Inequality and entrepreneurial thresholds

We explore the relationship between inequality and entrepreneurial activity. Drawing on cross-sectional data from a largescale survey of the economic conditions of individuals across India, we develop a number of dimensions of inequality to explore empirically how inequality interacts with entrepreneurship, operationalized as self-employment or as employing other people. We find compelling evidence that there are thresholds to becoming self-employed, and even more so to assembling the combinations of resources and personal attributes required to become an employer. Greater inequality leaves more people unable to make the transition to self-employment, leaving casual laboring as the occupation of necessity. At the same time, inequality increases the number of employers in a society, by concentrating resources - particularly land and finance - enough for significant numbers of people to be able to cross this higher threshold. Lastly, greater differentiation into social or religious groups curtails the ability to cross either entrepreneurial threshold, presumably by limiting the extent and benefits of social networks of value for entrepreneurship.     

REGIME DEPENDENT EFFECT OF OUTPUT GROWTH ON OUTPUT GROWTH UNCERTAINTY: EVIDENCE FROM OECD COUNTRIES

This paper studies the impact of output growth on output growth uncertainty by considering two important issues hitherto not properly and adequately addressed to in the existing empirical studies specifying this relationship. These are: (i) the possible existence of a threshold level of output growth, and the consequent identification of two regimes characterized by high and low output growth, and (ii) whether or not the coefficient capturing the causal link is different in these two output growth states. This paper proposes a regime switching model to study this asymmetric effect for 16 OECD countries. Based on monthly time‐series observations, our results strongly support that the impact varies significantly between the two output growth regimes with the coefficient in the high growth regime being negative for majority of the countries.     

Incorporating a “no claim bonus” in insurance agency contract

A bonus received by an agent from an insurer when the insured does not make a claim is called a “no claim bonus” (NCB). An NCB rewards the agent's risk‐management (RM) effort that reduces the probability that the insured suffers a loss. This paper designs an incentive compatible contract that induces the agent to choose an RM effort. If the agent's RM effort cost is lower than a threshold, feasible ranges of NCB and premium values exist such that the insurer can offer an incentive compatible agency contract with an NCB that is acceptable to the agent.     

Market orientation and customer-based corporate brand equity (CBCBE): a dyadic study of Indian B2B firms

The relationship between market orientation (MO) and one of its most important consequences – firm performance – has received considerable attention in marketing research. Performance has been largely judged through financial or objective measures. This paper connects assimilation of MO in firms with corporate brand performance since academics have not used judgmental or market-based measures in assessing performance. We have introduced customer-based corporate brand equity to obtain a rounded idea of firm performance. This is achieved through a dyadic study, instead of self-assessment, wherein the marketing chiefs of B2B firms and their respective organisational customers are surveyed to gauge the effects of incorporating MO. We have shown that corporate brand performance is enhanced significantly in the presence of organisational innovativeness. From a practitioner’s perspective, the study details the organisational actions to be taken to assimilate MO and how those can be exploited to enhance corporate brand performance.     

Role of search for domain knowledge and architectural knowledge in alliance partner selection

Research Summary: The literature on technological alliances emphasizes that search for knowledge drives alliance formation. However, in conceptualizing technological knowledge, prior work on alliances has not made a distinction between domain knowledge—knowledge that firms possess in distinct technological domains—and architectural knowledge—knowledge that firms possess about how to combine elements from different technological domains. We argue that firms seek partners that are similar in domain knowledge to deepen their knowledge, and partners that are dissimilar in architectural knowledge to broaden their knowledge. Our results indicate that the likelihood of alliance formation increases when two firms are similar in domain knowledge and dissimilar in architectural knowledge. Further, our results show that these effects are positively moderated by the degree of decomposability of a firm's knowledge base. Managerial Summary: In dynamic environments, companies need to continually deepen and broaden their technological knowledge, and they often look for alliance partners who can provide them that knowledge. For knowledge deepening, companies are more likely to form alliances with those companies that have expertise in similar technological fields. For knowledge broadening, they are more likely to form alliances with those companies that have expertise in the same technological fields, but have different recipes for combining knowledge from those fields. Furthermore, a company with a modular knowledge base is more likely to seek a partner that has expertise in similar technological fields or whose recipes for combining knowledge from different technological fields are different from the recipes it has.     

Optimal size, optimal timing and optimal financing of an investment

Corporate investment is an important determinant of economic well-being. The existing literature identifies optimal investment size and timing without the possibility of debt financing, as well as the effect of debt financing on investment timing without the option to choose investment size. This paper contributes to the literature by identifying the optimal size, optimal timing and optimal financing for an investment when the firm controls all three decisions (as it usually does in practice). The investment size and investment trigger are generally positively related: when investment is delayed (accelerated) it is larger (smaller) in size, thus the overall effect on investment is ambiguous. However, when tax rate or bankruptcy cost is increased, the trigger rises and size falls, hence the effect on investment is unambiguously negative. The effect of debt financing on investment depends on the amount of debt used; with the optimal amount of debt, investment is delayed relative to the no-debt case, and this delay can be economically significant; however, the investment, when eventually made, will be larger in size. Overall, it is not appropriate to ignore either the firm’s ability to choose investment size or its option to use debt financing, when modeling the investment decision.     

Managerial compensation and the underinvestment problem

This paper studies the effect of managerial compensation terms on the well-known “underinvestment” incentive. We extend the Mauer and Ott (2000) real-option model of corporate expansion, and show that, when the manager maximizes the value of his compensation package (rather than equity value), the underinvestment problem can be substantially mitigated. Further, by designing an appropriate compensation contract, it is possible to eliminate the underinvestment incentive altogether. This managerial contract, consisting of fixed salary and equity ownership, is explicitly derived in the model. The equity ownership level is found to be an increasing function of the manager's fixed salary and the company's earnings growth rate, and a decreasing function of leverage ratio, earnings volatility, tax rate, bankruptcy costs, and the manager's severance pay at bankruptcy.     

Do the English Legal Origin Countries have More Dispersed Share Ownership and More Developed Financial Systems?

The essence of the legal origin hypothesis is that a country with an English legal origin provides better investor and creditor protection and experiences greater financial development; financial institutions and stock markets flourish, the general public participate more in financing investment projects of companies and so shareholding is less concentrated. The present paper examines this hypothesis on the basis of a cross‐country study of 85 countries. We find no evidence of more dispersed share ownership in the English law countries than in other countries with different legal origins irrespective of whether we adjust for the existence of transitional economies and less developed countries in the sample. Using three indicators of development of banking and other credit institutions and four indicators of stock market developments, we also find no evidence of more developed financial systems in the English law countries. As expected, there is some evidence of lower financial development in the less developed countries and transitional countries. It is not the English law heritage but the security of persons and goods that appears to explain the cross‐country variations in financial development.     

Risk–Return Profiles of Islamic Equities and Commodity Portfolios in Different Market Conditions

Motivated by the recent phenomenal growth in Islamic finance and the financialization of commodities, this study makes an initial attempt to investigate the risk–return profiles of optimized portfolios combining (a) Islamic equities with commodities and (b) conventional equities with commodities during the crises and noncrises periods. The findings tend to indicate that Islamic equity–commodity portfolios provide relatively higher diversification benefits than the conventional equity–commodity portfolios during the 1997 Asian Financial Crisis triggered by the financial sector compared to the 2008 global financial crisis triggered by the real housing sector. The findings further suggest that except for a few cases, commodities in general and gold in particular improve diversification benefits.     

Debt and corporate governance in emerging economiesEvidence from India1

We analyze the role of debt in corporate governance with respect to a large emerging economy, India, where debt has been an important source of external finance. Using cross‐sectional data on listed manufacturing firms we estimate, simultaneously, the relation between Tobin's Q and leverage for three years, 1996, 2000 and 2003. Our analysis indicates that while in the early years of institutional change, debt did not have any disciplinary effect on either standalone or group affiliated firms, the disciplinary effect appeared in the later years as institutions became more market oriented. We also find limited evidence of debt being used as an expropriation mechanism in group firms that are more vulnerable to such expropriation. In general, our results highlight the role of ownership structures and institutions in debt governance.