Social responsibility and the future of multinationals: Guidance without rules

While voluntary behavior and social responsibility have so far played a peripheral role in multinational corporations’ global strategies, the author argues that the non-market social responsibility dimension will have to be incorporated systematically in management’s forward planning as a growing factor if the multinationals want to secure their future.     

Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership

We investigate the impact of stock-based compensation on managerial ownership. We find that equity compensation succeeds in increasing incentives of lower-ownership managers, but higher-ownership managers negate much of its impact by selling previously owned shares. When executives exercise options to acquire stock, nearly all of the shares are sold. Our results illuminate dynamic aspects of managerial ownership arising from divergent goals of boards of directors, who use equity compensation for incentives, and managers, who respond by selling shares for diversification. The findings cast doubt on the frequent and important theoretical assumption that managers cannot hedge the risks of these awards.     

The Global Asset Management Industry: Competitive Structure and Performance

The asset management industry represents one of the most dynamic parts of the global financial services sector. Funds under institutional management are massive and growing rapidly, particularly as part of the resolution of pension pressures in various parts of the world. The industry is not, however, well understood from the perspective of industrial organization and international competition, which is the focus of this paper. It begins with a schematic of asset management in a national and global flow-of-funds context, identifying the types of asset‐management functions that are performed and how they are linked into the financial system. It then assesses in some detail the three principal sectors of the asset management industry—mutual funds, pension funds, and private-client assets, as well as foundations, endowments, central bank reserves and other large financial pools requiring institutional asset management services. Relevant comparisons are drawn between the United States, Europe, Japan and selected emerging-market countries. This is followed by a discussion of the competitive structure, conduct and performance of the asset management industry, and its impact on global capital markets.     

Price Regulation for Independent Transmission Companies

This paper considers methods of price structure regulation of electricity transmission in the context of an independent transmission company (TRANSCO). The focus is on two-part tariffs where the variable part would reflect congestion charges (and ancillary services) while the fixed part would reflect capacity costs. The two-part tariffs form a price-cap index, and the firm could rebalance prices, as long as the index satisfies the price-cap constraint. The firm would then have incentives to trade off congestion against capacity expansion in such a way that it becomes profitable to expand, whenever the costs of congestion on average exceed the costs of expansion. However, with chained Laspeyres weights in the price-cap index expansion may be suboptimal. We therefore discuss ways to improve the expansion factor. Implementing the regulatory schemes considered suggests a hybrid approach combining a TRANSCO with an independent system operator (ISO).     

Central Bank Policy in a More Perfect Financial System

Financial innovation increases markets' liquidity and provides economic agents with new instruments to better handle risks, but it reduces the efficacy of monetary policy while strengthening the logic and force of the “unholy trinity”. Increased liquidity of financial markets and increased leverage of financial positions imply that speculators can attack unsustainable fixed exchange rates faster and more powerfully than ever. The rapid innovation of new financial instruments in these markets also implies the futility to “throw sand in the wheels” through regulation or the introduction of transaction taxes. The higher asset substitutability generated by the emergence of derivatives makes the definition of “money,” particularly of broad monetary aggregates, increasingly difficult. In a more complete financial market system central banks find it harder to predict the effect of a given monetary impulse on real output and employment with any reasonable precision. Discretionary monetary policies aimed at output and employment become more uncertain. Consequently, central banks should focus on the long-run goal of price stability.     

Does Outsourcing to Central and Eastern Europe Really Threaten Manual Workers’ Jobs in Germany?

Starting from the observation of significant within‐industry skill‐upgrading, this paper analyses how international outsourcing has affected the relative demand for manual workers in German manufacturing during the 1990s. We combine trade and input‐output data to disentangle international outsourcing and trade in final goods and differentiate between the effects of narrowly and broadly defined outsourcing towards Central and Eastern Europe (CEEC), the European Union (EU15) and the rest of the world. Accounting for the endogeneity of international outsourcing by applying instrumental variable techniques, the empirical analysis showed that international outsourcing is indeed an important explanatory factor for the observed decline in relative demand for manual workers in German manufacturing. Particularly, outsourcing towards CEEC plays a major role, irrespective of whether a narrow or wide measure of outsourcing is applied. Using a narrow outsourcing measure and controlling for the adverse demand effects of skill‐biased technological change, time‐changing industry characteristics, wages as well as industry unobserved characteristics, international outsourcing towards CEEC is found to have lowered the manual workers’ wage bill share by 2.7 per‐centage points between 1991 and 2000. In its magnitude this effect is comparable to the skill‐biased effect of technological progress, as captured by our controls. Outsourcing towards countries outside CEEC and outside the EU15 is found to have small negative effects on the relative demand for manual workers, but only if one follows the broad definition of international outsourcing. Outsourcing towards the EU15 is, however, always found to be insignificant.     

Economics of undersea resources

The open seas have recently become recognized as a major resource on which the world is likely to grow increasingly dependent in the years ahead. With regard to their exploitation questions of efficiency and equity have arisen that are being fought out primarily within the UN Conference on the Law of the Sea the sixth round of which ended last month, once again without any concrete results. Professor Walter explains what is at stake.     

Flights of fancy: Corporate jets,CEO perquisites,and inferior shareholder returns

This paper studies perquisites of CEOs, focusing on personal use of company planes. For firms that have disclosed this managerial benefit, average shareholder returns underperform market benchmarks by more than 4% annually, a severe gap far exceeding the costs of resources consumed. Around the date of the initial disclosure, firms’ stock prices drop by an average of 1.1%. Regression analysis finds no significant associations between CEOs’ perquisites and their compensation or percentage ownership, but variables related to personal CEO characteristics, especially long-distance golf club memberships, have significant explanatory power for personal aircraft use.     

How much of the diversification discount can be explained by poor corporate governance?

We investigate whether the diversification discount occurs partly as an artifact of poor corporate governance. In panel data models, we find that the discount narrows by 16% to 21% when we add governance variables as regression controls. We also estimate Heckman selection models that account for the endogeneity of diversification and dynamic panel generalized method of moments models that account for the endogeneity of both diversification and governance. We find that the diversification discount persists even with these controls for endogeneity. However, in selection models the discount disappears entirely when we introduce governance variables in the second stage, and in dynamic panel GMM models the discount narrows by 37% when we include governance variables.