Financial guarantors’ executive compensation,charter value and risk-taking

Financial guarantees have been extensively used recently as part of rescue packages to bail out troubled institutions and governments around the world. We propose a new incentive compensation model for studying agency conflict between the shareholders and the manager of a typical financial guarantor. In our model, the manager chooses the guarantor's risk level, with disutility to reduce risk (i.e., reducing the risk of the guarantor incurs a direct cost to the manager). Moral hazard causes the manager to select a level of risk that is higher than the level chosen in an otherwise first-best environment with no conflict of interest between the shareholders and the manager. However, in our proposed framework, charter value plays a self-disciplining role on the manager's appetite for risk, therefore it helps mitigate the extent of the deviation from first best with agency conflict found previously (e.g., 0055, 0015 and 0020). This suggests that researchers should study charter value, managerial compensation and risk decisions within a unified framework and not separately, as all studies have done in the past.     

Optimal portfolios with minimum capital requirements

We propose a novel approach to active risk management based on the recent Basel II regulations to obtain optimal portfolios with minimum capital requirements. In order to avoid regulatory penalties due to an excessive number of Value-at-Risk (VaR) violations, capital requirements are minimized subject to a given number of violations over the previous trading year. Capital requirements are based on the recent Basel II amendments to account for the ‘stressed’ VaR, that is, the downside risk of the portfolio under extreme adverse market conditions. An empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of VaR exceedances. Furthermore, the risk-adjusted performance of the proposed approach is superior to that of minimum-VaR and minimum-stressed VaR portfolios.     

Trade credit and company performance during the 2008 financial crisis

We investigate whether the 2008 financial crisis had an impact on companies’ trade credit, and whether changes in trade credit mitigated the crisis’s impact on firm profitability. We document that the availability of trade credit decreased, and that this decline is more pronounced, the higher the companies’ pre‐crisis reliance on short‐term debt. We further report evidence that the redistribution hypothesis holds during crisis periods. Finally, we show that the crisis had a negative impact on company performance, but that this impact was lower (greater) for firms that report an increase in trade receivables (payables) in crisis compared to pre‐crisis periods.     

Offshoring and firm innovation: The moderating role of top management team attributes

This study attempts to increase the understanding of how offshoring influences the introduction of new products and services. Focusing on the offshoring of those business functions that provide direct knowledge inputs for innovation (i.e., production, R&D, and engineering), we propose that offshoring has an inverted U‐shaped influence on firm innovativeness. Additionally, we provide an upper echelon contingency perspective by considering the moderating role of two top management team (TMT) attributes (i.e., informational diversity and shared vision). Using a cross‐industry sample with lagged data, we find that offshoring has an inverted U‐shaped influence on firm innovativeness and that this relationship is steeper in firms with high TMT informational diversity and in firms with low TMT shared vision. Copyright © 2012 John Wiley & Sons, Ltd.     

Stakeholder Pressures as Determinants of CSR Strategic Choice: Why do Firms Choose Symbolic Versus Substantive Self-Regulatory Codes of Conduct?

To encourage corporations to contribute positively to the environment in which they operate, voluntary self-regulatory codes (SRC) have been enacted and refined over the past 15?years. Two of the most prominent are the United Nations Global Compact and the Global Reporting Initiative. In this paper, we explore the impact of different stakeholders?? pressures on the selection of strategic choices to join SRCs. Our results show that corporations react differently to different sets of stakeholder pressures and that the SRC selection depends on the type and intensiveness of the stakeholder pressures as well as the resources at hand to respond to those pressures. Our contribution offers a more specific and finely variegated analysis of firm-stakeholder interactions.     

Identifying financially illiterate groups: An international comparison

Targeted policy interventions are more effective than one‐size‐fits‐all initiatives. This paper proposes the use of k‐means cluster analysis to identify vulnerable groups with respect to financial literacy. Using a rich sample of 12 countries, we distinguish 4 groups with varying financial literacy levels, and examine their socio‐economic characteristics. The results suggest that individuals in the most vulnerable financially illiterate groups are on average, single, less‐educated and unemployed with low incomes. This contrasts with those in the strongest group: individuals with the highest financial knowledge, financial behaviour and financial attitudes scores are on average highly educated males who live together with a partner. They earn a high income and hold several financial products. Integrating these insights into national strategies which promote financial literacy will not only lead to more effective but also to more efficient policy initiatives by focusing on the particular weaknesses of certain subgroups and using the appropriate transmission channels.     

When less information is good enough: experiments with global stag hunt games

There is mixed evidence on whether subjects coordinate on the efficient equilibrium in experimental stag hunt games under complete information. A design that generates an anomalously high level of coordination, Rankin et al. (Games Econo Behav 32(2):315–337, 2000), varies payoffs each period in repeated play rather than holding them constant. These payoff “perturbations” are eerily similar to those used to motivate the theory of global games, except the theory operates under incomplete information. Interestingly, that equilibrium selection concept is known to coincide with risk dominance, rather than payoff dominance. Thus, in theory, a small change in experimental design should produce a different equilibrium outcome. We examine this prediction in two treatments. In one, we use public signals to match Rankin et al. (2000)’s design; in the other, we use private signals to match the canonical example of global games theory. We find little difference between treatments, in both cases, subject play approaches payoff dominance. Our literature review reveals this result may have more to do with the idiosyncrasies of our complete information framework than the superiority of payoff dominance as an equilibrium selection principle.     

Karl Marx — heute noch aktuell?

On the occasion of his 200th birthday, Karl Marx is very popular again. He seems to be quoted in newspapers more often than even Keynes and great liberal economists. The authors agree that he should be taken seriously as a classic author. There are some fundamental pillars of his thinking: He fought for individual freedom and was a pioneer of systemic thinking. Marx was a self-taught economist and a powerfully eloquent demagogue. But all attempts to modernise his economic theory ultimately fail because of their mistakes and contradictions. He analysed an economy whose labour market was characterised by unrestricted competition. His prediction of a final collapse of the capitalist system failed due to far-reaching institutional changes, especially in the labour market. Today Karl Marx must be seen rather as an extremely interesting figure in the intellectual history of the 19th century. His ideas are only of limited use for the analysis of the economic present. Bertram Schefold judges him less stringently, arguing he is topical not only as a historical figure, but also as a theoretical economist and originator of still valuable analytical ideas. Jürgen Kromphardt points out that apart from his dialectical approach, the distribution of income between classes and its consequences are a research area where Marx’s explanations and failures are actually still worthy of consideration.     

X-efficiency and economies of scale in pension fund administration and investment

Pension funds’ operating costs impair pension benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within pension fund size classes. This article presents new estimates of scale economies of pension funds and is the first that also measures pension fund X-inefficiency. We use a unique supervisory data set which distinguishes between administrative and investment costs and apply various approaches and models. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits.     

Exploring consumers' preferences with regard to department and specialist food stores

Consumers' lifestyle changes and striving towards better time management have resulted in the greater choice they are offered with regard to store formats. Therefore, this study was undertaken to identify the factors that influence consumers in their patronage of a particular store format and to categorize department and specialist food store consumers according to their preferences in store layout and product range in a South African context. A qualitative research approach was used and data were collected using semi‐structured interviews with open‐ended questions. Purposive sampling recruited participants shopping for food in a department store in Johannesburg. Forty semi‐structured interviews were conducted before data saturation was reached. Store‐related factors such as store location, appearance and hygiene, service quality, convenience of trading hours, and consistency in store layout predominantly influenced participants in their patronage of a specific store format. Furthermore, product‐related factors such as quality, price, product range and convenient packaging enhanced consumers' store preference. Department store consumers were orientated towards one‐stop shopping and time‐saving strategies, while specialist food consumers were focused on food shopping and the trading hours of the store. Although similarities in participants' preferences with regard to department and specialist food store were found, different preferences were found regarding the placement of specific items within the store. Participants had similar preferences regarding the product range of a food store. However, department store participants emphasized the provision of convenience food and non‐food items. The findings of this study are valuable in providing department and specialist food store retailers with guideline recommendations regarding store layout and product range in order to effectively respond to the needs and preferences of consumers within an emerging economy.