How well is productivity being priced?

By understanding how productivity shocks affect firm value, an entrepreneur can better compute the risk premium associated with uncertainty in production. This study explores the link between plant-level productivity and firm value for the baking and confectionary sector. From the impulse response analysis, the study finds that there is a lag in the firm’s response to productivity shocks at the plant level. Further, the paper employs Tobin’s Q as a valuation metric that acts as a link between a firm’s manufacturing plant productivity and firm value. Empirical estimations indicate that there is comovement between firm valuation and plant level productivity.     

The optimal capital structure of the firm with stable Lévy assets returns

This article builds a new structural default model under the assumption that a firm’s assets return follows a dynamics displaying jumps of both signs. In essence, we expand the work of Hilberink and Rogers (itself an extension of the Leland and Toft framework), which deals only with negative jumps. In contrast, we make use of stable Lévy processes, and we compute the values of the firm, debt and equity under this assumption. Theoretical credit spreads can also be obtained in our framework. They prove to be consistent with the empirical credit spreads observed in financial markets.      

The effect of firm financial characteristics and the availability of alternative finance on IPO underpricing

This article tests the hypothesis that the financial characteristics of the issuing firm, along with the availability of alternative sources of financing, are important determinants of the level of underpricing. While risk and its relationship to underpricing have been examined in previous studies, liquidity risk is unique because of its special implications for a firm’s bargaining position with the underwriter. Consistent with my hypothesis, firms with greater liquidity concerns at the IPO experience greater underpricing. On the other hand, firms with higher levels of venture capital funding and/or debt financing are more fully priced.     

Entry,financing, and bankruptcy decisions: The limited liability effect

A firm, which has a privileged right to undertake an irreversible investment project, simultaneously determines whether to exercise this project and also how many bonds to issue in the presence of demand uncertainty. The firm will not exercise the project until its net value from investing immediately equals its option value from delaying investment. The firm’s choice of debt levels balances the tax advantage of debt against a cost associated with the event of bankruptcy. The effects of uncertainty, asset specificity, and the costs to purchase capital later on a firm’s entry, financing, and bankruptcy decisions are examined and compared with those in the literature.     

The need for speed: impacts of internet connectivity on firm productivity

Broadband access is widely considered to be a productivity-enhancing factor, but there are few firm-level estimates of its benefits. We use a large micro-survey of firms linked to longitudinal firm financial data to determine the impact that broadband access has on firm productivity. Propensity score matching is used to control for factors, including the firm’s own lagged productivity, that determine a firm’s internet access choice. Instrumental variables estimates are employed as a robustness check. Results indicate that broadband adoption boosts firm productivity by 7–10%; effects are consistent across urban versus rural locations and across high versus low knowledge intensive sectors.     

Real options and contingent convertibles with regime switching

We consider a firm with no assets in place but an option to invest in a project. The investment is irreversible but delayable in a regime-switching economy. The firm issues equity, straight bonds (SBs) and contingent convertibles (CoCos). We provide the closed-form prices for the firm׳s securities and the pricing and timing of the option. Our numerical analyses discover that issuing CoCos instead of SBs induces much less agency cost of debt. The agency cost is higher in a boom economy than in recession but the difference is small. There is a unique CoCos׳ conversion ratio such that the agency cost arrives at the minimum value zero. The inefficiencies arising from asset substitution and debt overhang are much more significant in recession than in boom. Only if the conversion ratio is not too small, the two inefficiencies disappear during boom periods. While the effects of the conversion rate on optimal capital structure and firm value and those of supervision and jump intensity on optimal CoCos׳ coupon are ambiguous and weak, the stricter the supervision or the longer the economy remains in recession, the less the option value and the optimal SBs׳ coupon.     

Human capital determinants of the survival of entrepreneurial service firms in Spain

The claim of this paper is that an entrepreneur’s human capital constitutes a key determinant of the survival time of new service industry companies created in Spain. To confirm this claim, a series of survival models has been specified and estimated for a sample of 237 Spanish service industry companies founded by one or more entrepreneurs between the years 2000 and 2004. We found that (1) both general and specific human capital have a positive impact on the survival time of a new firm and (2) human capital is accumulative, in the sense that the larger the number of entrepreneurs founding the company, the longer its survival time. We find that the specific aspects of human capital that are determinants of a company’s survival time are gender, previous work experience in the same activity or as the owner of a firm, and the number of partners. However, educational and training characteristics do not play a relevant role as regards a firm’s survival time. These facts suggest the presence of a gap between the objectives and results of current entrepreneurial-oriented training in Spain.     

On the cost-reducing effects of embodied technical progress: a panel study of the steel industry in Japan

To explicitly explain the cost-reducing effects of technical progress experienced by each firm, we assume that technical progress, namely, the prevalence of particular equipment, can be expressed by a function of logarithmic physical capital. Regarding the technology cost structure, we propose a modified dynamic cost function model that consists of the above equation, the translog variable cost equation containing technical progress as one of the factors, and Euler equations with respect to physical and research and development capital stocks. Using data on eight firms in the Japanese electric-furnace steel industry for the period 1970–1998, the model was empirically validated using the generalized method of moments. An elasticity of production cost with respect to technical progress showed a cost-reducing effect. This fact was influenced by the type of product and the extent of each firm’s R&D. Also derived from this model is one reasonable phenomenon of business-cyclically changing the use of endogenous capacity. This economic information supports the appropriateness of the above model, including the assumption of transforming technical progress into an endogenous variable, and the methods of analysis.     

Contingent capital,capital structure and investment

We examine the interaction between investment and financing policies in a dynamic model for a firm with existing assets-in-place and a growth option, of which investment cost is financed with equity and contingent convertible bonds (CoCos). We attempt to clarify how CoCos impact on investment timing, capital structure and inefficiencies arising from debt overhang and asset substitution. We show that there is a conversion ratio (the fraction of equity allocated to CoCo holders upon conversion) to eliminate the inefficiencies. Our conclusions predict that debt leverage decreases with investment option payoff factor and the average appreciation rate of the cash flow. In contrast to traditional corporate finance theory saying that a firm's value decreases globally with business risk, our model indicates that it might first decrease and then increase with asset volatility.     

The contributions of productivity, price changes and firm size to profitability

Sources of profit change for Telstra, Australia’s largest telecommunications firm, are examined. A new method allows for changes, in a firm’s profits to be broken down into separate effects due to productivity change, price changes, and growth in the firm’s size. This in turn allows us to calculate the distribution of the benefits of productivity improvements between consumers, labor, and shareholders. The results show that around half the benefits from Telstra’s productivity improvements from 1984 to 1994 were passed on to consumers in the form of real price reductions.

Adjusting for cultural differences,a new DEA model applied to a merged bank

The usefulness and application of Data Envelopment Analysis (DEA) efficiency measurements is usually limited by the requirement of consistent operating circumstances. However, in many real world situations this is not the case, so to overcome this problem, this paper reports on a new strategy by inventing a Culturally Adjusted DEA model to benchmark business units that operate under different cultural (business) environments. This is especially useful when these environmental factors are partial causes of inefficiency and can not be simply incorporated into a DEA model as inputs or outputs. A simulation analysis is conducted to examine the effectiveness of the CA-DEA model for controlling these environmental effects. This model is applied to a real life efficiency study of two major financial firms in Canada in 2000, when the two entities started to consolidate and merge their branch networks. Two cultural indices are identified to represent a firm’s unique operating environment, one to capture the nature of a firm’s corporate strategies (Corporate Index), and the other to estimate the effectiveness of a firm’s operational systems (Service Index). The results show that a firm’s corporate culture has a significant influence on its branches’ efficiency and this, we found, is often neglected in such studies. This paper also makes a contribution to the bank merger literature by providing an internal view of the potential benefits that may result from sharing cultural advantages while identifying the true managerial inefficiencies.     

Assessment of decision-making regarding market entry/exit for technology innovation

Based on the real options approach, this work intends to assess a firm’s strategy regarding the decision-making of either entering the market which requires technology innovation or leaving the market without technology innovation. Moreover, this work applies the discounted factor to discuss the intervals among different decision values and evaluate the relative timeframe with respect to the project values. Hence, this study intends to provide a mathematical model to assess the entry and exit thresholds in respect of the most optimum technology innovation for maximizing the firm value.     

Organizations undertaking complex projects in uncertain environments

Recent evidence suggests that firms’ environments are becoming more complex and uncertain. This paper investigates the relationship between the complexity of a firm’s activities, environmental uncertainty and organizational structure. We assume agents are arranged hierarchically, but decisions can be made at different levels. We model a firm’s activity set as a modified NK landscape. Via simulations, we find that centralized decision making generates a higher payoff in more complex and uncertain environments, and that a flatter structure is better for the organization with centralized decision making, provided the cost of information processing is low enough. Financial Support from Zengin Foundation for Studies on Economics and Finance is gratefully acknowledged.     

Knightian uncertainty and insurance regulation decision

In contrast to insurance companies, regulatory authorities or regulators can obtain only limited information about the companies’ value. It hence leads to some effects on the regulation design, which is however often overlooked in the literature. This article characterizes the limited/imperfect information as Knightian (Risk, Uncertainty, and Profit, Houghton Mifflin, Boston, 1921) uncertainty (ambiguity). In order to stress the analytical effects of ambiguity on the regulation decisions, we firstly carry out an analysis in a standard immediate bankruptcy regulation where default and liquidation are considered as indistinguishable events. It is noticed that ambiguity-averse regulators require more “ambiguity equity”. We show then that under ambiguity an immediate liquidation policy delivers wrong liquidation with a positive probability. As an illustrative example to fix the wrong liquidation problem under ambiguity, a new regulation rule is developed with a regulatory auditing process. Based on this new model setup, we focus on examining how the riskiness of the firm’s value and the debt ratio affect liquidation probability.      

The effectiveness of entrepreneurial firm’s knowledge acquisition from a business incubator

This cross-cultural research project, involving the United States and Finland, explored how the entrepreneurial firm’s acquisition of business processes’ knowledge from interaction with incubator management positively impacts on new product development, increased technical competence, enhanced reputation and lower costs of sales to customers. In a sample of 52 firms, the study’s methodology depended on single response, self-reported data. The findings suggest that the sole knowledge benefits gained by the firm, from the incubator relationship, is a perception of enhanced reputation. Also, incubator managers should focus more on assisting new technology based firms with growing the venture in the marketplace. Funding for this project was provided by The National Science Foundation, and The National Technology Agency of Finland.     

Efficiency of the Indian leather firms: some results obtained using the two conventional methods

Indian leather industry has massive potential for generating employment and achieving high export-oriented growth. However, its economic performance has not been assessed much till date. The present paper attempts to fill in this gap by examining technical efficiency (TE) of individual leather producing firms for some years since the mid-1980’s. Analyzing the industry’s firm-level data through the two conventional tools, viz., data envelopment analysis and stochastic frontier analysis, the paper observes a significant positive association between a firm’s size and its TE, but no such clear relation between a firm’s age and TE. It also finds significant variation in TE across firms in different groups of states as well as under different organizational structures and observes some technological heterogeneity across states. Although, non-availability of panel data does not allow one to assess effects of economic reforms on the performance of the Indian leather firms, the average firm-level TE, however, seems to be on an increasing path, except for downswing in the immediate post-reform years.     

Innovation in NTBFs: Does leadership really matter?

Innovation is considered to be a key contributor to both the long-term survival and development of superior competitiveness in New Technology-based Firms [NTBFs]. Many factors contribute to a firm’s differential innovation performance. According to the resource-based view of the firm, leadership is one of the key contributory resources. In this article, the relationship between innovation, leadership and performance is examined through a study of 194 NTBFs. The results suggest that the level of innovation, the likelihood of success and the development of the competences needed for effective innovation are influenced by the firm’s leadership style. In particular, it was found that the transformational/human resources leadership style is more conducive to innovation and the introduction of new products, whereas transactional leadership tends to be associated with the modification of existing products. The findings outline the attributes of each leadership style associated with innovation and provide practical guidelines to enable senior managers to consider leadership in the formulation and deployment of their innovation plan. Finally, the analysis indicates the need to consider and align leadership and approaches to innovation in order to achieve sustainable competitive performance.     

Do self-serving managers choose Chapter 11 filing over out-of-court restructuring?

I investigate whether self-serving managers in financially distressed firms influence a firm’s decision on the choice of debt restructuring method. I show that there is a non-linear relationship between managerial ownership and the probability of Chapter 11 filing. I find that distressed firms are more likely to choose Chapter 11 with the increase of managerial ownership when managerial ownership is in the 5%–25% range. I also find a significant curvilinear relation between managerial ownership and the probability of Chapter 11. My results are consistent with the hypothesis that managerial ownership plays a significant role in corporate decisions.     

A different perspective on operating leverage: Comments

A recent article in this journal by Dran (1991) suggests that the usual treatment of degree of operating leverage (DOL) is misleading because it improperly attributes the DOL to the ratio of fixed to total costs rather than the closeness of the firm’s output to breakeven. Managerial economics texts are clear in identification of DOL as an elasticity concept which varies with the nearness to break-even. Examples associating DOL with the relative level of fixed cost arise from association of higher fixed costs with higher breakeven points, and this appears to be the normal economic relationship.     

Empirical evidence on the effects of delisting from the National Market System

This study analyzes empirical evidence related to changes in market value and liquidity characteristics of stocks, which are delisted from the National Market System (NMS) due to an elevation of NMS listing standards. Our results are thus relatively independent of the financial conditions of the firms prior to delisting. We document significant increase in bid-ask spreads and decrease in trading volume after delisting. A significant negative stock price reaction around the delisting announcement period is also observed. Both sets of findings suggest that delisting from NMS increases a firm’s cost of capital by adversely affecting the liquidity of its stock. (JEL: G14)