Multinational companies, backward linkages, and labour demand elasticities

Abstract .  This paper investigates the link between nationality of ownership and wage elasticities of labour demand at the level of the plant. In particular, we examine whether labour demand in multinationals becomes less elastic with respect to the wage if the plant has backward linkages with the local economy. Our empirical evidence, based on a rich plant level dataset, shows that the extent of local linkages does indeed generally reduce the wage elasticity of labour demand. This result is economically important and holds for a number of different specifications.     

MUTUAL FUND DAILY CONDITIONAL PERFORMANCE

The empirical finance literature reveals that conditional models estimated with monthly data generally improve fund performance. Furthermore, it has been shown that using daily instead of monthly returns in an unconditional framework increases the proportion of abnormal performances relative to timing. In this article, we study conditional performance estimated with daily data in a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) framework. Our daily conditional alphas and global performances with GARCH are significantly better than those estimated with other parametrizations and they persist over time. Finally, the proportion of abnormal timing performances diminishes significantly when conditional parametrizations are used.     

Historic Changes in the High Yield Bond Market

In a history that now stretches about four decades, the high yield (HY) market has experienced growth in issuance and out‐standings that is remarkable both for its level (about 13% per annum, with HY bonds now accounting for about 25% of the total corporate bond market) and its cyclicality and sensitivity to the broad economy. The HY market has also experienced a notable shift away from B‐rated bonds and toward both lower‐risk Ba‐rated bonds and, to a lesser extent, more risky Caa‐rated bonds. Consistent with this development, studies of the performance of HY bonds show Ba‐rated bonds experiencing not only lower risk, but also higher returns than Caa‐rated bonds, which have produced surprisingly low average returns along with exceptionally high volatility. At the same time, studies of the correlation of HY bond returns with returns on other major asset classes report that all classes of HY bonds (but particularly the riskier B‐ and Caa‐rated bonds) have consistently stronger relationships with common stocks (especially small‐cap stocks) than with Treasuries and investment‐grade bonds. Analysis of the volatility of HY bond returns over time shows that during periods of stability in the economy and financial markets, the volatility of HY bond returns has been very similar to that of investment‐grade bonds. But during periods of political or economic uncertainty, the volatility of HY bonds has become two or three times that of investment‐grade bonds, approaching the volatility of common stocks. The main driver of the significant increase in the risk of the aggregate HY bond market during periods of uncertainty has been Caa‐rated bonds, whose risk pattern has been remarkably similar to that of small‐cap common stocks. Analysis of the credit risk spread (or CRS) series for both the composite HY bond market and each of its rating categories shows markedly non‐normal distributions with significant positive “skewness”—that is, periods of exceptionally high spreads (that are not counterbalanced by periods of exceptionally low spreads). The authors also report a consistently strong relationship of the CRS series with default rates and the general state of the economy, with major peaks occurring during or shortly after economic recessions. Near the end of 2008, however, there was a clear break in this relationship when the CRS reached an historic peak of 2,000 basis points, or more than five standard deviations above its long‐term mean, while the default rate (at 4%) was below its long‐term average. The authors offer two explanations for this break in CRS‐default rate relationship: the jump in the CRS caused by the extreme flight to quality and drop in liquidity for all risky securities during the second half of 2008; and the use of covenant‐lite securities and other sources of financial flexibility that appear to have enabled many HY issuers to defer defaults (if not avoid them entirely).     

A Simple Model of Entrepreneurship for Principles of Economics Courses

The critical roles of entrepreneurs in creating, operating, and destroying markets, as well as their importance in driving long-term economic growth are still generally either absent from principles of economics texts or relegated to later chapters. The primary difficulties in explaining entrepreneurship at the principles level are the lack of a universally accepted definition, a plausible explanation of the demand for entrepreneurship, and a diagram that summarizes the impact of entrepreneurship on market equilibrium and growth—a definition, a story, and a picture. This article discusses how the notion of the stationary state associated with Schumpeter (1911 Schumpeter, J. A. 1911/1983. Theory of economic development., Cambridge, MA: Harvard University Press.  [Google Scholar]/1983), Knight (1921 Knight, F. H. 1921/1971. Risk, uncertainty and profit, Chicago: University of Chicago Press. [Crossref] , [Google Scholar]/1971), and Weber (1930 Weber, M. 1930/2002. The Protestant ethic and the spirit of capitalism, New York: Scribner's.  [Google Scholar]/2002) can provide a framework for integrating the entrepreneur into the early part of principles of economics courses.