowest price of the month -- due to opportunistic timing. Lucky grants were more likely when the board did not have a majority of independent directors and/or the CEO had longer tenure -- factors associated with increased influence of the CEO on pay-setting. We find no evidence that gains from manipulated grants served as a substitute for compensation paid through other sources; total reported compensation from such sources was higher in firms providing lucky grants. Finally, opportunistic timing has been widespread throughout the economy, with a significant presence in each of the economy's twelve (Fama-French) industries. |
| JEL: | D23 G32 G38 J33 J44 K22 M14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12771&r=bec |
| By: | Elijah Brewer, III; William E. Jackson, III; Larry D. Wall |
| Abstract: | This paper investigates the impact of the target chief executive officer’s (CEO) postmerger position on the purchase premium and target shareholders’ abnormal returns around the announcement of the deal in a sample of bank mergers during the period 1990–2004. We find evidence that the target shareholders’ returns are negatively related to the postmerger position of their CEO. However, these lower returns are not matched by higher returns to the acquirer’s shareholders, suggesting little or no wealth transfers. Additionally, our evidence suggests that the target CEO becoming a senior officer of the combined firm does not boost the overall value of the merger transaction. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-28&r=bec |
| By: | Dittrich, Dennis; Kocher, Martin |
| Abstract: | We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under selfishness assumptions. Yet, we also find evidence for reciprocal behavior. The data analysis shows, however, that it does not pay for the employer to rely on the reciprocity of employees. |
| Keywords: | efficiency wages; experiment; incentive contracts; incomplete contracts; reciprocity; supervision |
| JEL: | C91 J31 J41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5962&r=bec |
| By: | Mueller, Holger M; Philippon, Thomas |
| Abstract: | Using firm-, industry-, and country-level data, we document a link between family ownership and labour relations. Across countries, we find that family ownership is relatively more prevalent in countries in which labour relations are difficult, consistent with firm-level evidence suggesting that family firms are particularly effective at coping with difficult labour relations. Our cross-country results are robust to controlling for minority shareholder protection and other potential determinants of family ownership. Our results also hold if we use strike data from the 1960s to predict cross-country variation in family ownership thirty years later. We address causality in two ways. First, we instrument our measure of the quality of labour relations using 'Labour Origin', a variable describing the extent to which the emerging European liberal states in the 18th and 19th centuries confronted guilds and labour organizations. Second, making use of within-country variation at the industry level, we show that - controlling for industry and country fixed effects - industries that are more labour dependent have relatively more family ownership in countries with worse labour relations. |
| Keywords: | family firms; labour relations |
| JEL: | G32 J52 J53 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6017&r=bec |
| By: | Gary Gorton; Matthias Kahl; Richard J. Rosen |
| Abstract: | We propose a theory of mergers that combines managerial merger motives and a regime shift that may lead to some value- increasing merger opportunities. Anticipation of the regime shift can lead to mergers, either for defensive or positioning reasons. Defensive mergers occur when managers acquire other firms to avoid being acquired themselves. Mergers may also allow a firm to position itself as a more attractive takeover target and earn a takeover premium. The identity of acquirers and targets and the profitability of acquisitions depend, among other factors, on the distribution of firm sizes within an industry. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-14&r=bec |
| By: | Lubos Pastor; Lucian Taylor; Pietro Veronesi |
| Abstract: | We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the U.S. between 1975 and 2004. |
| JEL: | G1 G3 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12792&r=bec |
| By: | Heitor Almeida; Murillo Campello; Michael S. Weisbach |
| Abstract: | Much of corporate finance is concerned with the impact of financing constraints on firms. However, the literature on financing constraints largely ignores the intertemporal implications of those constraints; in particular, how future financing constraints affect current investment decisions. We present a model in which future financing constraints lead firms to have a current preference for investments with shorter payback periods, investments with less risk, and investments that utilize more liquid/pledgeable assets. The model has a host of implications in different areas of corporate finance, including firms' capital budgeting rules, risk-taking behavior, capital structure choices, hedging strategies, and cash management policies. We show how a number of patterns reported in the empirical literature can be reconciled and interpreted in light of the intertemporal optimization problem firms solve when they face costly external financing. For example, contrary to Jensen and Meckling (1976), we show that firms may reduce rather than increase risk when leverage increases exogenously. Furthermore, firms in economies with less developed financial markets will not only take different quantities of investment, but will also take different kinds of investment (safer, short-term projects that are potentially less profitable). We also point out to several predictions that have not been empirically examined. For example, our model predicts that investment safety and liquidity are complementary: constrained firms are specially likely to distort the risk profile of their most liquid investments. |
| JEL: | G31 G32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12773&r=bec |
| By: | Bas ter Weel (MERIT, Maastricht University and IZA Bonn) |
| Abstract: | This research examines the impact of manager turnover on firm performance using information from the Dutch soccer league in the period 1986-2004. The advantage of using sports data is that both manager characteristics and decisions and firm outcomes are directly observable. Both difference-in-difference and 2SLS estimates suggest no improvements in firm performance after manager turnover, whereas previous research based on publicly traded firm data has found positive but very small effects of manager turnover on firm performance. In addition, manager quality does not seem to matter in predicting turnover. These estimates are compared and contrasted with studies using publicly traded firm data. |
| Keywords: | management turnover, firm performance |
| JEL: | J24 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2483&r=bec |
| By: | Ekkehart Schlicht (University of Munich and IZA Bonn) |
| Abstract: | Offering higher wages may enable firms to attract more applicants and screen them more carefully. If firms compete in this way in the labor market, "selection wages" emerge. This note illustrates this wage-setting mechanism. Selection wages may engender unconventional results, such as a pre-tax wage compression induced by the introduction of a progressive wage tax. |
| Keywords: | wage formation, efficiency wage, incentive wage, mobility, job-specific pay, wage-tax |
| JEL: | J31 J41 J62 J63 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2507&r=bec |
| By: | Horst Raff; Michael Ryan |
| Abstract: | This paper uses a proportional hazard model to study foreign direct investment by Japanese manufacturers in Europe between 1970 and 1994. We divide each firm’s investment total into a sequence of individual investment decisions and analyze how firm-specific characteristics affect each decision. We find that total factor productivity is a significant determinant of a firm’s initial and subsequent investments. Parent-firm size does not have a significant influence on the initial decision to invest. Large firms simply have more investments than smaller firms. Other firm-specific characteristics, such as the R&D intensity, export share and keiretsu membership, also play a role in the investment process. |
| Keywords: | foreign direct investment, productivity, hazard model, Japan, keiretsu |
| JEL: | F23 L20 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1874&r=bec |
| By: | Ferrett, Ben; Wooton, Ian |
| Abstract: | Intuition suggests that the international distribution of firm ownership ought to affect tax/subsidy competition for mobile plants. One might expect that the greater the share of a firm owned within a potential host country that offers a relatively profitable production location, the more that nation will be prepared to pay to attract the firm's production facility. We show this intuition to be false. In equilibrium, both plant location and the tax/subsidy offers are independent of the international distribution of ownership. The reason is that the tax/subsidy competition equalises the firm's post-tax profits across countries, making owners of capital indifferent towards the location of production. |
| Keywords: | foreign direct investment; international distribution of firm ownership; tax/subsidy competition |
| JEL: | F12 F23 H25 H73 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5984&r=bec |
| By: | Filippo VERGARA CAFFARELLI (Bank of Italy) |
| Abstract: | Vertical integration followed by quantity competition is studied. In the first stage of the game downstream firms simultaneously decide whether to integrate with one of the upstream suppliers. If firms are not able to observe whether their vertically integrated competitor enters the intermediate-good market then they are indifferent about vertical integration. If the entry choice of the integrated firm is observable then the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entry observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs. |
| Keywords: | Vertical integration, Cournot competition, Market entry |
| JEL: | L13 L22 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_608_06&r=bec |
| By: | Jaap H. Abbring; Jeffrey R. Campbell |
| Abstract: | This paper extends the static analysis of oligopoly structure into an infinite- horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first- out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms’ equilibrium entry and survival decisions. Bresnahan and Reiss’s (1993) empirical analysis of oligopolists’ entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game- theoretic foundation for that structure. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-28&r=bec |
| By: | Andrea Bassanini; Giorgio Brunello |
| Abstract: | According to Becker [1964], when labour markets are perfectly competitive, general training is paid by the worker, who reaps all the benefits from the investment. Therefore, ceteris paribus, the greater the training wage premium, the greater the investment in general training. Using data from the European Community Household Panel, we compute a proxy of the training wage premium in clusters of homogeneous workers and find that smaller premia induce greater incidence of off-site training, which is likely to impart general skills. Our findings suggest that the Becker model provides insufficient guidance to understand empirical training patterns. Conversely, they are not inconsistent with theories of training in imperfectly competitive labour markets, in which firms may be willing to finance general training if the wage structure is compressed, that is, if the increase in productivity after training is greater than the increase in pay. <BR>Dans la théorie de Becker [1964], lorsque le marché du travail est en concurrence parfaite, seuls les salariéss investissent dans la formation générale, car ils sont les seuls à pouvoir s’approprier les retombées bénéfiques de la formation. Par conséquent, toutes choses égales par ailleurs, plus la prime salariale à la formation est élevée et plus l’investissement en formation est importante. Sur la base des données du Panel Communautaire des Ménages, nous calculons une proxy de la prime salariale à la formation pour des groupes homogènes de salariés et nous trouvons une relation inverse entre cette proxy et l’incidence de la formation hors site, qui concerne, selon toute vraisemblance, des compétences relativement générales. Nos résultats suggèrent que le modèle de Becker ne fournit pas une clé interprétative suffisante pour comprendre les tendances empiriques de la formation. Par contre, la distribution de la formation ne semble pas être en contradiction avec les théories de la formation qui prévoient que, lorsque le marché du travail est en concurrence imparfaite, les entreprises peuvent être disposées à investir en formation si l’augmentation de la productivité qui en découle est supérieure à l’augmentation du salaire. |
| JEL: | J24 J31 J41 |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaab:41-en&r=bec |
| By: | Jaap H. Abbring; Jeffrey R. Campbell |
| Abstract: | This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov- perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last- in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer’s entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-29&r=bec |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | We develop a general equilibrium multicountry model and use it to evaluate concerns of high U.S. current account deficits and a declining net U.S. investment position. We introduce technology capital which can be used by multinationals in some or all of their domestic and foreign operations. Prime examples are brand equity and patents. This capital is intangible and is therefore expensed rather than capitalized. The expensing of the investment implies that there are differences in reported and actual balance of payments and net asset positions. Although our model economy has efficient domestic and international capital markets, the predicted equilibrium paths for the reported series exhibit similar behavior to the observed U.S. time series. Thus, on the basis of our model’s quantitative predictions, we conclude that there is no prima facie evidence that the large current account deficits are a harbinger of a future crisis. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:646&r=bec |
| By: | Ruud de Mooij; Gaetan Nicodème |
| Abstract: | In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on firm births and legal form of business to analyze income shifting via increased entrepreneurship and incorporation. The results suggest that lower corporate taxes exert an ambiguous effect on entrepreneurship. The effect on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s. |
| Keywords: | corporate tax, personal tax, entrepreneurship, incorporation, income shifting |
| JEL: | H25 M13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1883&r=bec |
| By: | Naghavi, Alireza; Ottaviano, Gianmarco I P |
| Abstract: | We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions. |
| Keywords: | growth; incomplete contracts; innovation; offshoring |
| JEL: | F12 F23 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6008&r=bec |