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on Business Economics |
| By: | Federico S. Mandelman; Pau Rabanal; Juan F. Rubio-Ramírez; Diego Vilán |
| Abstract: | In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error–correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-03&r=bec |
| By: | Jean Tirole |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies. |
| Keywords: | liquidity, contagion, bailouts, regulation |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:303&r=bec |
| By: | Robert E Verrecchia |
| Abstract: | The controversy about the choice among accounting alternatives is often based on arguments suggesting heuristic behaviour by market participants and firm managers. Debates focus on whether accounting methodology systematically alters reported earnings and whether this effect may add or subtract economic value independently of any effect on underlying cash flows. Arguments based on heuristic behaviour of firms’ management and investors influence decisions about the applicability of standards and regulation. |
| Keywords: | earnings reporting; heuristic behaviour; fair value; disclosure |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:302&r=bec |
| By: | Christian Calmès (Département des sciences administratives, Université du Québec (Outaouais), et Chaire d'information financière et organisationnelle, ESG-UQAM); Denis Cormier (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle, ESG-UQAM); Francois Racicot (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: | We formulate well-known discretionary accruals models in an investment setting. Given that accruals basically consist of short-term investment, we introduce, (i) cash-flows, as a proxy for financial constraints and other financial markets imperfections, and (ii) Tobin’s q as a measure of capital return. Accounting data and Tobin’s q being measured with errors, we propose an econometric method based on a modified version of the Hausman artificial regression which features an optimal weighting matrix of higher moments instrumental variable estimators. The empirical results suggest that all the key parameters of the discretionary accruals models studied are biased systematically with measurement errors. |
| Keywords: | Discretionary accruals; Earnings management; Investment; Measurement errors; Higher moments; Instrumental variable estimators. |
| JEL: | M41 C12 D92 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:012010&r=bec |
| By: | Antonczyk, Dirk (University of Freiburg); DeLeire, Thomas (University of Wisconsin-Madison); Fitzenberger, Bernd (University of Freiburg) |
| Abstract: | This paper compares trends in wage inequality in the U.S. and Germany using an approach developed by MaCurdy and Mroz (1995) to separate age, time, and cohort effects. Between 1979 and 2004, wage inequality increased strongly in both the U.S. and Germany but there were various country specific aspects of this increase. For the U.S., we find faster wage growth since the 1990s at the top (80% quantile) and the bottom (20% quantile) compared to the median of the wage distribution, which is evidence for polarization in the U.S. labor market. In contrast, we find little evidence for wage polarization in Germany. Moreover, we see a large role played by cohort effects in Germany, while we find only small cohort effects in the U.S. Employment trends in both countries are consistent with polarization since the 1990s. We conclude that although there is evidence in both the U.S. and Germany which is consistent with a technology-driven polarization of the labor market, the patterns of trends in wage inequality differ strongly enough that technology effects alone cannot explain the empirical findings. |
| Keywords: | wage inequality, polarization, international comparison, cohort study, quantile regression |
| JEL: | J30 J31 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4842&r=bec |
| By: | Oleg Badunenko; Christopher F. Baum; Dorothea Schäfer |
| Abstract: | The paper investigates whether the presence and tenure of Private Equity (PE) investment in European companies improves their performance. Previous studies documented the unambiguous merit of a buyout during the 1980s and 1990s for listed firms in the US and UK markets. This study analyzes such influences in both listed and unlisted European firms during 2002-2007. Our analysis suggests that shortterm PE investments have, on average, a detrimental effect on firm performance. The performance of a firm that has PE backing is lower than that of a firm without PE backing in the first year of PE investment. Such an effect disappears if PE investments remain in the firm for an uninterrupted six-year term |
| Keywords: | Private equity financing, corporate finance |
| JEL: | M14 G24 G34 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp990&r=bec |
| By: | Smith, Nina (University of Aarhus); Smith, Valdemar (Aarhus School of Business); Verner, Mette (Aarhus School of Business) |
| Abstract: | This paper analyses the gender gap in compensation for CEOs, Vice-Directors, and potential top executives in the 2000 largest Danish private companies based on a panel data set of employer-employees data covering the period 1996-2005. During the period, the overall gender gap in compensation for top executives and potential top executives decreased from 35 percent to 31 percent. However, contrary to many other studies, we do not find that the gender gap for Danish top executives disappears when controlling for observed individual and firm characteristics and unobserved individual heterogeneity. For CEOs, the raw compensation gap is 28 percent during the period while the estimated compensation gap after controlling for observed and unobserved characteristics increases to 30 percent. For executives below the CEO level, the estimated compensation gap is lower, ranging from 15 to 20 percent. Thus, we find evidence of both glass ceilings and sticky floors in Danish private firms. |
| Keywords: | CEO compensation, gender gap, glass ceiling |
| JEL: | J33 M52 J16 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4848&r=bec |
| By: | Marcus Miller; Joseph E. Stiglitz |
| Abstract: | An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts—threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset ‘fire-sales’ to pay down debts, however. We discuss how official intervention in the form of ‘super’ Chapter 11 actions can help prevent asset price correction causing widespread economic disruption. |
| JEL: | E32 G21 G32 G33 G34 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15817&r=bec |
| By: | Robert DeYoung; Emma Y. Peng; Meng Yan |
| Abstract: | This study examines whether and how the terms of CEO compensation contracts at large commercial banks between 1994 and 2006 influenced, or were influenced by, the risky business policy decisions made by these firms. We find strong evidence that bank CEOs responded to contractual risk-taking incentives by taking more risk; bank boards altered CEO compensation to encourage executives to exploit new growth opportunities; and bank boards set CEO incentives in a manner designed to moderate excessive risk-taking. These relationships are strongest during the second half of our sample, after deregulation and technological change had expanded banks' capacities for risk-taking. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp10-02&r=bec |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a dynamic stochastic general equilibrium model: We identify shocks that shift the demand for collateral assets and allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2010-01&r=bec |
| By: | Alex Bryson |
| Abstract: | This paper presents the first comparative analysis of the decline in collective bargaining in two European countries where that decline has been most pronounced. Using workplace-level data and a common model, we present decompositions of changes in collective bargaining and worker representation in the private sector in Germany and Britain over the period 1998-2004. In both countries within-effects dominate compositional changes as the source of the recent decline in unionism. Overall, the decline in collective bargaining is more pronounced in Britain than in Germany, thus continuing a trend apparent since the 1980s. Although workplace characteristics differ markedly across the two countries, assuming counterfactual values of these characteristics makes little difference to unionization levels. Expressed differently, the German dummy looms large. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:350&r=bec |
| By: | Filippo Taddei |
| Abstract: | This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity. |
| Keywords: | Liquidity; private information; robust pooling equilibrium; bond yield |
| JEL: | E2 E3 G14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:138&r=bec |
| By: | Mora, Nada (Federal Reserve Bank of Kansas City); Logan, Andrew (Oxford Economics) |
| Abstract: | This paper assesses how shocks to bank capital may influence a bank’s portfolio behaviour using novel evidence from a UK bank panel data set from a period that pre-dates the recent financial crisis. Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank’s capital in this (pre-crisis) sample period were coupled with a loan response that lasted up to three years. Banks also responded to scarce regulatory capital by raising their deposit rate to attract funds. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to non-residents to instrument bank capital’s impact on UK resident lending. A fall in capital brought about a significant drop in lending in particular, to private non-financial corporations. In contrast, household lending increased when capital fell, which may indicate that – in this pre-crisis period – banks substituted into less risky assets when capital was short. |
| Keywords: | Bank capital; bank lending |
| JEL: | E44 F34 G21 |
| Date: | 2010–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0387&r=bec |
| By: | Gabriel Jiménez (Banco de España); Jose A. Lopez (Federal Reserve Bank Of San Francisco); Jesús Saurina (Banco de España) |
| Abstract: | A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm. |
| Keywords: | bank competition, franchise value, Lerner index, credit risk, financial stability. |
| JEL: | G21 L11 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1005&r=bec |
| By: | Gregory Connor (Economics,Finance and Accounting, National University of Ireland, Maynooth); Thomas Flavin (Economics,Finance and Accounting, National University of Ireland,Maynooth); Brian O’Kelly (Dublin City University) |
| Abstract: | Abstract: Although the US credit crisis precipitated it, the Irish credit crisis is an identifiably separate one, which might have occurred in the absence of the U.S. crash. The distinctive differences between them are notable. Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case; and the same applies vice-versa. At a deeper level, we identify four common features of the two credit crises: capital bonanzas, irrational exuberance, regulatory imprudence, and moral hazard. The particular manifestations of these four “deep” common features are quite different in the two cases. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n206-10.pdf&r=bec |
| By: | Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | Heterogeneity in firm productivity affects the location patterns of firm and agglomeration. Here we provide an economic geography model, involving forward and backward linkages driven by the migration of a footloose entrepreneur (capital owner) with different productivity. As a result we find a sorting equilibrium characterised by co-agglomeration of similar productivity firms, however, in contrast to previous studies, unproductive firms are more likely to agglomerate than their more productive counterparts. This is due to the increasingly severe competition induced by productive firms. Productive firms prevent severe local competition through their co-agglomeration. In terms of social welfare, although the sorting equilibrium involves higher social welfare than a perfectly symmetric pattern of firm location, the market outcome is sub-optimal and induces too much agglomeration. |
| Keywords: | heterogeneous firms, footloose entrepreneurs, competition, productivity, economic geography |
| JEL: | F15 F23 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2010-11&r=bec |
| By: | ODAKI Kazuhiko; KODAMA Naomi |
| Abstract: | Theories of economic institutions predict that complementarity exists between the nature of corporate governance of a firm and the nature of its human capital investment. The complementarity theory insists that the commitment of a firm and its employees to invest in firm-specific human capital will be reinforced by the commitment of the firm to adopt stakeholder-oriented corporate governance. Using employer-employee matched data from the headquarters of large Japanese firms, this paper investigates the relationship between the wage-tenure profile of a firm and the nature of its corporate governance. Analysis of the wage-tenure profiles shows that firms with stakeholder-oriented corporate governance invest in firm-specific human capital more heavily than those with shareholder-oriented corporate governance. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:10014&r=bec |
| By: | MIYAGAWA Tsutomu; Keun LEE; KABE Shigesaburo; Junhyup LEE; Hyoungjin KIM; YoungGak KIM; EDAMURA Kazuma |
| Abstract: | To compare management practices between Japanese and Korean firms, we conducted interview surveys on organizational and human resource management based on Bloom and Van Reenen (2007). The average management scores resulting from the interview surveys in Japanese firms were higher than in Korean firms. The gap in the scores between Japan and Korea can be explained by more conservative human resource management practices in Korean small and medium sized firms. We regressed some indicators representing management practices on firm performance. Estimation results suggest that human resource management affects firm performance in Korean firms. In Japanese firms, we expect that organizational reform plays a role in improving firm performance in the service sector. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:10013&r=bec |