Development costs capitalization and debt financing

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non‐financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub‐sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.     

Dividend payments as a response to peer influence

I show dividend policies have peer effects. My estimates indicate that firms speed up the time taken to make a dividend change by about 1.5 quarters and increase payments by 16% in response to peer changes. The peer effects matter in increases but not decreases. In contrast to dividends, repurchases show no peer effects. In addition, announcement returns indicate that investors partially anticipate the consequences of peer effects. Overall, peer interdependencies account for 12% of total dividend payments.     

Fiscal decentralization and government size: The role of democracy

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.     

FREE VERSUS SECOND‐BEST ENTRY IN COURNOT OLIGOPOLIES WITH FIRM‐SPECIFIC NETWORKS

This paper endogenizes the number of firms in an industry with positive network effects, complete incompatibility, and firms that compete in quantity. To this end, we compare two possibilities: free entry and second‐best number of firms (the one that maximizes social welfare). We show that with business‐stealing competition, free entry yields, in general, more firms than the socially optimal solution. In addition, we find that by the nature of the industry with firm‐specific networks, total production may be greater or lower under free entry than with a regulator; moreover, some industries attain their maximum social welfare with a monopoly.     

Can media drive the electorate? The impact of media coverage on voting intentions

A growing literature uses media data to explain perception and behaviour in the economic and political context. In this paper, we investigate how media coverage affects political preferences, namely voting intention. For our empirical analysis, we merge 14 years of human-coded data obtained from leading media in Germany with results of the comprehensive German Politbarometer survey from February 1998 through December 2012. In contrast to the existing literature, we do not utilize access to certain media outlets, but use the tonality of articles and newscasts on political parties and politicians based on human coded media data. To account for endogeneity, we employ instrumental variable probit estimations. In addition, we control for a multitude of (internal) personal characteristics, such as age, and gender, as well as for (external) macroeconomic variables, such as business climate, unemployment, and inflation. The results show that media coverage of a political party has a positive and significant effect on the voting intention for this party. When media outlets cover a political party more positively, the electorate has a greater tendency to vote for it. Hence, we conclude that the electoral success or failure of political parties is at least partially caused by the media coverage on them. This hints on the special responsibility of media in democracies.     

The Impact of Farmland Transfers on Agricultural Investment in China: A Perspective of Transaction Cost Economics

There is growing concern that farmland transfers lead to less agricultural investment, which may adversely affect agricultural productivity growth in China. Prior research has primarily focused on the differences between owned cultivated land and rented plots, but little is known about how farmland transfers between relatives, which are popular in rural China, specifically affect agricultural investment. In this paper, we present a conceptual framework of transaction cost economics to compare different contracting strategies in China's farmland rental markets. As farmland rental markets in China are immature, land transfer between relatives establishes bilateral governance, which has the advantage of addressing the opportunistic activities of both parties and can ultimately increase investment by tenants. Based on data from two waves of household surveys, we empirically examine the impact of bilateral governance on the application of organic fertilizer, an indicator for agricultural investment. Our findings show that apart from economic factors, kinship is important to the functioning of farmland rental markets in rural areas.     

Political forecast cycles

A moral hazard model is used to show why overly optimistic revenue forecasts prior to elections can be optimal: Opportunistic governments can increase spending and appear more competent; ex post deficits emerge in election years, thereby producing political forecast cycles – as also found for US states in the empirical literature. Additionally, we obtain three theoretical results which are tested with panel data for Portuguese municipalities. The extent of manipulations is reduced when (i) the winning margin is expected to widen; (ii) the incumbent is not re-running; and/or (iii) the share of informed voters (proxied by education) goes up.     

Permit markets,carbon prices and the creation of innovation clusters

Innovation clusters combining public and private effort to develop breakthrough technologies promise greater technological advances to slow down climate change. We use a multi-country model with an emission trading system to examine whether and how international climate policy can incentivize countries to create such innovation clusters. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in complementary research infrastructure. We construct a mechanism that leads to innovation clusters when emissions targets are set before uncertainty surrounding technological developments is resolved. It is a combination of low permit endowments for the country with the lowest costs to build the needed infrastructure, compensation for this country by profits from permit trade, and maximal possible permit endowments for the remaining countries. We outline how the EU-ETS can be further refined according to this mechanism.     

Terrorism and international economic policy

We add to the ongoing discussion regarding the policy consequences of terrorism by analyzing the effect of terrorism on international economic policy for a panel of 170 countries between 1970 and 2016. We find that countries resort to less liberal international economic policies when facing the threat of terrorism. This effect is especially relevant to smaller (less populated) countries. Our main finding is robust to an instrumental-variable approach. We argue that governments pursue less liberal international economic policies in response to terrorism to interrupt the organization and financing of terrorism, limit capital flight, stabilize public finances and signal political resolve.     

The initiative,referendum, and distribution of income: An empirical analysis of Swiss cantons

This study examines how direct democratic institutions affect income distribution before and after taxes. Based on a panel of Swiss cantons from 1945 to 2014, we test the effects of the constitutional reforms of direct democratic instruments. Our findings show that better voter access to the initiative induces policy shifts that significantly decrease top incomes and benefit the upper middle class. For the popular referendum we do not find such effects. The income effects of direct democracy are not a consequence of shifts in fiscal redistribution, but rather result from policy changes affecting pre-tax incomes.