MANAGERIAL INCENTIVES AND THE PRICE EFFECTS OF MERGERS*

Most analysis of market power assumes that managers are perfect agents for shareholders. This paper relaxes that assumption. When managers of a multi‐product firm exert unobservable effort to improve product quality, there is a trade‐off between providing adequate effort incentives and ensuring sufficient price‐coordination between the product divisions. This makes some intra‐firm price competition optimal, explaining why many multi‐product firms allow for competition between divisions. When there are effort spillovers, the optimal amount of price competition can be as great as when the products are under separate ownership. Even with some profit‐sharing, intra‐firm price competition can reduce quality‐adjusted price, which has important implications for antitrust policy.     

On Storage Behavior Under Imperfect Competition,with Application to the American Cheese Market

This paper investigates the economic implications of storage behavior under imperfect competition. It evaluates the economic dynamics implied by a storage firm under alternative market structures. This includes perfect competition as well as imperfect competition under Cournot behavior. The conceptual analysis is used to specify and estimate a model of storage behavior, with an econometric application to the U.S. American cheese market. The empirical results provide statistical evidence of non-competitive storage behavior. They show how the exercise of market power can contribute to reduced stock fluctuations and increased price instability in the U.S. cheese market.      

RELATIONSHIPS,COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*

It is well known that competition can destroy incentives to invest in firm‐specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non‐exclusive relationships, competition from arm's‐length intermediaries, non‐price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar‐sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.     

Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty

This article theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.     

Board structure and firm capability: An environment-embedded relationship between board diversity and marketing capability

The role of the firm’s top governance team, the board, is largely missing in the capability literature. This paper takes the first step to link board diversity, one of the most critical traits of the board, to marketing capability. Further, this relationship is embedded into a contingency-based model involving a set of environmental factors, munificence, turbulence, and competition intensity. This model illustrates how the internal top governance traits and external factors may jointly and dynamically affect firm competency. The empirical results show that board diversity significantly increases marketing capability. This effect is stronger when a firm faces unfriendly market situations characterized by low munificence, high turbulence, and intensified competition. This study generates meaningful theoretical implications for marketing capability-building of business firms, especially in the business-to-business (B2B) settings in which reciprocal organizational engagements are more emphasized. It also advances firm governance theories and business environment studies, and provides useful guidelines for managerial practices.     

INNOVATION AND COMPETITIVE PRESSURE*

I analyze the effects of competition on process innovation and product introduction and obtain robust results that hold for a range of market structures and competition modes. It is found that increasing the number of firms tends to decrease cost reduction expenditure per firm, whereas increasing the degree of product substitutability, with or without free entry, increases it—provided that the average demand for product varieties does not shrink. Increasing market size increases cost reduction expenditure per firm and has ambiguous effects on the number of varieties offered, while decreasing the cost of entry increases the number of entrants and varieties but reduces cost reduction expenditure per variety. The results are extended to other measures of competitive pressure and to investment in product quality. The framework and results shed light on empirical strategies to assess the impact of competition on innovation.     

Investment sharing in broadband networks

This paper presents a model of competition between an incumbent firm and an Other Licensed Operator (OLO) in the broadband market, where the incumbent has an investment option to build a Next Generation network (NGN) and it can do so by making an investment sharing agreement with the OLO, or alone. Two different kinds of investment sharing contractual forms are analyzed, a basic investment sharing, where no side-payment is given for the use of the NGN between co-investors, and joint-venture, where a side-payment is set by the co-investing firms. Results show that investment sharing can potentially be beneficial in terms of competition and investments, but the number of firms involved matters and so does the choice of the NGN access price, for insiders and outsiders of the agreement. Even when the presence of firms outside of the agreement force insiders to compete more fiercely, there might be a concern with the potential exclusion of the outsiders from the NGN.     

Innovations,Prices and Employment: A Theoretical Model and an Empirical Application for West German Manufacturing Firms

In this paper a theoretical model of the impact of product and process innovations on output, capacity utilization, employment and prices is developed. The model is estimated with a unique set of micro-data from West German manufacturing firms. The empirical results reveal that innovative firms are more successful. They show a higher utilization and more output and employment growth than non-innovative firms. Innovations also change market behaviour. In sectors with a large share of product innovators, firms more often change employment and less often change prices, i.e. product innovations reduce price competition.     

Product innovation,product–market competition and persistent profitability in the U.S. pharmaceutical industry

Increasingly, strategy scholars are exploring the relationships between innovation, competition, and the persistence of superior profits. Sustained high profitability may result when a firm repeatedly introduces valuable innovations that service previously unmet consumer demands. While the returns to the firm from each innovation may erode over time, innovation ensures that, overall, the firm maintains a high performance position. At the same time, sustained high profitability may also accrue to firms that innovate less often, but effectively avoid the competition that otherwise erodes high returns. This paper elaborates these relationships before presenting an empirical analysis of the effects of differential innovative propensities and differential rates of competition on pharmaceutical firms’ abilities to sustain profit outcomes that are above those earned by competing firms. The analysis, which is situated within the U.S. pharmaceutical industry, finds support for the expected relationship between high innovative propensity and sustained superior profitability, but no support for a link between persistence and the ability to avoid competition. Copyright © 1999 John Wiley & Sons, Ltd.     

Economies of Scope,Resource Relatedness,and the Dynamics of Corporate Diversification

Research summary: The dominant view has been that businesses that are more related to each other are more often combined within diversified firms. This study uses a dynamic model to demonstrate that, with inter‐temporal economies of scope, diversified firms are more likely to combine moderately related businesses than the most‐related businesses. That effect occurs because strong relatedness reduces redeployment costs and makes firms redeploy all resources to better performing businesses. The strength of that effect depends on inducements for redeployment measured as the current return advantage of one business over another business, volatilities of business returns, and correlation of those returns. This study develops hypotheses for those relationships and suggests empirical operationalizations, encouraging empiricists to retest the implications of relatedness for the dynamics of corporate diversification. Managerial summary: It is believed that diversified firms are more likely to combine more‐related businesses because relatedness enables sharing of resources between businesses. Indeed, a firm can apply knowledge created in one business to another business, avoiding costly duplication in knowledge development. Resource sharing also adds value when a firm offers several products, adding the convenience of one‐stop shopping and charging higher prices. However, resource sharing is not the only motivation for corporate diversification. In environments where profitability of businesses changes frequently, firms diversify by redeploying part of resources from an underperforming business to a better performing business. This study uses a dynamic model to demonstrate that, with that second motivation for corporate diversification, firms end up combining moderately related businesses rather than the most‐related businesses. Copyright © 2017 John Wiley & Sons, Ltd.     

Quantity restrictions and endogenous quality choice

In a vertical product differentiation model under Cournot competition both foreign and domestic firms respond by lowering their investment in long-run quality for a quantity restriction at, and in the neighborhood of, the free trade import level. Average quality increases only when the low-quality foreign firm faces a substantially restrictive quota/voluntary export restraint. The change in quality depends on whether the foreign firm is of high or low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long-run choice of quality.     

Competitive customer poaching with asymmetric firms

Conditioning the pricing policies on purchase history is proven to generate a cutthroat price competition enhancing consumer surplus. This result typically relies on a framework where competitors are assumed to be symmetric. This paper demonstrates that under significant asymmetries of competing firms, the strong firm trades off current market share for future market share and the weak firm does the opposite. This inter-temporal market sharing agreement generates unidirectional poaching and entails new and distinctive welfare implications. In particular, if consumers are sufficiently myopic, price discrimination softens price competition in relation to uniform pricing, overturning the conclusion of previous studies.     

Underpricing of initial public offerings in Singapore: A discriminating test of the information-signalling hypotheses

This study provides a discriminating test of two signalling models which explain the underpricing of initial public offerings. The empirical results suggest a one-signal equilibrium which is consistent with Leland and Pyle's model, but which rejects Grinblatt and Hwang's two-signal model. The fraction of equity that the issuer retains in the firm which goes public dominates the offering price as a signal for firm quality. A higher equity fraction indicates better firm quality and therefore a lowerex ante uncertainty over firm value. Investors should then expect a smaller initial return on the offering.The author thanks Warren Bailey for his useful comments and suggestions in the earlier draft. The author is also grateful for the financial assistance from the research grant programme at the National University of Singapore.     

Information Generation in Vertically Differentiated Markets*

In a model of vertical competition two firms draw costly public signals that are informative about the quality of their products and then competitively set prices. When each firm generates information independently from the other, there will be overinvestment (underinvestment) in information generation if the market share of the quality follower in the subsequent market equilibrium is high (low). Moreover, information generation by one firm has a positive externality on the other firm. Hence, coordination (e.g., via industry associations) increases information generation. When product qualities are endogenous, information generation may prevent quality degradation and thus have an additional social benefit.     

Market size and competition: A “hump-shaped” result

An active empirical literature estimates entry threshold ratios (ETRs), introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on competition. We show that in the standard homogeneous goods oligopoly model, there is no monotonic relationship with the price-cost margin, one measure for the strength of competition. Regardless of the shape of demand, the ETR is hump-shaped in the number of active firms. It can also increase with entry in the Salop model of product differentiation or in a game of repeated interactions where collusion is possible. Empirical applications should use caution and only interpret changes in the ratio as indicative of a change in competition when the number of firms is sufficiently large.     

When do they care to share? How manufacturers make contracted service partners share knowledge

Manufacturing firms that outsource customer-facing services, risk losing touch with their customers and thereby forfeit valuable market and customer-related knowledge. To maintain informed and competitive, the manufacturer's customer-facing service partners should engage in knowledge sharing and transfer their market knowledge and insight to the firm. Building on knowledge transfer and organizational learning theory, this study investigates how contractual and non-contractual (i.e., relationship) characteristics influence knowledge sharing behavior by service partners. The authors specifically distinguish between sharing exploitative knowledge (insights that help the manufacturing firm to refine current skills and procedures) and exploratory knowledge (insights that help the manufacturing firm to challenge prior approaches to interfacing with the market). Based on survey data from 70 relationship managers from a large multinational firm and partial least squares path modeling, results show that contractual incentives had a negative effect on exploratory knowledge sharing, but not on exploitative knowledge sharing. The level of contract specification and relationship quality positively related to both types of knowledge sharing. Relationship manager experience related positively to exploratory knowledge sharing, but not to exploitative knowledge sharing. These findings provide valuable insights on how (non-)contractual mechanisms can be used to manage knowledge sharing in outsourced services.     

Real Estate Investments,Product Market Competition and Stock Returns

By limiting operating flexibility, real estate investments are found to increase firm risk, thus expected returns. This study introduces product market competition as a critical determinant of the relation between real estate investments and stock returns. As part of capacity strategies, these investments are generally associated with increased market power and lower cash flow volatility in oligopolistic industries. I present a simple model of oligopolistic competition showing a negative relation between real estate holdings and firm beta, and empirically confirm this prediction. Controlling for product market competition enhances identification of the endogenous relation between real estate investments and stock returns.     

高管人员报酬激励与公司治理绩效研究——一项基于深、沪A股上市公司的实证分析

本文选取深、沪A股上市公司1107家,分别从报酬形式、总经理来源形式、公司规模、行业竞争环境、地区分布、股权结构、代理成本等方面来对高管人员报酬(高管薪酬和高管持股)激励与公司治理绩效之间的相关关系进行分析,主要结论是:在目前的报酬激励体系下,非年薪制激励形式优于年薪制和股权性报酬激励形式;总经理为董事长或董事的公司治理绩效和激励机制优于其他类型;公司规模、行业竞争环境和地区分布影响公司治理绩效水平;股权结构的外生性扭曲了股票市场的有效性理论;高管薪酬、公司治理绩效与代理成本显著负相关。最后,根据实证分析的结果,提出了相关的政策建议。     

Corporate diversification: the impact of foreign competition,industry globalization,and product diversification

The globalization of markets and industries has fundamentally changed the competitive conditions facing firms. Yet, how globalization has influenced the international diversification strategies of firms is an issue largely overlooked in both the strategic management and international business literatures. This paper develops a theoretical framework to understand how industry globalization, foreign competition, and firm product diversification may influence a firm's choice of its degree and scope of international diversification. Utilizing a panel dataset of U.S. manufacturing firms for the period 1987–99, we provide the first empirical evidence that industry globalization and foreign-based competition are statistically significant factors explaining the degree and scope of international diversification by U.S. firms. Copyright © 2007 John Wiley & Sons, Ltd.     

Firm Density and Industry R & D Intensity: Theory and Evidence

By deriving a formal model of industry R & D that identifies factors influencing industry R & D intensity, this paper first suggests firm density, defined as the inverse of average firm sales or simply the number of firms divided by industry sales, as a measure of market structure that is appropriate in explaining industry R & D intensity. The model shows that the cost structure of R & D, consumer preference over quality and price, the appropriability of R & D, firm density, and the average level of firm R & D intensity jointly determine industry R & D intensity. In particular, firm density has a positive relationship with industry R & D intensity, implying that firms in higher firm-density industries feel fiercer competitive pressure and thus engage more intensively in R & D. An empirical analysis of panel data on industry R & D activities of Korean manufacturing industries during the period 1991–1996 provides supportive evidence for the predictions of the model including the positive relationship between firm density and industry R & D intensity. The theoretical model and the empirical results are also consistent with the recent survey of U.S. corporate R & D activities by the U.S. Department of Commerce and the National Science Foundation (1999).