Effects of bank insolvency on corporate incentives in transition economies

In transition countries, the real impact of banking crises has so far been rather moderate. We study the effect of bank insolvency on corporate incentives in a model where incumbent banks possess an informational advantage. We find that bank insolvency reduces the incentive to restructure for firms whose incumbent bank becomes insolvent. However, bank insolvency provides an additional incentive for firms that enter the credit market to develop new projects because it reduces asymmetric information between banks. Firms’ credit costs are thereby lowered. We also explain a path‐dependent development by demonstrating that the firms’ decision to develop new projects depends on the banks’ share of non‐performing loans.     

Vertical integration, market foreclosure and quality investment

We study incentives to vertically integrate in an industry with vertically differentiated downstream firms. Vertical integration by one of the firms increases production costs for the rival. Increased production costs negatively affects quality investment both by the integrated firm and the unintegrated rival. Quality investment by both firms decreases under any (vertical integration) scenario. The decrease in quality invesment by both firms softens competition among downstream firms. By integrating first, a firm always produces the high quality good and earns higher profits. A fully integrated industry, with increased product differentiation, is observed in equilibrium. Due to increase in firm profits, social welfare under this structure is greater than under no integration.     

Global financial crisis,corporate governance,and firm survival:: The Russian experience

Using a unique dataset obtained from large-scale panel enterprise surveys conducted in 2005 and 2009, we clarify the survival status of Russian industrial firms before and after the global financial crisis and empirically examine the determinants of firm survival. The estimation of the Cox proportional hazard model provided evidence that the independence of company’s governance bodies, their human resource abundance, and influence over corporate management are statistically significant factors affecting the survival probability of the surveyed firms. In particular, the board of directors and the audit committee are likely to play a vital role in reducing the potential exit risk. We also found that there is a significant difference in the viewpoints of economic logic for firm survival held by independent firms and group companies.     

MULTINATIONALS,TAX HOLIDAYS,AND TECHNOLOGY TRANSFER*

Host country governments often grant investment incentives to foreign firms located in their territories. We show that such preferential treatment of foreign firms can induce transfer of foreign technology, facilitate entry by the local firm, and improve host country welfare. However, this pro‐competitive outcome results when preferential treatment is granted for a limited time. Permanent tax concessions yield the opposite effect.     

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When the number of downstream firms is endogenous, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss why allowing upstream firms to charge per-unit payments in addition to fixed fees dramatically alters their strategic incentives.     

货币薪酬能激励高管承担风险吗

有关“风险承担”（risk taking）的研究是近年来特别是全球金融危机背景下财务学研究的热点问题之一。本文研究结果表明：（1）货币薪酬激励的增加能提升高管承担风险的水平;（2）最终控制人性质和公司成长性会影响两者之间的关系,在国有企业以及公司成长性较低的公司,货币薪酬激励与风险承担之间的正相关关系较弱;（3）风险承担水平的提高能促进公司绩效的提升;（4）进一步研究发现,风险承担在高管薪酬激励与企业绩效之间发挥中介效用作用。这些结论在采用两阶段最小二乘法（2SLS）和三阶段最小二乘法（3SLS）处理内生性问题等稳健性测试后依然成立。因此,本文从“风险承担”这一新的视角深化了有关高管薪酬激励降低代理问题并提升公司绩效的研究,也为中国上市公司尤其是国有上市公司高管薪酬契约设计的有效性提供了借鉴和参考价值。     

Does tax competition make mobile firms more footloose?

We examine a two‐period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez‐faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez‐faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump‐sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.     

EXIT OPTIONS AND DIVIDEND POLICY UNDER LIQUIDITY CONSTRAINTS

We introduce a post‐entry liquidity constraint to the standard model of a firm with serially correlated profitability and an irreversible exit decision. We assume that firms with no cash holdings and negative cash flow must either exit or raise new cash at a transaction cost. This creates a precautionary motive for holding cash, which must be traded off against the liquidity cost of holding cash. We characterize the optimal exit and payout policy. The direct effect of financial frictions is to impose inefficient exit, but there is also an indirect effect through higher equilibrium price that leads to inefficient survival.     

Is executive compensation a substitute governance mechanism to debt financing and leasing?

This study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity.     

Wealth Effects, Distribution, and the Theory of Organization

We construct a general equilibrium model of firm formation in which organization is endogenous. Firms are coalitions of agents providing effort and investment capital. Effort is unobservable unless a fixed monitoring cost is paid, and borrowing is subject to a costly state verification problem. Because incentives vary with an agent's wealth, different types of agents become attractive firm members under different circumstances. When borrowing is not costly, firms essentially consist of one type of agent and are organized efficiently. But when the costly state verification problem is sufficiently severe, firm organization will depend on the distribution of wealth: with enough inequality, it will tend to be dictated by incentives of rich agents to earn high returns to wealth, even if the chosen organizational form is not a technically efficient way to provide incentives.Journal of Economic LiteratureClassification Numbers: D2, D31, J41, L2.     

Privatization and Strategic Mergers across Borders

We present a theoretical model to capture the role of privatization in the incentives for and implications of cross‐border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross‐border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take‐over of a home firm by a foreign firm but magnify the potential gains from a take‐over of a foreign firm by a home firm.     

Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

Board monitoring,firm risk,and external regulation

We examine the relationship between board monitoring and firm characteristics using a broad sample of firms over the 8 year period from 1996 to 2003. We find that board independence and monitoring is negatively related to firm risk in the absence of external regulation. In addition, we find that external regulatory and political pressures affect the level of board monitoring, especially after the increased focus on board composition by the stock exchanges beginning in 1999 and the passage of the 2002 Sarbanes–Oxley Act. We find that the sensitivity of the negative relationship between board monitoring and firm risk decreases in the post 1999 period suggesting that firms have increased board monitoring in response to external regulations. We also find that these external regulations have had an asymmetrical impact on high-risk firm. In our empirical analysis we also control for other factors that affect board monitoring and find that firms in which the CEO has longer tenure and greater equity ownership have less board monitoring activity and that there is a negative relationship between the level of board monitoring and the level of shareholder rights.      

Does support from government help firms survive? Evidence on financial and political assistance in China, 1998–2007

ABSTRACT

Using the National Bureau of Statistics data set over the period 1998–2007, this article examines the dual roles of financial assistance and strong political links on firm survival in China by applying a semi-parametric duration model. We find that generally either financial assistance or strong political links had a positive effect on the likelihood of firm survival. Furthermore, if firms received both types of support from government, their survival rate was around two times as high compared to only receiving a single support. The likelihood of survival depended on the amount of assistance a firm received. We also find firm ownership impacts on its survival pattern. Lastly, China joining the World Trade Organisation (WTO) coincided with (cet. par.) higher firm failure, especially with regard to state-owned firms; however, this period also saw the authorities targeting political and financial help on the ‘better’ firms (especially SOEs) with characteristics likely to increase their chance of survival.     

Control rights,competitive markets,and the labor management debate

Labor-managed firms are often asserted to display perverse short-run behavior and defective investment incentives. These criticisms rely upon assumed departures from the neoclassical framework of complete and competitive markets, including restricted trading in worker memberships. This paper treats management by capital and by labor as special cases within a common analytical setting, and shows that there is no basis for distinguishing between these two principles of organizational design in a competitive-market environment: capital can be collectively owned by a labor-managed firm without undermining investment incentives. Future debate should thus center on identification of pertinent market failures.     

多元化战略对管理层激励的影响--来自中国资本市场的经验证据

本文利用2001-2004年中国上市公司的数据,使用面板数据模型,对中国上市公司多元化与管理层激励之间的关系进行了检验.结果表明:现金薪酬水平与公司价值负相关,高管人员持股比例与公司价值之间是非线性关系,激励并没有发挥其应有的作用;多元化对公司价值的影响并不显著.当控制了影响多元化的公司内部因素后,我们发现国有股占主导地位的公司,多元化程度与现金薪酬之间是负向关系;多元化程度与管理层持股比例之间是正向关系.多元化程度与在职消费正相关.多元化决策是管理当局希望从多元化中获取更多的剩余收益和隐性的私人利益.     

Diversification and tunneling: Evidence from Indian business groups

We provide evidence suggesting an important yet largely unexplored motive for the diversified structure of emerging economy business groups is to facilitate expropriation of minority shareholders by controlling insiders through tunneling. Using firm level panel data from India, and defining the core firm of a group as the one with the largest asset base, we find that the relatedness of the activity of a group affiliate to the activity of the core firm is correlated with the wedge between control and cash flow rights of insiders as well as with the opacity in insider ownership. Firms with ownership-control wedge lower and ownership opacity higher relative to a group’s core firm are more likely to be in activities unrelated to that of the core firm. Our findings are strengthened by evidence of tunneling in the same direction, from affiliates with wedge equal to or higher than that of the core firm to affiliates with wedge lower than that of the core firm. Taken together this suggests an expropriation motive for diversification: affiliate firms are located away from a business group’s core firm to serve as destination points for funds tunneled from the group’s core.     

Firm ownership and internal labour practices in a transition economy

One feature common to many post‐socialist transition economies is a relatively compressed wage structure in the state‐owned sector. We conjecture that this compressed wage structure creates weak incentives for work effort and worker skill acquisition and thus presents adverse consequences for the entire transition economy if a substantial portion of the labour force works in the state sector. We explore firm wage incentives and worker training, as well as other labour practices and outcomes, in a transition setting with matched firm and worker data collected in one of the largest provinces of Vietnam – Ho Chi Minh City. The Vietnamese state sector exhibits a compressed wage distribution in relation to privately owned firms with foreign ownership. State wage practices stress tenure over worker productivity and their wage policies result in flatter wage–experience profiles and lower returns to education. The state work force is in greater need of formal training, a need that is in part met through direct government financing. In spite of the opportunities for government financed training and at least partly due to inefficient worker incentives, state firms, by certain measures, exhibit lower levels of labour productivity. The private sector comparison group to state firms for all of these findings is foreign owned firms. The internal labour practices of foreign firms are more consistent with a view of profit‐maximizing firms operating with no political constraints. This is not the case for Vietnamese de novo private firms that exhibit much more idiosyncratic behaviour and whose labour practices are often indistinguishable from state firms. The exact reasons for this remain a topic of on‐going research yet we conjecture that various private sector constraints, including limited access to formal capital, play an important role.     

Foreign Direct Investment and the Incentives to Innovate and Imitate*

We propose a new channel of FDI spillovers on domestic firms, which operates through imitation of original products. Domestic heterogeneous firms may not introduce any new products, introduce a new product line (innovate), or develop a variety that is a close substitute to an existing product line (imitate). The presence of foreign firms generates incentives for imitation because they introduce original products that are vertically differentiated from domestic products. Using firm‐level panel data for China, we find that increased FDI presence in a given industry leads to more imitation, but not necessarily more innovation, by domestic firms.     

Institutional environment,ownership and firm taxation

This paper examines how ownership type and institutional environment affect firm taxation. Using a sample of Chinese‐listed firms from 1999 to 2006, we find that private firms enjoy a lower effective tax rate than local state‐owned enterprises. In addition, the preferential taxation of private firms is associated with local government incentives to promote local economic growth. We find that private firms located in regions with a lower level of privatization receive preferential tax treatment. Our results also suggest that decentralization and interjurisdictional competition lead to financial interdependence between local governments and private firms.