Market reactions to announcements to expense options

The joint hypotheses of informationally efficient markets, transparent financial statements, and adequate accounting disclosure suggest that announcements of changes in the accounting treatment of employee stock options from footnote disclosure to expense recognition should not trigger stock price reactions because free-cash-flows will not change. Event study results from a sample of 241 firms that announce such changes reveal statistically significant negative price changes followed by positive price changes about equal in magnitude. We propose the learning, sophisticated investor, neglected firm, and firm size hypotheses to explain the observed announcement-period stock price reaction.

An examination of the performance and prospects for the future of internet-primary banks

We study Internet-primary banks for differences in performance versus newly chartered traditional banks from 1996 through 2003. Internet-primary banks are larger, with lower net interest margins and loan losses, and higher wage and physical capital rates than newly chartered traditional banks. Univariate ROE is lower, but profit efficiency is significantly higher on average for Internet-primary banks compared to all newly chartered banks as well as those that survive through the sample period. In multivariate models, Internet-primary banks continue to have significantly higher average profit efficiency, and particularly so when of sufficient size.

Firm entry and exit in Italian provinces and the relationship with unemployment

This study investigates the influence of the unemployment rate on firm entry, exit and net entry in Italian provinces. We attempt to explain these market dynamics in six different sectors, including manufacturing, construction, commerce, hotels and restaurants, transport and financial services. We control for other regional factors, such as patenting activity, economic growth, economic welfare, tourism, industrial districts and whether being a major city. Findings indicate that the effects of unemployment on entry and exit are dependent upon the sector under study, but are mainly negative. This suggests a lack of dynamics in the Italian regional labor markets.

Employee Moral Rights: Recognizing Their Implicit Financial Investments in the Firm

The literature on employee (moral) rights has been limited to workplace human rights. This essay focuses on Employee Moral Rights defined as the moral claims individuals are entitled to due to their role as employees. Noting they make significant (although implicit) financial investments in the firm they work for, this essay argues dedicated employees should be treated as financial investors, which implies dedicated employees have the moral right to (1) be treated as every other financial investor; (2) share in the firm’s profits; (3) timely, accurate, and sufficient disclosure of significant information; (4) protection from senior managers’ abusive self-dealing; and (5) mechanisms to protect their financial investment including fair severance payments and effective pension protection.

A generalized procedure to recover the first derivatives of a production function when the firm is a profit maximizer

Partial derivatives of production functions are necessary in many instances to characterize the technology of firms. We present here a general method to recover the first derivatives of the production function of a profit maximizing firm. The method is systematic and applies even when the optimization problem of the firm is subject to additional constraints. It allows researcher to recover returns to scale and technological progress in complex situations.

How useful are signals? A micro-structure analysis

We analyze how the market processes a signaling event by studying a sample of self-tender offers, events often viewed as signals of firm value. By examining changes in the degree of informed trading, we find asymmetric information costs fall at announcement, remain low throughout the event, and increase at offer expiration. By 1 month following expiration, informed trading returns to a level not significantly different from that prior to the offer. Higher risk firms have significantly larger declines in information asymmetry during the offer. Increases in information asymmetry persist 1 month following expiration for firms with lower pre-offer informed trading.

Stochastic productivity measurement

Stochastic productivity indicators are defined, and superlative measures of these indicators are derived. It is shown that, in the presence of complete markets or a common-expectations equilibrium, differences in the market values of firms are superlative indicators of cross-sectional productivity differences. Exactness results are used to decompose nonstochastic productivity indicators into a measure of true productivity change and a measure of ‘luck’. The decomposition is illustrated empirically.

Noise trading and autocorrelation interactions in the foreign exchange market: Evidence from developed and emerging economies

This paper seeks to empirically determine whether feedback trading strategies result in stabilization or destabilization in the foreign exchange market and if such strategies are a distinctive characteristic of an emerging economy or they are a common element to both developed and emerging economies. These hypotheses are tested via the use of a feedback model augmented with a generalized autoregressive conditional heteroskedasticity (GARCH) process for modeling the errors. The results suggest presence of both positive and negative feedback trading and asymmetric behavior in both types of economies. Irrespective of the nature of feedback trading, presence of asymmetric behavior implies that market traders rely on central banks to intervene so they can realize short-term profits. Finally, in cases of a positive first-order autoregressive parameter presence of the bandwagon effect is implied, whereby past currency movements are followed by expectations of currency movements in the same direction.

Interest rate and bank stock returns asymmetry: Evidence from U.S. banks

We use the multivariate extension of Exponential Generalized Autoregressive Conditionally Heteroscedastic (EGARCH) of Nelson, Econometrica, 59: 347–370, 1991 to test for spillover effects and examine the extent of asymmetries between short- and long-term interest rates and portfolios of money center, large, and medium-size banks in the U.S. Our results indicate the existence of price and volatility spillovers from short- and long-term interest rates to the three bank portfolios. We also provide evidence of response asymmetries for the portfolios of money center and large banks, suggesting that money center and large banks are more sensitive to negative than positive short- and long-term interest rate changes.

Individual, organizational and environmental determinants of new firm employment growth: evidence from Latin America

New ventures are increasingly playing an important role in Latin American economies. However, little is known about the determinants of new firm growth in this context. The purpose of this study is to gain an understanding of the factors influencing new firm growth in Argentina, Brazil, Mexico and Peru. Individual, organizational and environmental factors are included in an empirical model, which is tested using data collected by face-to-face interviews with 582 entrepreneurs. Different specifications of employment growth and regression approaches are employed. Results suggest that growth strongly depends on the characteristics of the entrepreneur. National environment and firm-related factors are also important factors in determining growth.

Legitimating behaviors and firm emergence: a resource dependence perspective

This study makes an attempt to understand some of the reasons why some nascent firms make the transition to new operational firms (a process called “firm emergence”) while others do not. Because of liabilities-of-newness, nascent firms face the daunting task of acquiring legitimacy from their immediate audience in order to emerge as new operational firm. This study claims and finds empirical evidence that through certain legitimating behaviors nascent firms can acquire legitimacy from their immediate audience and thus succeed in becoming new operational firms. The study will put forward more general propositions for future testing, and will draw implications for practitioners and entrepreneurship scholars.

The impact of desirability and feasibility on entrepreneurial intentions: A structural equation model

There is general agreement that attitudes towards entrepreneurship are determinant factors to decide to be an entrepreneur. In this context, this research is focused on analyzing the relationship between desirability and feasibility on university student’s intentions to create a new firm in Catalonia. A structural equation model supported by Krueger & Brazeal’s Model was tested with different groups of students. The main results reveal most of university students consider desirable to create a new firm, although the perception of feasibility is not positive. Also, there is a statistical significant and positively relationship between credibility and the intention to create a new firm.

The relative decline of a Musgrave ‘Merit Good:’ the case of public support of flagship public universities

Fifty years ago, Richard Musgrave put forward the notion of a “merit good”—one that despite its virtue would be undersupplied and under consumed in a free market economy driven by traditional notions of consumer sovereignty. Higher education is considered by many to be a merit good because they believe it generates highly desirable spin-off effects. If higher education has been a merit good, then that status appears to be disappearing. Declining state funding for higher education, increasing tuition rates and highly successful fund-raising by independent institutions have diminished public flagship universities, at least relatively. Consequently, their rankings have declined.

Bias of distance functions estimates and Primont and Primont’s homotheticity test

The question of whether a technology exhibits particular properties such as radial input or output homotheticity is a crucial one for a producer since it should strongly impact on its reactions to market changes. Primont and Primont (Econ Lett 45:191–195, 1994) established that it can be tested using only weak assumptions. They further used their results to test for input homotheticity of an educational production technology (Primont and Primont, Can J Econ 29:587–591, 1996). In this paper, it is shown that if not implemented properly, the test can lead to biased results. Some ways to obtain unbiased results are also suggested.

Intra- and inter-country bank branch assessment using DEA

Increasingly globalized financial markets with considerable activity in the multinational sector have created the need to understand inter-country bank branch performance. This topic is relatively unstudied, primarily due to the immense difficulty encountered in gathering reliable data. Fortunately, we have been able to obtain data on a group of banks operating in one geographical market area, but in different countries. In this paper we critically assess bank branch profitability and productivity in seven national branch networks owned and operated by a multi-national financial services corporation. The corporate head office (owner) imposes its management philosophy equally on all of its subsidiaries, thus removing executive managerial and corporate disparity. Results suggest that countries in which branch performance is quite consistent amongst domestic branches are less productive and less profitable when compared to other countries that have more disparity in their efficiency scores. In addition, we discovered that, surprisingly, branches do not have to be productive in order to be profitable and this led us to somewhat of a major breakthrough in inter-country branch analysis. Significant managerial advice may be derived from these results vis-à-vis trans-national benchmarking and opportunity for performance improvements both at the branch level and nationally as well.

The Obama effect

Many observers argued that Barack Obama’s candidacy in the U.S. presidential election of 2008 benefited from the financial crisis and recessionary economic conditions which voters blamed on the Republican administration. However, an empirical examination of stock price and public opinion data indicates that improvements in Obama’s electoral prospects led stock price declines and that gains by Obama were more likely to be followed by falling stock prices than by rising prices. This evidence suggests that the poor performance of the stock market in the days leading up to Obama’s victory was partly caused by, rather than causing, Obama’s success.

The effect of marketing regulations on efficiency: LeChatelier versus coordination effects

Government regulations designed to promote social welfare can have unintended consequences on efficiency. According to the LeChatelier Principle, regulations that effectively limit substitution possibilities among inputs will reduce firm and industry-wide efficiency. In imperfectly competitive markets, however, government constraints on a strategic variable can facilitate coordination. An advertising restriction, for example, would improve efficiency if it enables firms to produce the same level of sales with less advertising spending. We use data envelopment analysis to estimate the effect of marketing regulations on efficiency in the U.S. cigarette industry. Unlike previous studies, we do not assume that marketing and production technologies are separable. Our results demonstrate that coordination effects dominate LeChatelier effects. Cigarette producers have benefited from advertising restrictions, a result consistent with the capture theory of regulation.

Optimal geographic diversification and firm performance: evidence from the U.K.

This paper examines the relationship between multinationality and firm performance. The analysis is based on a sample of over 400 UK multinationals, and encompasses both service sector and manufacturing sector multinationals. This paper confirms the non-linear relationship between performance and multinationality that is reported elsewhere in the literature, but offers further analysis of this relationship. Specifically, by correcting for endogeneity in the investment decision, and for shocks in productivity across countries, the paper demonstrates that the returns to multinationality are greater than those that have been reported elsewhere, and persist to higher degrees of international diversification.

Convertibles and milestones in staged financing

This paper investigates a popular financing strategy whereby the manager of a firm uses convertibles in staged financing. Staged financing is particularly popular in corporate finance, even although it has potential incentive and risk problems. This paper identifies many interesting properties of convertibles in staged financing, including the fact that staged financing using convertibles can almost achieve the first best. We also find that risks can reduce agency costs by putting pressure on the manager to perform. These results may explain why convertibles are a popular instrument in staged financing in reality.

Model selection in stochastic frontier analysis with an application to maize production in Kenya

This paper shows how to compute the standard errors for partial effects of exogenous firm characteristics influencing firm inefficiency under a range of popular stochastic frontier model specifications. We also develop an R²-type measure to summarize the overall explanatory power of the exogenous factors on firm inefficiency. The paper also applies a recently developed model selection procedure to choose among alternative stochastic frontier specifications using data from household maize production in Kenya. The magnitude of estimated partial effects of exogenous household characteristics on inefficiency turns out to be very sensitive to model specification, and the model selection procedure leads to an unambiguous choice of best model. We propose a bootstrapping procedure to evaluate the size and power of the model selection procedure. The empirical application also provides further evidence on how household characteristics influence technical inefficiency in maize production in developing countries.