The economics of convergence: Towards monetary union in Europe

The Economics of Convergence: Towards Monetary Union in Europe. —In this paper, the literature on monetary integration has been surveyed in order to discover the economic rationale of the Maastricht convergence requirements. The traditional theory of optimum currency areas is silent on the need for Maastricht-type convergence requirements. Similarly, the “new” view of monetary integration using credibility concepts cannot easily be used to justify these convergence requirements. It is also argued that the dynamics of the convergence requirements will almost certainly lead to a “Great Divide” of the European Union. The paper concludes that less emphasis should be put on prior convergence conditions and more on strengthening the functioning of the future monetary institutions in the Union.     

Economic growth and convergence in Germany

Conclusions The empirical analysis gives clear evidence of regional convergence in West Germany: poorer regions tend to grow faster than richer ones. In the period 1957–88, the speed of convergence was around 4 percent per year, implying a halving of the difference between actual and steady-state income every 16 years. While our empirical findings on convergence are of a similar magnitude as found by studies for the US and Europe by Barro and Sala-i-Martin (1991) and Mankiw et al. (1990), they indicate however a somewhat faster speed of adjustment for Germany. Also the pattern of a deceleration of the speed of convergence in recent years is similar to the developments found in these two regions (Barro and Sala-i-Martin 1991).     

Environmental growth convergence among Chinese regions

Since the end of the 20th century, numerous studies have analyzed Chinese economic development to gauge whether China's rapid growth is sustainable. Most of these studies focused on assessing total factor productivity (TFP) in Chinese mainland provinces but suffered from methodological weaknesses by assuming constant returns to scale (CRS) for the production frontier and/or incorrectly modeling variables returns to scale (VRS) technology taking into account bad output such as carbon dioxide emissions. Our paper offers a right non-parametric programming framework based on weak disposability and VRS assumptions to estimate environmental growth convergence among Chinese regions characterized by size heterogeneity. We explicitly separate regional efficiency gaps into two components: The first studies the technical catching-up process on each one (technical effect), and the second reveals convergence or divergence in the combinations of input and output among regions (structural effect). Moreover, carbon shadow price levels for provinces can be derived through the dual version of our activity analysis framework. Our empirical work focuses on 30 Chinese regions from 1997 to 2010. The results emphasize that environmental growth convergence among regions has mainly relied on the structural effect. We find that the structural effect largely depends on the pollution cost convergence and not on the evolution of the relative prices of capital or labor. The carbon shadow price is increasing at an annual rate of 2.5% and was evaluated around 864 yuan per ton in 2010 in China while regional estimates show significant disparities at the beginning of the period.     

Corporate In‐house Tax Departments*

In‐house human capital tax investment is a significant input to a firm's tax decisions. Yet, due to the lack of data on corporate in‐house tax departments, there is little empirical evidence on how tax departments are associated with tax planning and compliance outcomes. We expect the size of tax departments to be positively associated with the effectiveness of tax planning and compliance. Using hand‐collected data on the number of corporate tax employees in S&P 1500 firms over the 2009–2014 period, we find that firms with larger tax departments are associated with lower and less volatile cash effective tax rates. Furthermore, using tax employees' specialization, we identify tax departments' relative focus on planning or compliance and document a trade‐off between tax avoidance and tax risk. Specifically, tax departments with more of a tax planning focus have incrementally greater tax avoidance but higher tax risk, whereas tax departments with more of a tax compliance focus have incrementally lower tax risk but higher tax rates. Overall, this paper contributes to the literature by looking inside the “black box” of corporate tax departments and shedding light on the importance of human capital tax investment for tax outcomes.     

FDI and productivity convergence in Central and Eastern Europe: an industry-level investigation

This paper presents empirical evidence of the effect of FDI inflows on productivity convergence in Central and Eastern Europe, using a new and harmonized industry-level data set. Four conclusions stand out. First, there is a strong convergence effect in productivity, both at the country and at the industry level. Second, FDI inflow plays an important role in accounting for productivity growth. Third, the impact of FDI on productivity critically depends on the absorptive capacity of recipient countries and industries. Fourth, there is important heterogeneity across countries, industries and time with respect to some of the main findings.     

Corporate Taxes and Financing Methods for Taxable Acquisitions*

We examine the influence of corporate taxes on U.S. firms' financing methods for taxable acquisitions of 100 percent of a target corporation's stock. We conduct tests of acquirer firms' use of debt or internal funds as the funding source for these acquisitions over the period 1987‐97. Our results provide the first empirical evidence that U.S. firms' use of debt to fund acquisitions significantly declines as foreign tax credit limitations reduce the marginal tax benefits received from borrowing. This finding is consistent with earlier speculation that U.S. foreign tax credit provisions could materially affect the capital costs of U.S. companies in debt‐financed acquisitions. We also find that these firms are generally high‐tax‐rate corporations whose financing choices are not significantly influenced by whether they acquire target‐firm tax loss carryovers. Our findings contribute to the accounting literature on the influence of taxes on the structure and financing of corporate acquisitions.     

Rank Transformations and the Prediction of Corporate Failure*

Rank transformation of observations has been shown to be useful in linear modeling because the models so constructed are less sensitive to outliers and/or non-normal distributions than are models constructed using standard methods. In the present study, we apply rank transformations to financial ratios to improve the predictive usefulness of standard failure prediction models. Kane, Richardson, and Graybeal (1996) have shown that failure prediction can be improved by conditioning accounting-based statistical models on the occurrence of recession. Our results suggest that rank- transformed data models show additional improvement in prediction without the added cost of having to predict recession for the companies undergoing testing for potential failure.     

Recession-Induced Stress and the Prediction of Corporate Failure*

Abstract. In this paper we examine whether the occurrence of recession-induced stress is an incrementally informative factor that contributes to the predictive and explanatory power of accounting-based failure prediction models. We show that accounting-based statistical models used to predict corporate failure are sensitive to the occurrence of a recession. Moreover, after controlling for the intertemporally unconditioned “stressed” and “unstressed” types of corporate failure, we find that models conditioned on the occurrence of a recession still add incremental explanatory power in predicting the likelihood of corporate failure. This source-related characterization of stress appears distinct from other types of corporate failure that have been identified. Résumé. Les auteurs se demandent si l'occurrence du stress amené par la récession est un facteur qui apporte une information supplémentaire contribuant au pouvoir prédictif et explicatif des modèles de prévision des faillites reposant sur la comptabilité. Ils montrent que les modèles statistiques fondés sur la comptabilité utilisés pour prévoir les faillites des entreprises sont sensibles à l'occurrence d'une récession. De plus, une fois contrôlée la nature de la faillite de l'entreprise — faillite annoncée par le stress et faillite non annoncée par le stress sans conditionnement intertemporel —, les auteurs en viennent à la conclusion que les modèles conditionnés par l'occurrence d'une récession ont encore un pouvoir explicatif accru dans la prédiction de la probabilité de faillite de l'entreprise. Cette définition du stress liée à la source semble différente des autres types de faillite de l'entreprise qui ont été cernés.     

Corporate Social Responsibility,Firm Value and Corporate Governance Code Revisions: The Asian Evidence*

The present study examines the relationship between corporate social responsibility (CSR) and firm value, and the effects of corporate governance code revisions on the relationship. We examine this relationship for: (i) a high‐income country, Japan; (ii) middle‐income countries China, Malaysia and Thailand; and (iii) low‐income countries India and Indonesia. We use the Heckman two‐stage sample selection bias approach for the empirical analysis. We find that Japanese stakeholder CSR and environmental CSR have a smaller positive effect on firm value compared to the middle‐income countries, but we do not find any statistically significant association for the low‐income countries. In addition, we find that only Japanese corporate governance code revisions significantly contribute to the positive relationship between CSR and firm value, which concurs with the new recommendations documented in the revised codes of corporate governance. The present study reveals that foreign major shareholders matter to the value creation of CSR in Japan and the middle‐income countries of China, Malaysia and Thailand.     

Dynamic technological specialization,aggregated convergence and growth

This paper focuses on the contribution of dynamic technological specialization to aggregated growth and convergence. Certain theoretical approaches (Structuralism) maintain the view that being specialized in ‘correct’ technologies helps to achieve: i) sustainable rhythms of long-run growth; ii) accelerated catching up and higher rhythms of convergence in delayed countries. Using an endogenous growth model for a 23 countries sample between 1980 and 2010, the work contrasts those hypotheses by using static and dynamic approaches for technological specialization in comparison to other technological variables. Empirical results do not confirm that any ‘good’ specialization matters to growth and convergence at an aggregated level, neither under static nor dynamic approaches. The key elements to aggregated convergence and growth are more linked to spillovers of technological diffusion and to country-specificities (technological capabilities and capacities, domestic technical efforts, national innovation systems, industrial innovation processes, etc.) as it is pointed out by catching-up theories.     

Corporate Disclosure of Environmental Liability Information: Theory and Evidence*

Abstract. The decision to disclose information concerning a firm's environmental liabilities is modeled as a sequential game involving the firm, a capital market, and outside stakeholders who can impose proprietary (political) costs on the firm. A partial disclosure equilibrium is derived in which firms reveal information strategically, maximizing the share-value net of expected political costs. Inherent uncertainty regarding the existence and size of the liabilities creates a setting where outsiders are uncertain if management is informed about these liabilities, so firms can plausibly withhold “bad news”, that is, they do not disclose liabilities that exceed a threshold level. Three novel hypotheses are that a firm is more likely to disclose as (1) its pollution propensity increases, (2) outsiders' knowledge of its environmental liabilities increases, and (3) the risk of incurring proprietary costs decreases. Empirical support is found for the hypotheses, based on the accounting disclosures made by sample firms selected from the records of the Ontario Ministry of the Environment and Energy. Improved accounting and auditing standards for environmental disclosure would build on at least three implications of the study:

• 1 To the extent that inherent uncertainty leaves managers with discretion as to what to disclose, the partial disclosure equilibrium result suggests that not all firms will comply with disclosure standards.
• 2 Publishing broad environmental performance indicators for companies in nonaccounting outlets would increase public awareness of a manager's private information endowment, making voluntary accounting disclosures of the liabilities more likely.
• 3 If a significant decline in stakeholder tolerance of pollution occurs, the expected proprietary costs of disclosing increase, and companies become less likely to disclose.

     

Disclosure and Recognition Requirements: Corporate Investment Decisions with Externalities*

This paper examines the effects of disclosure and recognition requirements on investment decisions when shareholders have limited liability. Firms' investment projects have either high initial pollution prevention costs or high subsequent clean‐up costs, and their liability for clean‐up costs may be either individual or joint and several. Even with individual liability for clean‐up costs, shareholders' limited liability creates an incentive to select the latter project type and to impose costs on the rest of the economy. This tendency is exacerbated when clean‐up liability is joint and several. We show that a disclosure requirement cannot have an unambiguous effect on the selection of the “cleaner” project. However, an accrual requirement, together with an accounting‐based dividend restriction, is shown to promote choice of the project that imposes lower expected costs on the rest of the economy. Moreover, we find that it is possible for a recognition requirement to have a greater impact in a joint‐and‐several liability regime than in an individual liability regime.