Can Diversification Create Value? Evidence from the Electric Utility Industry

Despite SEC and state-level resistance, and contrary to the trend pursued by other firms, many electric utilities have diversified into non-electric and unregulated businesses. Moreover, this failure to focus has been rewarded with higher firm values, again contrary to the discounts documented in the literature for other diversifying firms. Prior literature has questioned whether these premiums (or discounts) can be attributed to diversification per se. Rather, these premiums could arise from the characteristics of the diversifying firms, which have then endogenously chosen to diversify. In a new approach, where regulation can make the diversification decision largely exogenous, we examine the investment policies of the comparable electric-segments in the diversifying and non-diversifying utilities. We find that single-segment electric utilities over-invest compared to diversifying utilities, which explains their diversification premiums and implies that diversification can create value by opening up new investment opportunities.     

Optimal income taxation and social norms in the labor market

This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One norm refers to “normal behavior” with respect to work hours (the hours of work norm), whereas another means that “one should earn one’s living by working” (the participation norm). The results show how the hours of work norm gives rise to a corrective motive for using income taxation. We also show how the interaction between the hours of work norm and the private incentive to participate in the labor market (which reflects the participation norm) gives rise to an employment motive for using the income tax.     

Do managers know what their customers think and why?

The ability of a firm’s managers to understand how its customers view the firm’s offerings and the drivers of those customer perceptions is fundamental in determining the success of marketing efforts. We investigate the extent to which managers’ perceptions of the levels and drivers of their customers’ satisfaction and loyalty align with that of their actual customers (along with customers’ expectations, quality, value, and complaints). From 70,000 American Customer Satisfaction Index (ACSI) customer surveys and 1068 firm (manager) responses from the ACSI-measured companies, our analyses suggest that managers generally fail to understand their firms’ customers in two important ways. First, managers systematically overestimate the levels of customer satisfaction and attitudinal loyalty, as well as the levels of key antecedent constructs such as expectations and perceived value. Second, managers’ understanding of the drivers of their customers’ satisfaction and loyalty are disconnected from those of their actual customers. Among the most significant “disconnects,” managers underestimate the importance of customer perceptions of quality in driving their satisfaction and of satisfaction in driving customers’ loyalty and complaint behavior. Our results indicate that firms must do more to ensure that managers understand how their customers perceive the firm’s products and services and why.     

Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies

We investigate determinants of foreign ownership in newly privatized firms. We analyze data on privatized Czech firms to address two related general questions. First, what characteristics distinguish transition firms that attract a foreign investor? Second, how do firm‐specific characteristics influence the size of the foreign equity stake? Our results suggest that foreign investors i) seek safe, profitable firms in which they can exert unchallenged influence on corporate governance and then ii) structure their equity stakes to mitigate agency costs and political risk.     

Firm,strategic group,and industry influences on performance

A long‐standing debate has focused on the extent to which different levels of analysis shape firm performance. The strategic group level has been largely excluded from this inquiry, despite evidence that group membership matters. In this study, we use hierarchical linear modeling to simultaneously estimate firm‐, strategic group‐, and industry‐level influences on short‐term and long‐term measures of performance. We assess the three levels' explanatory power using a sample of 1,165 firms in 12 industries with data from a 7‐year period. To enhance comparability to previous research, we also estimate the effects using the variance components and ANOVA methods relied on in past studies. To assess the robustness of strategic group effects, we examine both deductively and inductively defined groups. We found that all three levels are significantly associated with performance. The firm effect is the strongest, while the strategic group effect rivals and for some measures outweighs the industry effect. We also found that the levels have varying effects in relation to different performance measures, suggesting more complex relationships than depicted in previous studies. Copyright © 2007 John Wiley & Sons, Ltd.     

A note on Wick products and the fractional Black-Scholes model

In some recent papers (Elliott and van der Hoek 2003; Hu and Øksendal 2003) a fractional Black-Scholes model has been proposed as an improvement of the classical Black-Scholes model (see also Benth 2003; Biagini et al. 2002; Biagini and Øksendal 2004). Common to these fractional Black-Scholes models is that the driving Brownian motion is replaced by a fractional Brownian motion and that the Itô integral is replaced by the Wick integral, and proofs have been presented that these fractional Black-Scholes models are free of arbitrage. These results on absence of arbitrage complelety contradict a number of earlier results in the literature which prove that the fractional Black-Scholes model (and related models) will in fact admit arbitrage. The objective of the present paper is to resolve this contradiction by pointing out that the definition of the self-financing trading strategies and/or the definition of the value of a portfolio used in the above papers does not have a reasonable economic interpretation, and thus that the results in these papers are not economically meaningful. In particular we show that in the framework of Elliott and van der Hoek 2003, a naive buy-and-hold strategy does not in general qualify as self-financing. We also show that in Hu and Øksendal 2003, a portfolio consisting of a positive number of shares of a stock with a positive price may, with positive probability, have a negative value.Received: August 2004, Mathematics Subject Classification (2000): 91B28, 60H05JEL Classification: G10Support of the first author from the Jan Wallander and Tom Hedelius foundation is gratefully acknowledged. The research of the second author is supported by the Swedish Research Council.     

The power of local information

The author argues that telecommunications efforts too often tend to stress distant connections. The local informative contacts are important, and should be given a chance in future systems. The argument presented to support this view includes the specific example of the TERESE project (Telecommunications and Rural Development in Sweden). This publically funded project uses narrowband communication, including computer conferencing, to stress economic and social identity in a region in the far north of Sweden. Details of continuing regional efforts are given.     

FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: A META‐ANALYSIS

We analyze 1334 estimates from 67 studies that examine the effect of financial development on economic growth. Taken together, the studies imply a positive and statistically significant effect, but the individual estimates vary widely. We find that both research design and heterogeneity in the underlying effect play a role in explaining the differences in results. Studies that do not address endogeneity tend to overstate the effect of finance on growth. While the effect seems to be weaker in less developed countries, the effect decreases worldwide after the 1980s. Our results also suggest that stock markets support faster economic growth than other financial intermediaries.     

Estimating vertical spillovers from FDI: Why results vary and what the true effect is

In the last decade, more than 100 researchers have examined productivity spillovers from foreign affiliates to local firms in upstream or downstream sectors. Yet results vary broadly across methods and countries. To examine these vertical spillovers in a systematic way, we collected 3626 estimates of spillovers and reviewed the literature quantitatively. Our meta-analysis indicates that model misspecifications reduce the reported estimates and journals select relatively large estimates for publication. No selection, however, was found for working papers. Taking these biases into consideration, the average spillover to suppliers is economically significant, whereas the spillover to buyers is statistically significant but small. Greater spillovers are received by countries that have underdeveloped financial systems and are open to international trade. Greater spillovers are generated by investors who come from distant countries and have only a slight technological edge over local firms.