Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance*

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms ? 2 Correction added after online publication on 20^th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.
     

Dumping and Injury Margins in Markets with Horizontal as well as Vertical Product Differentiation

This paper examines the GATT/WTO rules for anti-dumping measures in a duopoly model with both horizontal and vertical product differentiation. The GATT/WTO rules allow for anti-dumping measures if domestic producers, exposed to price discrimination, also demonstrate injury where price-undercutting is an important indicator of the latter. The paper shows that the procedure for calculating injury is flawed due to negligence of quality differences in the calculation of the margin of price-undercutting. This gives countries with high-quality producers an option to practice protectionism. This asymmetry between countries in ability to implement anti-dumping measures predominantly favors the developed countries which are specialized in producing high-quality products. The paper suggests an overall critical look at the lenient rules for implementing anti-dumping measures—especially the rules for injury determination—in order to restrict the use of such measures to a minimum and to move the world economy closer to free trade.     

Institutional Investors and Private Equity

Entrepreneurial finance literature has highlighted that institutionalinvestors are the main contributors to private equity funds.This paper complements these findings by documenting that institutionalinvestors also invest directly in private equity. A major concernfor such investments is the higher agency costs associated withprivate equity. We show that institutions invest in privatefirms with governance mechanisms that tend to reduce the expectedagency costs and risk of minority expropriation. Good governancemechanisms further allow institutional investors to enjoy thebenefits of syndication and thereby reduce idiosyncratic risk.In addition, we show that institutional investments tend tobe followed by further improvements in corporate governanceand tend to occur in high-growth firms within research and developmentintensive industries.     

Compensating Wage Differentials for Schooling Risk in Denmark*

In this paper we analyse the association between wage differentials and risk using detailed information on length and type of education as seen in Danish administrative registers. Our contribution to the literature is that we distinguish between transitory (time‐series) and permanent (cross‐sectional) income shocks, and estimate the compensation for both sorts of risk. We find that wage risk in a given education cell is associated with higher wages, while skewness is associated with lower wages. As a robustness check, we see that ad hoc risk measures based on earnings‐mobility indicators confirm these findings.     

Public Policy for Venture Capital

This paper proposes a simple partial equilibrium model to investigate the effects of government policy on venture capital backed investments. Giving up an alternative career, entrepreneurs focus their effort on a single, high risk venture each. Venture capitalists acquire an equity stake and offer a base salary as well. In addition to providing incentive compatible equity finance, they support the venture with managerial advice to raise survival chances. We analyze several policy measures addressed at venture capital activity: government spending on entrepreneurial training, subsidies to equipment investment, and output subsidies at the production stage. While these measures stimulate entrepreneurship, only cost-effective government services can improve welfare.     

Evaluation of training in African enterprises

The importance of skill-shortage in Africa, combined with the extensive use of training, necessitates appropriate evaluation of training programs. By using firm data from Sub-Saharan Africa, we evaluate the effect of on-the-job training on log wages using matching estimators. We find that training tends to improve wages, and that the effect is larger and more well-determined when we focus on long training durations and large firms.     

UK money demand 1873–2001: a long-run time series analysis and event study

This paper performs a multivariate cointegration analysis of UK money demand 1873–2001, and illustrates how a long-run time series analysis may be conducted on a data set characterized by turbulent episodes and institutional changes. We suggest accounting for the effects of the two world wars by estimating additive data corrections, thereby allowing the propagation of war-time shocks to be fundamentally different from the transmission of peace-time innovations. In addition, the corrected series may be used in counterfactual event studies to assess the impacts of special events. In the empirical analysis we find a single equilibrium relationship relating velocity to opportunity costs, and we identify a significant link between excess money and inflation. After accounting for the turbulent periods, the equilibrium structure is reasonably stable over a period of 130 years. The empirical analysis was carried out using the OxMetrics software, see Doornik (2002). Ox procedures to estimate the vector equilibrium correction model with additive corrections are available from the author upon request.     

Multivariate Lagrange Multiplier Tests for Fractional Integration

We introduce a multivariate Lagrange multiplier (LM) test forfractional integration. We derive and analyze the LM statisticand show that it is asymptotically noncentral chi-squared distributedunder local alternatives, and that, under Gaussianity, the LMtest is asymptotically efficient against local alternatives.It is shown that the regression variant in Breitung and Hassler(2002, Journal of Econometrics 110, 167–185) is not equivalentto the LM test in the multivariate case, although it is in theunivariate case. A generalization of the LM test that explicitlyallows for different integration orders for each variable isalso introduced. The finite sample properties of the LM testare evaluated by Monte Carlo experiments which demonstrate thatit is superior to the Breitung and Hassler (2002) test. An applicationto multivariate time series of real interest rates for six countriesis offered, demonstrating that more clear-cut evidence can bedrawn from multivariate tests compared to conducting severalunivariate tests.