Is rising RTS a figment of poor data?

While using detailed firm-level data from the private business sector, this study identifies two empirical puzzles: (i) returns-to-scale (RTS) parameter estimates rise at higher levels of data aggregation and (ii) estimates from the firm level suggest decreasing returns to scale. The analysis shows that, although consistent with rising estimates, neither entry/exit nor the Basu-Fernald [Returns to scale in U.S. production: estimates and implications. Journal of Political Economy 105, 249-283) aggregation-bias effect drives this result. Rather, rising and too low RTS estimates seem to reflect a mixture of random errors in factor inputs at the firm level. It turns out, in fact, that a 7.5-10 percent error in labor (hours worked) can explain both puzzles.     

The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico

I use data on oil and gas drilling in the Gulf of Mexico to measure how a corporate alliance—a group of firms that jointly develops an offshore tract—performs relative to a solo firm. I employ a regression discontinuity strategy based on bids in first-price sealed-bid auctions for the rights to develop leases. By focusing on leases where one organizational form narrowly outbids the other, I measure drilling outcomes while controlling for the endogenous matching of projects and organizational forms. Solo firm leases are less profitable than alliance leases because alliance members combine their information and expertise.     

Ownership and Production Costs: Choosing between Public Production and Contracting‐Out in the Case of Swedish Refuse Collection

Many comparisons of public and private firms use a public/private ownership dummy variable to capture cost differences. If, however, public and private firms use different production technologies, the dummy‐variable approach is misspecified. Data from public and private firms should not be pooled. Secondly, selectivity bias may arise, making it more difficult to identify cost differentials that actually exist. Thirdly, if data should be pooled, the resulting empirical model may be logically inconsistent. This paper compares public and private firms using the refuse collection costs of 170 firms in 115 Swedish municipalities. First, public production costs were 6 per cent lower than private production costs. Secondly, cost differences did not affect producer choice. It is crucial to adjust for selectivity. Data for private and public firms should not be pooled. The dummy‐variable model is misspecified.     

The brevity and violence of contractions and expansions

Early studies of business cycles argued that contractions in economic activity were briefer (shorter) and more violent (rapid) than expansions. This paper systematically investigates this claim and in the process discovers a robust new business cycle fact: contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output. The difference arises because employment typically lags output around peaks but they coincide in their troughs. We discuss the performance of existing business cycle models in accounting for this fact, and conclude that none can fully account for it. We then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively.     

On Quality and Variety Bias in Aggregate Prices

How do product variety and quality affect the aggregate price bias? We develop a general equilibrium model that accounts for the joint interaction of product quality and variety. Our findings show that the aggregate price bias is procyclical and the contribution of product variety is persistent whereas the contribution of product quality becomes countercyclical in the medium to long run. We show that accounting for product quality and variety has critical implications on the measure of cyclical fluctuations. Measurements of cyclical fluctuations derived using the consumption deflator, which abstracts from changes in product quality and variety, underestimate the variables' true volatility.     

Collateral and capital structure

We develop a dynamic model of investment, capital structure, leasing, and risk management based on firms' need to collateralize promises to pay with tangible assets. Both financing and risk management involve promises to pay subject to collateral constraints. Leasing is strongly collateralized costly financing and permits greater leverage. More constrained firms hedge less and lease more, both cross-sectionally and dynamically. Mature firms suffering adverse cash flow shocks may cut risk management and sell and lease back assets. Persistence of productivity reduces the benefits to hedging low cash flows and can lead firms not to hedge at all.     

Internal financial constraints,external financial constraints,and investment choice: Evidence from a panel of UK firms

This paper uses a panel of 24,184 UK firms over the period 1993–2003 to study the extent to which the sensitivity of investment to cash flow differs at firms facing different degrees of internal and external financial constraints. Our results suggest that when the sample is split on the basis of the level of internal funds available to the firms, the relationship between investment and cash flow is U-shaped. On the other hand, the sensitivity of investment to cash flow tends to increase monotonically with the degree of external financial constraints faced by firms. Combining the internal with the external financial constraints, we find that the dependence of investment on cash flow is strongest for those externally financially constrained firms that have a relatively high level of internal funds.     

Stock market boom and the productivity gains of the 1990s

Together with a sense of entering a New Economy, the U.S. experienced in the second half of the 1990s an economic expansion, a stock market boom, a financing boom for new firms and productivity gains. This article proposes an interpretation of these events within a general equilibrium model with financial frictions and decreasing returns to scale in production. We show that the mere prospect of high future productivity growth can generate sizable gains in current productivity, as well as the other above mentioned events.     

Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956-2004

We document large differences in trend changes in hours worked across OECD countries between 1956 and 2004. We assess the extent to which these changes are consistent with the intratemporal first order condition from the neoclassical growth model, augmented with taxes on labor income and consumption expenditures. We find that the model can account for most of the trend changes in hours worked measured in the data. Differences in taxes explain much of the variation in hours worked both over time and across countries.     

Cash flow,investment, and investment opportunities: New tests using UK panel data

The interpretation of the correlation between cash flow and investment is controversial. Some argue that it is caused by financial constraints, others by the correlation between cash flow and investment opportunities that are not properly measured by Tobin’s Q. This paper uses UK firms’ contracted capital expenditure to capture information about opportunities available only to insiders and thus not included in Q. When this variable is added to investment regressions, the explanatory power of cash flow falls for large firms, but remains unchanged for small firms. This suggests that the significance of cash flow stems from its role in capturing the effects of credit frictions.     

Investment and financing constraints in China: Does working capital management make a difference?

We use a panel of over 116,000 Chinese firms of different ownership types over the period 2000–2007 to analyze the linkages between investment in fixed and working capital and financing constraints. We find that those firms characterized by high working capital display high sensitivities of investment in working capital to cash flow (WKS) and low sensitivities of investment in fixed capital to cash flow (FKS). We then construct and analyze firm-level FKS and WKS measures and find that, despite severe external financing constraints, those firms with low FKS and high WKS exhibit the highest fixed investment rates. This suggests that an active management of working capital may help firms to alleviate the effects of financing constraints on fixed investment.     

The extensive margin and monetary policy

The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy.     

Banking relationships and access to equity capital markets: Evidence from Japan’s main bank system

We study the role of banking relationships in IPO underwriting. When a firm in Japan goes public, it can engage an investment bank that is related through a common main bank, or can select an alternative investment bank. The main bank relationship can be an efficient way for the investment bank to acquire information generated by the main bank, but may give rise to conflicts of interest. We find that main bank relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs often switch to non-related investment banks that are capable of managing large offerings. While investment banks seek to exploit bargaining power with related issuers, issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.