[GEST] Business: working papers (RePEc, 15/09/2010)

Source : NEP (New Economics Papers) | RePEc

  • What can we learn from privately held firms about executive compensation?
Date: 2010-02-04
By: Cole, Rebel
Mehran, Hamid
URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24668&r=bec
This study examines executive compensation using data from two nationally representative samples of privately held U.S. corporations conducted ten years apart—in 1993 and 2003—and uses these data to test a number of hypotheses. We find that: (i) the level of executive pay at privately held firms is higher at larger firms and varies widely by industry, consistent with stylized facts about executive pay at public companies; (ii) inflation-adjusted executive pay has fallen at privately held companies, in contrast with the widely documented run-up in executive pay at large public companies; (iii) the pay-size elasticity is much larger for privately held firms than for the publicly traded firms on which previous research has almost exclusively focused; (iv) executive pay is higher at more complex organizations; (v) organizational form affects taxation, which, in turn, affects executive pay, with executives at C-corporation s being paid significantly more than executives at S-corporations; (vi) executive pay is inversely related to CEO ownership; (vii) executive pay is inversely related to financial risk; and (viii) executive pay is related to a number of CEO characteristics, including age, education and gender: executive pay has a quadratic relation with CEO age, a positive relation with educational, and is significantly lower for female executives.
Keywords: CEO; compensation; education; executive; executive pay; gender; organizational form; ownership; SSBF; taxes
JEL: H25
  • Knowing Versus Telling Private Information About a Rival
Date: 2010-08
By: Mark Bagnoli
Susan G. Watts
URL: http://d.repec.org/n?u=RePEc:pur:prukra:1250&r=bec
As part of a broad competitive intelligence strategy, firms expect to acquire information about their rivals’ customers and production processes. In this study, we examine the firms’ incentives to disclose this information. We find that firms adopt a policy of disclosing their information regardless of whether it concerns a rival’s customers or production costs or whether the firms are Cournot or Bertrand competitors. Firms that have private information about their rivals tell. Their willingness to disclose private information about their rivals contrasts with the results in the literature when the firm has information about itself. This literature shows that the chosen disclosure policy depends on whether information is about the firm’s own payoffs or industry demand and whether the firms’ strategies are substitutes or complements.
Keywords: disclosure policy, voluntary disclosure, asymmetric information, Cournot competition, Bertrand competition
JEL: G1
  • Fixed-term and permanent employment contracts: theory and evidence
Date: 2010
By: Shutao Cao
Enchuan Shao
Pedro Silos
URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2010-13&r=bec
This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixed-term contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firms’ hiring and firing rules. Using matched employer-employee data from Canada, we estimate the wage equations from the model. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken into account.
  • Individual and Corporate Social Responsibility.
Date: 2010
By: Benabou, Roland
Tirole, Jean
URL: http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2691/&r=bec
  • The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours
Date: 2010
By: Luca Sala
Ulf Soderstrom
Antonella Trigari
URL: http://d.repec.org/n?u=RePEc:igi:igierp:365&r=bec
We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap – the gap between the actual and effcient levels of output – and the labor wedge|the wedge between households’ marginal rate of substitution and firms’ marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inecient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important r espects: it does not give clear guidance concerning the eciency of business cycle fluctations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
  • Insider Trading, Option Exercises and Private Benefits of Control (Revision of DP 2010-32)
Date: 2010
By: Cziraki, P.
Goeij, P. C. de
Renneboog, L.D.R. (Tilburg University, Center for Economic Research)
URL: http://d.repec.org/n?u=RePEc:dgr:kubcen:201090&r=bec
We investigate patterns of abnormal stock performance around insider trades and option exercises on the Dutch market. Listed firms in the Netherlands have a long tradition of employing many anti-shareholder mechanisms limiting shareholders rights. Our results imply that insider transactions are more profitable at firms where shareholder rights are not restricted by anti-shareholder mechanisms. This finding goes against the monitoring hypothesis which states that more shareholder orientation and stronger blockholders would reduce the gains from insider trading. We show robust support for the substitution hypothesis as insiders of firms which effectively curtail shareholder rights enjoy valuable private benefits of control in lieu of engaging in insider trading to exploit their position.
Keywords: insider trading;management stock options;timing by insiders;corporate governance;anti-shareholder mechanisms;anti-takeover mechanisms.
JEL: G14
  • Incentive provision when contracting is costly
Date: 2010-09-01
By: Kvaløy, Ola (Dept. of Economics and Business Administration, University of Stavanger)
Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
URL: http://d.repec.org/n?u=RePEc:hhs:nhhfms:2010_010&r=bec
We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. We show that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We find that social surplus may be higher under costly relational contracting than under costless verifiable contracting, and show that there is not a monotonic relationship between contracting costs and incentive intensity. In particular we show that an increase in contracting costs may lead to higher-powered incentives. Moreover we formulate hypotheses about the relationship between legal systems and incentive provision, specifically the model predicts higher-powered incentives in common law than in civil law systems.
Keywords: Contract costs; incentive provision
JEL: J00
  • Trade, Resource Reallocation and Industry Heterogeneity
Date: 2010-09-02
By: Blyde, Juan
URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24767&r=bec
Recent trade models with heterogeneous firms (Bernard et al., 2003 and Melitz, 2003) show how lower trade costs can spur aggregate productivity by forcing lower productivity firms out of the market, cutting off the lower tail of the productivity distribution. In this paper we find significant heterogeneity regarding this impact across different industries. In particular, we find that the exit of inefficient plants due to stronger import competition is very prominent in light industries, that is, in industries in which only a limited amount of capital is needed and where most plants are of small-scale. In contrast, we find no significant effects of import competition on the exit of plants in heavy industries. The result has important policy implications regarding the role of trade reform in boosting aggregate productivity, particularly in industries with high levels of distortions.
Keywords: Trade costs; productivity; resource reallocation
JEL: F13
  • Global Banking and International Business Cycles
Date: 2010-08
By: Robert Kollmann
Zeno Enders
Gernot J. Müller
URL: http://d.repec.org/n?u=RePEc:eca:wpaper:2013/60880&r=bec
This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank’s capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007-09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reducti on in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
  • Bank credit, trade credit or no credit: Evidence from the Surveys of Small Business Finances
Date: 2010-03-15
By: Cole, Rebel
URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24689&r=bec
In this study, we use data from the SSBFs to provide new information about the use of credit by small businesses in the U.S. More specifically, we first analyze firms that do and do not use credit; and then analyze why some firms use trade credit while others use bank credit. We find that one in five small firms uses no credit, one in five uses trade credit only, one in five uses bank credit only, and two in five use both bank credit and trade credit. These results are consistent across the three SSBFs we examine—1993, 1998 and 2003. When compared to firms that use credit, we find that firms using no credit are significantly smaller, more profitable, more liquid and of better credit quality; but hold fewer tangible assets. We also find that firms using no credit are more likely to be found in the services industries and in the wholesale and retail-trade industries. In general, these findings are consistent with the peck ing-order theory of firm capital structure. Firms that use trade credit are larger, more liquid, of worse credit quality, and less likely to be a firm that primarily provides services. Among firms that use trade credit, the amount used as a percentage of assets is positively related to liquidity and negatively related to credit quality and is lower at firms that primarily provide services. In general, these results are consistent with the financing-advantage theory of trade credit. Firms that use bank credit are larger, less profitable, less liquid and more opaque as measured by firm age, i.e., younger. Among firms that use bank credit, the amount used as a percentage of assets is positively related to firm liquidity and to firm opacity as measured by firm age. Again, these results are generally consistent with the pecking-order theory of capital structure, but with some notable exceptions. We contribute to the literature on the availability of credit in at least two importa nt ways. First, we provide the first rigorous analysis of the differe nces between small U.S. firms that do and do not use credit. Second, for those small U.S. firms that do participate in the credit markets, we provide new evidence regarding factors that determine their use of trade credit and of bank credit, and whether these two types of credit are substitutes (Meltzer, 1960) or complements (Burkart and Ellingsen, 2004). Our evidence strongly suggests that they are complements.
Keywords: availability of credit; bank credit; capital structure; entrepreneurship; relationships; small business; SSBF; trade credit
JEL: L11
  • Outsourcing and Pass-Through
Date: 2010-02-01
By: Hellerstein, Rebecca
Villas-Boas, Sofia B.
URL: http://d.repec.org/n?u=RePEc:cdl:agrebk:146257&r=bec
A large share of international trade occurs through intra-firm transactions. We show that this common cross-border organization of the firm has implications for the well-documented incomplete transmission of shocks across such borders. We present new evidence of an inverse relationship between a firm’s outsourcing of inputs and its rate of exchange-rate pass-through. We then develop a structural econometric model with final assemblers and upstream parts suppliers to quantify how firms’ organization of their activities across national borders affects their pass-through behavior.
Keywords: exchange-rate pass-through, intra-firm trade, vertical contracts, outsourcing
  • Corporate governance structure and mergers
Date: 2010
By: Elijah Brewer, III
William E. Jackson, III
Julapa Jagtiani
URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:1&r=bec
Few transactions have the potential to generate revelations about the market value of corporate assets and liabilities as mergers and acquisitions (M&A). Corporate governance and control mechanisms such as independent directors, independent blockholders, and managerial share ownership are usually important predictors of the size and distribution of the incremental wealth generated by M&A transactions. The authors add to this literature by investigating these relationships using a sample of banking organization M&A transactions over the period 1990-2004. Unlike research on nonfinancial firms, the impact of independent directors, share ownership of the top five managers, and independent block holders on bank merger purchase premiums in this environment is likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has no t received adequate attention. The authors model controls for risk characteristics of the target banks, the deal characteristics, and the economic environment. Their results are robust. They support the hypothesis that independent directors may provide an important internal governance mechanism for protecting shareholders’ interests, especially in large-scale transactions such as mergers and takeovers. The authors also find the results to be consistent with the hypothesis that independent blockholders play an important role in the market for corporate control as does managerial share ownership. But these effects dampen the impact of independent directors on target shareholders’ merger prices. Their overall findings would support policies that promote independent outside directors on the board of banking firms in order to provide protection for shareholders and investors at large.
Keywords: Corporate governance ; Bank mergers
  • Debt Value and Capital Structure with Firm’s Net Cash Payouts
Date: 2010-08
By: Flavia Barsotti (Department of Statistics and Applied Mathematics – University of Pisa, Italy)
Maria Elvira Mancino (Dipartimento di Matematica per le Decisioni, Universita’ degli Studi di Firenze)
Monique Pontier (Institut de Mathematiques de Toulouse (IMT) – University of Toulouse, France)
URL: http://d.repec.org/n?u=RePEc:flo:wpaper:2010-10&r=bec
In this paper a structural model of corporate debt is analyzed following an approach of optimal stopping problem. We extend Leland model [5] introducing a dividend paid to equity holders and studying its effect on corporate debt and optimal capital structure. Varying the parameter affects not only the level of endogenous bankruptcy, which is decreased, but modifies the magnitude of a change on the endogenous failure level as a consequence of an increase in risk free rate, corporate tax rate, riskiness of the firm and coupon payments. Concerning the optimal capital structure, the introduction of dividends allows to obtain results more in line with historical norms: lower optimal leverage ratios and higher yield spreads, compared to Leland’s [5] results.
Keywords: optimal capital structure; endogenous bankruptcy; default; optimal stopping time
  • Market imperfections and firm-sponsored training
Date: 2010-08-16
By: Matteo PICCHIO (Department of Economics, Tilburg University and IZA)
Jan C. VAN OURS (Department of Economics and CentER, Tilburg University, Department of Economics, University of Melbourne; IZA and CEPR)
URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010026&r=bec
Recent human capital theories predict that labor market frictions and product market competition influence firm-sponsored training. Using matched worker-firm data from Dutch manufacturing, our paper empirically assesses the validity of these predictions. We find that a decrease in labor market frictions significantly reduces firms’ training expenditures. Instead, product market competition does not have an effect on firm-sponsored training. We conclude that increasing competition through international integration and globalization does not pose a threat to investments in on-the-job training. An increase in labor market flexibility may reduce incentives of firms to invest in training, but the magnitude of this effect is small.
Keywords: firm-sponsored training, labor market frictions, product market competition, matched worker-firm data
JEL: D43
  • Moral hazard and risk-sharing: risk-taking as an incentive tool
Date: 2010-08-31
By: Mohamed Belhaj (GREQAM – Groupement de Recherche en Économie Quantitative d’Aix-Marseille – Université de la Méditerranée – Aix-Marseille II – Université Paul Cézanne – Aix-Marseille III – Ecole des Hautes Etudes en Sciences Sociales (EHESS) – CNRS : UMR6579)
Renaud Bourlès (GREQAM – Groupement de Recherche en Économie Quantitative d’Aix-Marseille – Université de la Méditerranée – Aix-Marseille II – Université Paul Cézanne – Aix-Marseille III – Ecole des Hautes Etudes en Sciences Sociales (EHESS) – CNRS : UMR6579)
Frédéric Deroïan (GREQAM – Groupement de Recherche en Économie Quantitative d’Aix-Marseille – Université de la Méditerranée – Aix-Marseille II – Université Paul Cézanne – Aix-Marseille III – Ecole des Hautes Etudes en Sciences Sociales (EHESS) – CNRS : UMR6579)
URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00512779_v1&r=bec
We examine how moral hazard impacts risk-sharing when risk-taking can be part of the mechanism design. In a two-agent model with binary effort, we show that moral hazard always increases risk-taking (that is the amount of wealth invested in a risky project) whereas the effect on risk-sharing (the amount of wealth transferred between agents) is ambiguous. Risk-taking therefore appears as a useful incentive tool. In particular, in the case of preferences exhibiting Constant Absolute Risk Aversion (CARA), moral hazard has no impact on risk-sharing and risk-taking is the unique mechanism used to solve moral hazard. Thus, risk-taking appears to be the prevailing incentive tool.
Keywords: Risk-Taking, Informal Insurance, Moral Hazard
  • Markups, bargaining power and offshoring: An empirical assessment
Date: 2010-09
By: Lourdes Moreno (Universidad Complutense de Madrid and GRIPICO)
Diego Rodríguez (Universidad Complutense de Madrid and GRIPICO)
URL: http://d.repec.org/n?u=RePEc:aee:wpaper:1005&r=bec
This paper tests the pro-competitive effect of imports on product and labour markets for Spanish manufacturing firms in the period 1990-2005. In doing so, it takes into account the type of imported products: final vs intermediate. Markups are estimated following the procedure suggested by Roeger (1995) and including an efficient bargaining model. The observed heterogeneity among firms is parameterized to consider additional product standardization and market concentration. The results support the Imports as Market Discipline hypothesis for importers of final goods, while firms that offshore intermediate inputs show similar markups to non-importers. Additionally, the union bargaining power is smaller the more final-goods oriented imports are and the more homogeneous is the type of goods elaborated by firms.
Keywords: Markups, Offshoring, Bargaining power.
JEL: F12
  • How Trade Unions Increase Welfare
Date: 2010-08-30
By: Alejandro DONADO (University of Wurzburg, Department of Economics)
Klaus WALDE (University of Mainz, School of Management and Economics, Universite catholique de Louvain and CESifo)
URL: http://d.repec.org/n?u=RePEc:ctl:louvir:2010027&r=bec
Historically, worker movements have played a crucial role in making workplaces safer. Firms traditionally oppose better health standards. According to our interpretation, workplace safety is costly for .firms but increases average health of workers and thereby aggregate labour supply. A laissez-faire approach in which firms set safety standards is suboptimal as workers are not fully informed of health risks associated with jobs. Safety standards set by better-informed trade unions are output and welfare increasing.
Keywords: occupational health and safety, trade unions, welfare
JEL: J
  • On the Impact of Financial Structure on Product Selection
Date: 2010-11
By: Christos Constantatos (Department of Economics, University of Macedonia)
Stylianos Perrakis (Department of Finance, the John Molson School of Business, Concordia University)
URL: http://d.repec.org/n?u=RePEc:mcd:mcddps:2010_11&r=bec
We examine the interaction between financial and microeconomic decisions in a differentiated duopoly under uncertainty as to consumer taste for quality. Financing is by equity and debt and product specification is endogenous. We consider two three-stage games, according to the order of moves: qualities-financial structure-prices and financial structure-qualities-prices. Once debt is contracted, the manager maximizes equity instead of total value. We find that in both games debt a) increases both prices and qualities but most likely reduces product differentiation due to rival quality response; b) reduces the value of the levered high quality firm because it increases the low quality. Moreover, c) the cost of debt is higher for the second game, implying that it is higher for projects using debt to finance a product’s development-cum-commercialization compared to those financing only the commercialization stage. The resul ts turn out to be robust to alternative specifications of quality and market size uncertainty.
Keywords: Vertical differentiation; uncertainty; financial structure; leverage; sequential quality choice.
JEL: L00
  • Applying Shape and Phase Restrictions in Generalized Dynamic Categorical Models of the Business Cycle
Date: 2010-09
By: Don Harding
URL: http://d.repec.org/n?u=RePEc:acb:camaaa:2010-25&r=bec
To match the NBER business cycle features it is necessary to employ Gen- eralised dynamic categorical (GDC) models that impose certain phase re- strictions and permit multiple indexes. Theory suggests additional shape re- strictions in the form of monotonicity and boundedness of certain transition probabilities. Maximum likelihood and constraint weighted bootstrap esti- mators are developed to impose these restrictions. In the application these estimators generate improved estimates of how the probability of recession varies with the yield spread.
JEL: C22
  • Revising the Horizontal Merger Guidelines: Lessons from the U.S. and the E.U.
Date: 2010-02-01
By: Gilbert, Richard J
Rubinfeld, Daniel L.
URL: http://d.repec.org/n?u=RePEc:cdl:compol:1141530&r=bec
Recently, the U.S. Department of Justice and Federal Trade Commission have embarked on an effort to revise and update the U.S. Horizontal Merger Guidelines. There is substantial overlap between the U.S. and E.U. Guidelines, which makes a proposal for U.S. revisions immediately applicable to the E.U. and elsewhere. The U.S. Merger Guidelines can be revised in light of the learning of economists and lawyers in the past two decades to emphasize the importance of competitive effects analysis in merger evaluation and the forces that drive innovation. The Guidelines should also note that once a competitive effects analysis has been completed, it is possible to “back out†a relevant market (or markets) that is consistent with that competitive effects analysis.
Keywords: mergers, antitrust, market competition
  • A Comprehensive Look at Financial Volatility Prediction by Economic Variables
Date: 2010-09-02
By: Charlotte Christiansen (School of Economics and Management, Aarhus University and CREATES)
Maik Schmeling (Department of Economics, Leibniz Universität Hannover)
Andreas Schrimpf (Aarhus University and CREATES)
URL: http://d.repec.org/n?u=RePEc:aah:create:2010-58&r=bec
What drives volatility on financial markets? This paper takes a comprehensive look at the predictability of financial market volatility by macroeconomic and financial variables. We go beyond forecasting stock market volatility (by large the focus in previous studies) and additionally investigate the predictability of foreign exchange, bond, and commodity volatility by means of a data-rich modeling methodology which is able to handle a potentially large number of predictor variables. In line with previous research, we find relatively little economically meaningful predictability of stock market volatility. By contrast, volatility in foreign exchange, bond, and commodity markets appears predictable by macro and financial predictors both in-sample and out-of-sample.
Keywords: Realized volatility, Forecasting, Data-rich modeling, Bayesian Model Averaging, Model Uncertainty.
JEL: G12
  • The Effects of Imbalanced Competition on Demonstration Strategies
Date: 2010
By: Heiman, Amir
Ofir, Chezy
URL: http://d.repec.org/n?u=RePEc:ags:huaedp:93131&r=bec
This paper analyzes the effect of competition on product demonstration decisions. Pre-purchase product demonstration enables marketers to differentiate products that are ex-post differentiated but are judged according to perceived fit, rather than actual fit, due to pre-purchase consumer uncertainty. Imbalanced competition accompanied by fit uncertainty motivates the follower to offer demonstrations to avoid a price war. This paper explores the conditions that lead the leader to retaliate. In addition to effects on quantity, competition may increase the quality of demonstrations offered by the leader. We analyze a business case, showing that competition may increase the demonstration intensity and that the leading manufacturerâs response to changes in competition is stronger than the responses of the followers. Our research has the potential to aid mangers in formulating demonstration strategies and in responding to comp etitorsâ demonstration efforts.
Keywords: Imbalanced competition, product demonstration, differentiation, test-drive, price war, Political Economy, Production Economics,
  • Making Sense of Non-Binding Retail-Price Recommendations
Date: 2009-10-15
By: Gärtner, Dennis L
Buehler, Stefan
URL: http://d.repec.org/n?u=RePEc:cdl:econwp:936667&r=bec
We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs. Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations. JEL Classification: D23; D43; L14; L15.
  • Employee Selection as a Control System
Date: 2010-08
By: Dennis Campbell (Harvard Business School, Accounting and Management Unit)
URL: http://d.repec.org/n?u=RePEc:hbs:wpaper:11-021&r=bec
Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision-making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision-making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an impo rtant, but understudied, element of organizational control systems
  • The Risk-Return Tradeoff and Leverage Effect in a Stochastic Volatility-in-Mean Model
Date: 2010-09-01
By: Bent Jesper Christensen (Aarhus University, School of Economics and Management, Bartholins Allé 10, Aarhus, Denmark & CREATES)
Petra Posedel (University of Zagreb)
URL: http://d.repec.org/n?u=RePEc:aah:create:2010-50&r=bec
We study the risk premium and leverage effect in the S&P500 market using the stochastic volatility-in-mean model of Barndor¤-Nielsen & Shephard (2001). The Merton (1973, 1980) equilibrium asset pricing condition linking the conditional mean and conditional variance of discrete time returns is reinterpreted in terms of the continuous time model. Tests are per- formed on the risk-return relation, the leverage effect, and the overidentifying zero intercept restriction in the Merton condition. Results are compared across alternative volatility proxies, in particular, realized volatility from high-frequency (5-minute) returns, implied Black-Scholes volatility backed out from observed option prices, model-free implied volatility (VIX), and staggered bipower variation. Our results are consistent with a positive risk-return relation and a significant leverage effect, whereas an additional overidentifying zero intercept c ondition is rejected. We also show that these inferences are sensitive to the exact timing of the chosen volatility proxy. Robustness of the conclusions is verified in bootstrap experiments.
Keywords: Financial leverage effect, implied volatility, realized volatility, risk-return relation, stochastic volatility, VIX
JEL: G13
  • How Much Should You Own? Cross-ownership and Privatization
Date: 2010
By: Rupayan Pal
URL: http://d.repec.org/n?u=RePEc:ess:wpaper:id:2810&r=bec
This paper examines the interdependence of cross-ownership and level of privatization in case of differentiated products mixed duopoly. It shows that it is optimal for the private firm not to own any (own the entire) portion of the privatized share of its rival firm, if the level of privatization is very low (very high). In equilibrium, the government makes sure that cross-ownership is not attracted. However, in most of the situations, the possibility of cross-ownership adversely affects the prospect of privatization. Results of this paper have strong implications to antitrust regulations and divestment policies. [Working paper No. 2010-015].
Keywords: divestment, developing, transition econoies, firm, industry, consumenr, social welfare, competition, shareholder, Cross-ownership, mixed duopoly, partial privatization, product differentiation
  • The effects of bank capital on lending: What do we know, and what does it mean?
Date: 2010-09
By: Jose M. Berrospide
Rochelle M. Edge
URL: http://d.repec.org/n?u=RePEc:acb:camaaa:2010-26&r=bec
The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel-regression techniques—following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)—to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan’s (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters’ and policymakers’ views regarding the effects of bank capital on loan growth. Our estimated models are then used t o understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.

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