The Actuarial Balance Sheet for Pay‐As‐You‐Go Finance: Solvency Indicators for Spain and Sweden*

This paper provides the first estimate of the actuarial balance of the Spanish contributory pension system for the old‐age contingency, based on official data. The main accounting entries are developed from the principles of double‐entry bookkeeping. The novel entry in the balance sheet, entitled the ‘contribution asset’ or ‘hidden asset’, is at the centre of the theoretical discussion. A comparison between the official balance sheet for the Swedish notional account system and our balance sheet for the Spanish contributory pension system is also provided. The main finding is that the Spanish pension system has an insolvency rate of 31.4 per cent. The policy implication is that unless current legislation is reformed, Spanish taxpayers (the plan sponsor) should count on making transfers to the pension system with a present discounted value of 31.4 per cent of current liabilities. Moreover, a comparison of the consecutive balance sheets for 2001‐06 shows that the degree of insolvency is growing over time, even though the cash‐flow outcome has improved over the same period. Taking steps to reverse this trend and restore solvency is in Spanish taxpayers' interest, and possibly also in the interest of those in the European Union who recognise that there is a chance that they may have to support the Spanish budget in the future.     

Work‐related perks,agency problems,and optimal incentive contracts

Work‐related perks, such as corporate jets, nice offices, and so forth, improve the tradeoff between incentives and insurance that determines the optimal incentive contract. We show that (i) such perks may be offered even if their direct consumption benefits are offset by their costs; (ii) they will be offered for free; (iii) agents in more uncertain production environments will receive more perks; (iv) senior executives should receive more perks; and (v) better corporate governance can lead to more perk consumption by CEOs. Our analysis also offers insights into firms' decisions about how much autonomy they should grant to their employees.     

Entrepreneur: do social capital and culture matter?

This paper analyzes the effect of the individual perceptions of social capital and culture in entrepreneurial aspirations before and after the economic crisis in Western Europe. Following the approach of the Theory of Planned Behavior (Ajzen in Organizational Behavior and Human Decision Processes, 50, 179–211, 1991), we advance the analysis of the effect of the perception of subjective norms in the entrepreneurial intentions. We studied the Total Early-Stage Entrepreneurial Activity (TEA) of twelve countries in 2006 and 2010. The results reveal that the perception of having social networks is significant for the TEA, and it increases after the economic crisis. However, the cultural factors do not have a significant impact, except the one related with the perception of social equality. The results obtained through the double perspective of this analysis (individual’s social capital vs cultural factor of individualistic perspective) offers a certain dilemma when we try to understand the entrepreneurial intntion through the individual’s perception of subjective norms, following the Ajzen’s model. The more individualist is a person, the lower the weight of its social capital. However, the more a person has access to social networks, the greater his entrepreneurial intention will be. This result opens future lines of research focused on understanding the value of the individual’s social capital for different countries and groups of entrepreneurs.

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Book Reviews

Mohamed Ariff and Hal Hill, Export-Oriented Industrialisation: The ASEAN Experience, Sydney: Allen and Unwin, 1985, pp. 270. Aus$ 19.95

David Lim (ea.), ASEAN-Australian Trade in Manufactures, Melbourne: Longman Cheshire, 1985, pp. xii + 263

Kathryn May Robinson, Stepchildren of Progress: The Political Economy of Development in an Indonesian Mining Town, Albany: State University of New York Press, 1986, pp. xvi + 315.

Gillian Hart, Power, Labor and Livelihood: Processes of Change in Rural Java, Berkeley: University of California Press, 1986, pp. xvi + 228. US$ 30.00

Walter P. Falcon, William O. Jones, Scott R. Pearson and others, The Cassava Economy of Java, Stanford: Stanford University Press, 1984, pp.xvii + 212. $US 38.50.

Randolph Barker, Robert W. Herdt with Beth Rose, TheRice Economy of Asia, Washington, D.C.: Resources for the Future, 1985, pp. xx + 324 $US 30 (hardcover), $US 12 (paper).

C.W. Watson, Kerinci: Two Historical Studies, Canterbury: University of Kent, Centre of South-cast Asian Studies Occasional Paper No.3, 1984, pp.63.

Asia Pacific Report: Trends, Issues, Challenges, Honolulu: East-West Center, University of Hawaii, 1986, pp. x + 104.

B.L. Greenshields and M.A. Bellamy (eds), Rural Development, Growth and Inequity, International Association of Agricultural Economists Occasional Paper No. 3, Aldershot: Gower, 1983, pp.viii + 312.

Masami Mizuno, Population Pressure and Peasant Occupations in Rural Central Java, Canterbury: University of Kent, Centre of South-east Asian Studies Occasional Paper No. 4, 1985, pp.71.     

Entrepreneurial intention among University students in Malaysia: integrating self-determination theory and the theory of planned behavior

The present study endeavors to develop a deeper understanding of the motivational processes involved in intentional entrepreneurial behavior. For this purpose, it integrates the social cognitive approach of the theory of planned behavior (TPB) and the organismic theory of motivation of self-determination theory (SDT). More specifically, it tests the role of basic psychological needs of autonomy, competence and relatedness as defined in SDT in shaping university students’ attitudes and intentions toward entrepreneurship. The sample of this study consisted of 438 (Males?=?166, Females =272) 3rd and 4th year university students from four Malaysian Public Universities. The results of the study show that the model strongly explains about 71% of the variance in entrepreneurial intention. Basic psychological needs of autonomy, competence and relatedness have a strong indirect impact on entrepreneurial intention via their attitudinal antecedents: attitude, subjective norm, and perceived behavioral control. This indicates a full-mediational model, where the attitudinal factors operated as transmitters of effects from the distal constructs of SDT on entrepreneurial intention. These findings confirm that both SDT and the TPB provide complementary explanations of the motivational processes of entrepreneurial behavior. The study contributes to the existing knowledge by providing a theory-based understanding of the role of motivations in the formation of entrepreneurial intentions. It opens the way for future research to analyze how alternative motivations may affect new venture creation, survival and success.

     

Is transfer pricing strictness deterring profit shifting within multinationals? Empirical evidence from Europe

This paper examines the extent to which the introduction and tightening of transfer pricing frameworks deter income shifting strategies by European multinational companies. To do so, we have built an index that measures the transfer pricing framework strictness by host country and year. Then, tax rate differentials are used to capture profit-shifting incentives and are interacted with the strictness index to assess whether the host country's transfer pricing framework impacts profit-shifting behaviour. The index is shown to increase significantly over the sample period, indicating that the scrutiny of related party transactions by European governments has increased over the period 2001–2009. Using a sample of European foreign subsidiaries, the results suggest that the stricter the transfer pricing framework the lower the tax rate difference sensitivity of reported earnings. This indicates that tightening the transfer pricing framework is capable of dissuading multinational companies from shifting profits from higher- to lower-tax countries.     

No news is good news: voluntary disclosure in the face of litigation

We study disclosure dynamics when the firm value evolves stochastically over time. The presence of litigation risk, arising from the failure to disclose unfavorable information, crowds out positive disclosures. Litigation risk mitigates firms' tendency to use inefficient disclosure policies. From a policy perspective, we show that a stricter legal environment may be an efficient way to stimulate information transmission in capital markets, particularly when the nature of information is proprietary. We model the endogeneity of litigation risk in a dynamic setting and shed light on the empirical controversy regarding whether disclosure preempts or triggers litigation.     

An empirical application of the EVA® framework to business cycles

Following financial concepts like duration and economic value added (EVA®) we estimate the impact of interest rate movements on firms that are more and less roundabout. We find that firms that are more roundabout, that is, work with expected cash-flows with higher duration, are more sensitive to interest rate movements. To the extent that monetary policy is able to move the discount rate used by investors, monetary policy changes the relative present value of any investment project and therefore affects resource allocation. We show evidence that this effect is present in the U.S. in the years prior to the subprime crisis.     

Analysis of the Nonlinear Option Pricing Model Under Variable Transaction Costs

In this paper we analyze a nonlinear Black–Scholes model for option pricing under variable transaction costs. The diffusion coefficient of the nonlinear parabolic equation for the price V is assumed to be a function of the underlying asset price and the Gamma of the option. We show that the generalizations of the classical Black–Scholes model can be analyzed by means of transformation of the fully nonlinear parabolic equation into a quasilinear parabolic equation for the second derivative of the option price. We show existence of a classical smooth solution and prove useful bounds on the option prices. Furthermore, we construct an effective numerical scheme for approximation of the solution. The solutions are obtained by means of the efficient numerical discretization scheme of the Gamma equation. Several computational examples are presented.