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on Business Economics |
| By: | Boyan Jovanovic (Department of Economics, New York University); Peter L. Rousseau (Department of Economics, Vanderbilt University) |
| Abstract: | Investment of U.S. firms responds asymmetrically to Tobin's Q: Investment of established firms -- `intensive' investment -- reacts negatively to Q whereas investment of new firms -- `extensive' investment -- responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q. A composite-capital version of the model fits the data well using aggregates since 1900 and our new database of firm-level Qs that extend back to 1920. |
| Keywords: | Compatibility costs, composite capital, vintage capital, Tobin's Q, 20th century investment |
| JEL: | E3 N1 O3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0912&r=bec |
| By: | Sustek, Roman |
| Abstract: | In most manufacturing industries output is adjusted in a lumpy way along three margins: shiftwork, weekend work, and closing a plant temporarily down. We incorporate such decisions into a dynamic general equilibrium model and study: (i) if such micro-level nonconvexities magnify business cycles; and (ii) if the aggregate effects of changes in firms' borrowing costs due to monetary policy shocks vary over the cycle. Calibrated to industrial observations, the model implies that aggregate output is in fact 25% less volatile than in an economy without such features, and monetary policy shocks have similar effects on output in recessions as in expansions. |
| Keywords: | Nonconvexities; business cycles; capacity utilization; monetary policy; asymmetries |
| JEL: | E32 E22 E23 E52 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17486&r=bec |
| By: | Pascal François; Georges Hubner; Nicolas Papageorgiou |
| Abstract: | In a one-period setting Green (1984) demonstrates that convertible debt perfectly mitigates the asset substitution problem by curbing shareholders’ incentive to increase risk. This is because claimholders design the capital structure precisely when the risk-shifting opportunity is available. In practice, firms do not alter their capital structure over the life of the convertible debt. Hence, when the risk-shifting opportunity arises, convertible debt design may no longer match with firm asset value to mitigate the asset substitution problem. This leaves room for a strategic non-cooperative game between shareholders and convertible debtholders. We show that two risk-shifting scenarios arise as attainable Nash equilibria. Pure asset substitution occurs when, despite convertible debtholders not exercising their conversion option, shareholders still find it profitable to shift risk. Strategic conversion occurs when, despite convertible debtholders giving up the conversion option value, they are better off receiving their share of the wealth expropriation from straight debtholders. We use contingent claims analysis and the Black and Scholes (1973) setup to characterize the equilibria. Even when initial convertibles debt is endogenously designed so as to minimize the likelihood of risk-shifting equilibria, we show that asset substitution cannot be completely eliminated. Our overall conclusion is that – in contrast to agency theory’s claim – convertible debt is an imperfect instrument for mitigating shareholders’ incentive to increase risk. |
| Keywords: | Convertible debt, risk-shifting, non-cooperative game |
| JEL: | C72 G32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0930&r=bec |
| By: | Pawe{\l} Sieczka; Janusz A. Ho{\l}yst |
| Abstract: | We present a simple model of firm rating evolution and resulting bankruptcies, taking into account two sources of defaults: individual dynamics of economic development and ordering interactions between firms. We show that such a defined model leads to phase transition, which results in collective defaults. Our results mean that, in the case when the individual firm dynamics favors dumping of rating changes, there is an optimal strength of firms' interactions from the risk point of view. For small interaction strength parameters there are many independent bankruptcies of individual companies. For large parameters there are giant collective defaults of firm clusters. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:0904.4430&r=bec |
| By: | Yi-Li Chien; Harold L. Cole; Hanno Lustig |
| Abstract: | Our paper examines whether intermittent portfolio re-balancing on the part of some stock market investors can help to explain the counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up an incomplete markets model in which CRRA-utility investors are subject to aggregate and idiosyncratic shocks and have heterogeneous trading technologies. In our model, a large mass of passive investors do not re-balance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors adjust their portfolio each period to respond to changes in the investment opportunity set. We find that intermittent re-balancers amplify the effect of aggregate shocks on the time variation in risk premia by a factor of three in a calibrated version of our model. |
| JEL: | G12 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15382&r=bec |
| By: | Horst Raff ,; Joachim Wagner |
| Abstract: | This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry |
| Keywords: | international trade, firm heterogeneity, productivity, clothing industry |
| JEL: | F12 F15 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1557&r=bec |
| By: | Edward L. Glaeser; William R. Kerr; Giacomo A.M. Ponzetto |
| Abstract: | Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people. |
| JEL: | J00 J2 L0 L1 L2 L6 O3 R2 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15377&r=bec |
| By: | Lihong Han (Department of Economics, Illinois College); Peter L. Rousseau (Department of Economics, Vanderbilt University) |
| Abstract: | Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a prospective target has a non-monotone, inverted U-shaped effect on the probability of the two firms merging. Further, we find that the likelihood of a merger is positively and linearly related to the ratio of the growth potential of an acquirer and its prospective target. Using data from Compustat, a series of bootstrap logit regressions bear out these implications. |
| Keywords: | Total factor productivity, growth potential, bootstrap logit model |
| JEL: | G3 O3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0914&r=bec |
| By: | Andrea Bassanini; Pascal Marianna |
| Abstract: | In the economic literature there is an increasing interest in the process of job creation and destruction as well of hirings and separations. Many studies suggest that idiosyncratic firm-level characteristics shape both job and worker flows in a similar way in all countries. Others argue that cross-country differences in terms of gross job flows are minor. However, these statements are usually based on the comparison of national estimates, typically collected on the basis of different definitions and collection protocols. By contrast, in this paper, we use crosscountry comparable data on both job and worker flows to examine key determinants of these flows and of their cross-country differences. We find that idiosyncratic firm (industry, firm age and size) and worker (age, gender, education) characteristics play an important role for both gross job and worker flows in all countries. Nevertheless, in contrast with part of the literature, we find that, even controlling for these idiosyncratic factors, cross-country differences concerning both gross job and worker flows appear large and of a similar magnitude. Both job and worker flows in countries such as the United States and the United Kingdom exceed those in certain continental European countries by a factor of two. Moreover, the variation of worker flows across different dimensions is well explained by the variation of job flows, suggesting that, to a certain extent, the two flows can be used as substitutes in cross-country analysis. Consistently, churning flows, that is flows originating by firms churning workers and employees quitting and being replaced, display much less variation across countries.<BR>La littérature économique consacre un intérêt de plus en plus grand pour le processus de création et de destruction d’emplois ainsi que pour les flux d’embauches et de séparations. Plusieurs études soulignent que les caractéristiques propres aux entreprises façonnent les flux d’emplois et de main-d’œuvre de manière similaire dans tous les pays. D’autres soutiennent que les différences inter-pays des flux bruts d’emplois ne sont pas très grandes. Cependant, ces constats s’appuient généralement sur des comparaisons d’estimations nationales reposant sur différentes définitions et protocoles de collecte de données. En revanche, dans ce document, nous utilisons des données comparables entre les pays sur les flux d’emplois et de main-d’œuvre afin d’examiner les déterminants principaux de ces flux et des différences inter-pays. Nous trouvons que les caractéristiques propres aux entreprises (le secteur d’activité, l’âge et la taille des entreprises) et aux salariés (l’âge, le sexe et le niveau d’éducation) jouent un rôle important pour les flux d’emplois et de main-d’œuvre dans tous les pays. Néanmoins, contrairement à une partie de la littérature, nous trouvons que, même à structure constante pour ces caractéristiques, les différences inter-pays des flux d’emplois et de main-d’œuvre demeurent importantes et de même ampleur. Les flux d’emplois et de main-d’œuvre aux États-Unis et au Royaume-Uni sont deux fois plus importants que ceux observés dans certains pays d’Europe continentale. En outre, la variation des flux de main-d’œuvre selon différentes dimensions est bien expliquée par la variation des flux d’emplois, ce qui permet de suggérer, dans une certaine mesure, que les deux variables peuvent être utilisées comme des substituts dans les analyses inter-pays. En revanche, les flux de déplacement de la main d’oeuvre, résultant de la substitution des salariés sur les mêmes emplois opérée par les entreprises ou par les départs et remplacement de salariés, sont marqués par nettement moins de variation entre les pays. |
| JEL: | J23 J24 J63 |
| Date: | 2009–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaab:95-en&r=bec |
| By: | Michele Boldrin; Adrian Peralta-Alva |
| Abstract: | The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to account for stock market movements as well. We thus abandon the perfect foresight assumption. Assuming instead that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only, we find that standard asset pricing theory can be reconciled with the secular trends in the stock market. Nevertheless, our studyleaves open an important puzzle for asset pricing theory: the market value of U.S. corporations was much lower than the replacement cost of corporate tangible assets from the mid 1970s to the mid 1980s. |
| Keywords: | Stock market ; Asset pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-042&r=bec |
| By: | Mary F. Evans; V. Kerry Smith |
| Abstract: | Efforts to reconcile inconsistencies between theory and estimates of the income elasticity of the value of a statistical life (IEVSL) overlook important restrictions implied by a more complete description of the individual choice problem. We develop a more general model of the IEVSL that reconciles some of the observed discrepancies. Our framework describes how exogenous income shocks, such as unexpected medical expenditures, may affect labor supply decisions which in turn influence both the coefficient of relative risk aversion and the IEVSL. The presence of a consumption commitment, such as a home mortgage, also alters this labor supply adjustment. We use data from the Health and Retirement Study to explore the responsiveness of labor force exit decisions to spousal health shocks and the role of a home mortgage as a constraint on this response. |
| JEL: | J31 Q51 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15372&r=bec |
| By: | Donato Iacobucci (Dipartimento di Ingegneria Informatica, Gestionale e dell’Automazione, Università Politecnica delle Marche); Peter Rosa (Centre for Entrepreneurship Research, Management School & Economics, University of Edinburgh) |
| Abstract: | Previous research demonstrates that entrepreneurial processes underpin the growth of business groups. A business group is a set of companies controlled by the same entrepreneur. Case studies of portfolio entrepreneurs suggest that one of the main reasons for business group formation is the need to create an entrepreneurial team, which is achieved by giving minority shares in the new ventures to others, mainly former employees. This enhances the portfolio entrepreneur’s ability to grow and diversify the businesses under their control. The paper identifies and discusses the different types of entrepreneurial teams developed by portfolio entrepreneurs, and their dynamics. |
| Keywords: | Business groups, entrepreneurship, entrepreneurial teams |
| JEL: | L25 L26 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cme:wpaper:0904&r=bec |
| By: | Edward L. Glaeser (Harvard University, Faculty of Arts and Sciences; Harvard Kennedy School); William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Giacomo A. M. Ponzetto (CREI and Universitat Pompeu Fabra) |
| Abstract: | Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people. |
| Keywords: | Entrepreneurship, Industrial Organization, Chinitz, Agglomeration, Clusters, Cities. |
| JEL: | J2 L0 L1 L2 L6 O3 R2 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:10-019&r=bec |
| By: | Pot Erik; Flesch János; Peeters Ronald; Vermeulen Dries (METEOR) |
| Abstract: | We study a framework where two duopolists compete repeatedly in prices and where cho-sen prices potentially affect future market shares, but certainly do not affect current sales.This assumption of consumer inertia causes (noncooperative) coordination on high pricesonly to be possible as an equilibrium for low values of the discount factor. In particular,high discount factors increase opportunism and aggressiveness of competition to such anextent that high prices are no longer sustainable as an equilibrium outcome (not even intrigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena withoutrequiring exogenous shocks in market or firm characteristics. |
| Keywords: | microeconomics ; |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2009039&r=bec |
| By: | Laetitia Andrieu (EDF R&D); Michel De Lara (CERMICS); Babacar Seck (CERMICS) |
| Abstract: | We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in a classic expected return maximization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker (DM) maximizes the expectation of a random return under constraint that the risk measure is bounded above, he then behaves as a ``generalized expected utility maximizer'' in the following sense. The DM exhibits ambiguity with respect to a family of utility functions defined on a larger set of decisions than the original one; he adopts pessimism and performs first a minimization of expected utility over this family, then performs a maximization over a new decisions set. This economic behaviour is called ``Maxmin under risk'' and studied by Maccheroni (2002). This economic interpretation allows us to exhibit a loss aversion factor when the risk measure is the Conditional Value-at-Risk. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:0906.3425&r=bec |
| By: | José-VÃctor RÃos-Rull; Frank Schorfheide; Cristina Fuentes-Albero; Maxym Kryshko; Raül Santaeulà lia-Llopis |
| Abstract: | In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches. |
| JEL: | C1 C8 E3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15375&r=bec |
| By: | Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM) |
| Abstract: | This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble 2006) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997-2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988-1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerged, pricing the risk associated to OBS activities risks. |
| Keywords: | Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium. |
| JEL: | G20 G21 |
| Date: | 2009–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:032009&r=bec |