Trade costs, firms and productivity

This paper examines the response of U.S. manufacturing industries and plants to changes in trade costs using a unique new dataset on industry-level tariff and transportation rates. Our results lend support to recent heterogeneous-firm models of international trade that predict a reallocation of economic activity towards high-productivity firms as trade costs fall. We find that industries experiencing relatively large declines in trade costs exhibit relatively strong productivity growth. We also find that low-productivity plants in industries with falling trade costs are more likely to die; that relatively high-productivity non-exporters are more likely to start exporting in response to falling trade costs; and that existing exporters increase their shipments abroad as trade costs fall. Finally, we provide evidence of productivity growth within firms in response to decreases in industry-level trade costs.     

The effect of regulation on optimal corporate pension risk

We study firms' pension prefunding and portfolio allocation choices in a model in which firms trade off the need to compensate workers for the financial risk in their pension benefit against the cost advantage that may be gained by exploiting underpriced pension insurance. In the absence of pension insurance, the firm minimizes costs by rendering promised benefits free of risk to workers, who are assumed to be unable to hedge firm-specific risk. Various forms of government intervention, such as benefit guarantees, can alter this outcome dramatically by providing the firm with an incentive to shift risk to other parties. In this case, we find that the firm's decisions depend on, among other influences, the degree of insurance mispricing, the amount of guaranteed benefits, the stringency of minimum funding requirements, and the costs of financial distress.     

Education, redistribution and the threat of brain drain

We analyze how the threat of brain drain affects redistributive government policies and net incomes of skilled and unskilled workers. Our analysis is based on a model that captures human capital formation, credit market constraints and tax avoidance activities. We characterize how decreasing migration costs for skilled workers shape the time-consistent policies of a government that wants to shift resources from skilled to unskilled workers. Starting from a closed economy, declining migration costs first increase net incomes of both skilled and unskilled workers, and then decrease net incomes of all households. There is a conflict of interest only for very low migration costs. In this case, skilled workers start to benefit from a further rise in their mobility, but now at the expense of the unskilled labor force.      

Value of Multinationality: Internalization, Managerial Self-interest, and Managerial Compensation

In this paper, we examine the impact of managerial self-interest on the value of multinationality. Since agency theory also suggests that a divergence between the interests of managers and shareholders can be aligned by effective managerial incentive, we also examine the effect of managerial compensation on the value of multinationality. Our results show that for high- Q (Tobin's Q > 1 ) firms, investors do not associate the spending of free cash flow on multinationality with the problem of overinvestments. For high- Q firms, it is also found that the value of multinationality can be enhanced by effective managerial incentives. For low- Q firms (Tobin's Q < 1 ), it is found that the concern of managerial self-interest overwhelms the benefits of internalization, making multinationality a value-decreasing event. For low- Q firms, managerial compensation is also ineffective in promoting value-enhancing foreign direct investments.     

International tax competition: do public good spillovers matter?

We study the impact of public good spillovers on tax competition between two imperfectly integrated countries with different levels of productivity. We show that international public good spillovers, by reducing the tax gap between countries, strengthen the agglomeration of firms in the most productive country. Then we carry on a welfare analysis. We first assume that governments are engaged in a redistributive tax policy. At the non-cooperative equilibrium, the tax level in the high-productivity country is inefficiently high while it is inefficiently low in the other country. A different conclusion emerges when tax revenues are recycled in a public good provision: taxes are inefficiently low in both countries and public good spillovers increase the global welfare. Finally, for a given amount of total tax revenues, public good provision in the high-productivity country is inefficiently high compared to its level in the low-productivity country.     

Asset Revaluations and Assessment of Borrowing Capacity

Prior research has found support for contracting, political cost and information asymmetry explanations for managements’ decision to revalue non-current assets. This study proposes that asset revaluations occur to signal available borrowing capacity via an increase in collateral values at the time of increases in secured debt and that the economic benefits associated with an asset revaluation will be greatest for firms when they are experiencing times of declining cash flows from operations. Results imply that firms that have undertaken an asset revaluation are more likely to be experiencing declining cash flows from operations than firms that have not revalued. This study also investigates whether the incidence of valuations coincides with increases in levels of secured borrowings due to lenders’ demands for current values of assets offered as collateral. The evidence indicates that firms are more likely to record an asset revaluation if they have increased their secured borrowings, and that most non-year-end revaluations emanate directly from contracting with lenders.     

Political considerations in the decision of Chinese SOEs to list in Hong Kong

This paper investigates why Chinese state-owned enterprises (SOEs) with strong political connections (i.e., politically connected firms) are more likely to list overseas than non-politically connected firms. We find that connected firms' post-overseas listing performance is worse than that of non-connected firms. This evidence suggests that connected firms' managers list their firms overseas for private (political) benefits. Consistent with this private benefits explanation, we further find that connected firms' managers are more likely to receive political media coverage or a promotion to a senior government position subsequent to overseas listing than domestic listing.     

Labor unemployment risk and corporate financing decisions

This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.     

Government contracts and US bond yield spreads: A study on costs and benefits of materialized political connections

In a 1991–2013 sample of bonds issued by US public firms, we find that the cost of debt (yield spread relative to comparable Treasuries) of suppliers to government agencies is contingent on the strategic importance of the supplier's industry. The yield spreads for strategically unimportant government suppliers are higher than for firms that are not government suppliers. If government contracts serve as tangible evidence of political connections, these higher yield spreads indicate that weaker corporate governance as a cost of political connections outweighs the benefits of said connections. For the subsample of government suppliers from strategically important industries, where the benefits of implicit bailout guarantees and revenue stability outweigh the corporate governance problems, the cost of debt is lower than for firms that are not government suppliers. The higher (lower) cost of debt for strategically unimportant (strategically important) suppliers is confined to contracting with the federal government. Our findings are robust to alternative variable and sample specifications, and to endogeneity concerns.     

Rent-seeking incentives, corporate political connections, and the control structure of private firms: Chinese evidence

We examine how the rent-seeking incentives of local government motivate private firms¹ listed in China to establish political connections, and whether such connections lead to more concentrated corporate control structures. Our results show that such firms are more likely to establish political connections in regions in which the local economy is less market-oriented or in which the government has more discretion in allocating economic resources. This is consistent with the notion that the presence of incentives for government officials to engage in rent seeking motivates private firms to look for alternative safeguards through political connections. We also find that the controlling owners of politically connected firms tend to concentrate their shareholdings and dominate the board of directors by occupying the position of either chairman or CEO, which supports the conjecture that a concentrated control structure facilitates rent seeking through political connections and allows the controlling owner to retain all of the benefits arising from connections with politicians.     

Fiscal Requirements for Dynamic and Real Determinacies in Economies with Private Provision of Liquidity: A Monetarist Assessment

We study the impact of fiscal policies on the inherent links between inflation, unemployment, and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule. Firms, other than hiring workers, also supply private assets that are not only useful as a store of value but also as collateral. When firms are not taxed and public debt is scarce, the economy is non-Ricardian so that real indeterminacies can be observed. Moreover, labor market characteristics do not affect the demand for government liabilities. However, when agents face public and private asset scarcity, labor market conditions then impact asset prices and inflation. We further show that irrespective of the type of asset scarcity agents face, when firms are taxed non-ad valorem, not only the level of tax revenues but also its composition matter for real allocations. Moreover, we show that labor market conditions directly affect the dynamics of all government liabilities and inflation.     

A Gap‐Filling Theory of Corporate Debt Maturity Choice

We argue that time variation in the maturity of corporate debt arises because firms behave as macro liquidity providers, absorbing the supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with more short‐term debt, firms fill the resulting gap by issuing more long‐term debt, and vice versa. This type of liquidity provision is undertaken more aggressively: (1) when the ratio of government debt to total debt is higher and (2) by firms with stronger balance sheets. Our theory sheds new light on market timing phenomena in corporate finance more generally.     

Should Firms Going Public Enjoy Tax Benefits? An Analysis of the Italian Experience in the 1990s

In Italy tax benefits are granted to firms going public. However, does such tax relief really reduce the corporate tax burden? In this study we tackle the issue by considering 21 industrial firms that were listed on the Italian Exchange from 1995 to 1997 and enjoyed a temporary tax rate cut‐off. We find that the increase in the taxable income reported by these firms largely counterbalances the effect of the tax relief. We conclude that a tax rate cut‐off may not necessarily provoke a reduction in the tax burden for newly listed firms, since in the short term they report larger earnings compared with privately‐owned companies. We claim that this ‘induced’ effect is mainly due to: the significant improvement of operating performance in the year of the listing; the reduction of the debt tax shield; an increase in investment and more accounting transparency. Our findings suggest that tax relief for IPO firms does not necessarily mean a loss of revenue for the government.     

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

We evaluate the effect of downside insurance on self-employment. We exploit a large-scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one-for-one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.     

Who works for startups? The relation between firm age,employee age,and growth

Young firms disproportionately employ and hire young workers. On average, young employees in young firms earn higher wages than young employees in older firms. Young employees disproportionately join young firms with greater innovation potential and that exhibit higher growth, conditional on survival. We argue that the skills, risk tolerance, and joint dynamics of young workers contribute to their disproportionate share of employment in young firms. Moreover, an increase in the supply of young workers is positively related to new firm creation in high-tech industries, supporting a causal link between the supply of young workers and new firm creation.     

The global financial crisis and stock market migrations: An analysis of family and non-family firms in Germany

In most European countries, the number of exchange-listed firms has begun declining subsequent to the global financial crisis in 2008/2009. In the U.S., these numbers had already started to decrease one decade earlier. We investigate how the global financial crisis encouraged family and non-family firms in Germany to transfer from the highest to a lower stock market segment. Using logit and firm-fixed effects regressions, we provide several explanations why we observe a higher propensity of family firms relative to non-family firms to migrate to a lower market segment subsequent to the financial crisis. Explanations are lower investments during the financial crisis, decreasing growth opportunities and operating performance as well as lower stock market quality. Consequently, many family firms reassessed their listing benefits and costs after the financial crisis as well as their initial market segment decision. In contrast, the transfer reasons for non-family firms are often a lower performance and financial difficulties.     

Vested interests and technology adoption

The asymmetric ability of different interest groups to exclude non-members and the concentrated benefits and diffused costs of policies favoring vested interests matters for technology adoption. We analyze a political economy model where coalitions of workers in many small industries lobby government for a prohibition on the adoption of superior technologies. For reasonable parameter values, the “smallness” of industry lobbies leads to barriers to the adoption of technologies that would make all workers more productive. Higher government corruption can lead to lower levels of TFP and per capita output. The model can generate TFP growth cycles.     

Capitalizing R&D expenses versus disclosing intangible information

We study how to improve the value-relevance of financial information for intangible-intensive firms by investigating two alternatives: capitalizing research and development (R&D) expenses and disclosing intangible information. Using patent counts/citations to proxy for intangible intensity, we find that the incremental value-relevance of disclosing patent counts/citations is greater than that of capitalizing R&D expenses for the high-patent group and vice versa for the low- or medium-patent group. Investors favor the disclosure of patent information for firms with more successful innovations. Since disclosing intangible information may lead to appropriation by rivals, we find that, for the high-patent group, the incremental value-relevance of disclosing patent counts/citations is more pronounced for firms in industries with stronger protection of intellectual property. Overall, our results suggest that disclosing R&D outputs can improve the value-relevance of financial statements for firms rich in intangibles and the incremental benefits of such disclosure will be greater in industries with strong protection of intellectual property.     

Bank discrimination, holding bank ownership, and economic consequences: Evidence from China

This paper finds that compared with Chinese state-owned firms, non-state-owned firms have a greater propensity to hold significant ownership in commercial banks. These results are consistent with the notion that because non-state-owned firms are more likely to suffer bank discrimination for political reasons, they tend to address their financing disadvantages by building economic bonds with banks. We also find that among non-state-owned firms, those that hold significant bank ownership have lower interest expenses, and are less likely to increase cash holdings but more likely to obtain short-term loans when the government monetary policy is tight. These results suggest that the firms building economic bonds with banks can enjoy benefits such as lower financial expenses and better lending terms during difficult times. Finally, we find that non-state-owned firms with significant bank ownership have better operating performance. Overall, we find that firms can reduce discrimination through holding bank ownership.     

Government Intervention and Investment Comovement: Chinese Evidence

This study examines whether government intervention affects corporate investment comovement, and whether this impact varies across firms with different types of ownership. We use a large Chinese sample to investigate these questions, and perform a regional as well as firm‐level analysis. We show that government intervention is positively and significantly associated with investment comovement. We also find that the impact of government intervention on investment comovement is higher and more significant for state‐owned firms than for domestic private and foreign firms. Finally, we show that investment comovement hinders corporate performance for state‐owned and domestic private firms but not for foreign firms.