Private Equity and Portfolio Companies: Lessons from the Global Financial Crisis

Critics of private equity have warned that the high leverage often used in PE‐backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested (“dry powder”), could increase the resilience of PE‐backed companies. In their study of PE‐backed buyouts in the U.K.—which requires and thereby makes accessible more information about private companies than, say, in the U.S.—the authors report finding that, during the 2008 global financial crisis, PE‐backed companies decreased their overall investments significantly less than comparable, non‐PE firms. Moreover, such PE‐backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE‐backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.     

Euro depreciation and trade asymmetries between Germany and Italy versus the US: industry-level estimates

Since April 2014 to March 2015, the European Central Bank expansionary monetary policy instigates a huge depreciation of the euro in terms of dollar. According to the mainstream monetary theory, these dynamics should make the exports cheaper and at the same time make the imports more expensive. Has real depreciation of the euro helped in the improvement of European countries’ trade balances? Following the main methodologies in the recent literature, our study analyses the effects of this depreciation both for Italy and Germany towards the US. We use industry-level data at monthly frequency. The results are different from each bilateral relationship. We find that 11 industries register a long-run improvement (8 for Italy and 3 for Germany). The J-curve effect is proven just in six cases, always for Italy. The inverted J-curve effect is proven in eight cases, four for Germany, and four for Italy. These results seem to be an indirect demonstration of the structural asymmetries between German and Italian economies: German economic system is more able to be competitive with a strong currency, than Italy.     

Defending a dominant position in a technology led environment

A company with a significant technology lead over its rivals cannot afford to be complacent about its position. In this article, Filippo Dell'Osso contrasts the case of Glaxo's Zantac — a massively successful drug representing only a modest technological advance — with EMI's CAT scanner, a massive technological advance of limited commercial benefit to EMI. In order to be fully exploited, a technology advantage needs to be complemented by the development of other corporate assets.     

Foreign direct investment productivity premium and foreign affiliates' heterogeneity: A comparison between advanced and emerging market overseas investments in the EU

This paper aims to investigate the existence of productivity heterogeneity among foreign‐owned firms (FOFs) based in the European Union (EU). Using firm‐level data for a sample of FOFs investing in the EU over the period 2006–14, we find that foreign affiliates from advanced countries (AFOFs) show a positive productivity gap compared to foreign affiliates from emerging countries (EFOFs). However, when we consider the type and the motivation of foreign direct investment, our results reveal that, while AFOFs always seem to be more productive than EFOFs in manufacturing sectors, EFOFs appear to enjoy a productivity premium compared to AFOFs in the services, when their activity occurs in the same industry as their parent and they operate in less knowledge‐intensive market sectors.     

Employer‐employee profit‐sharing and the incentives to innovate when the dismissal regulation matters

We develop a simple incomplete‐contract model of the relationship between worker participation to revenue sharing and innovation performance of firms, under firing regimes with different stringency. Stronger worker participation to profits is shown to increase innovation probability when employer‐side hold‐up is prevented by stringent layoff regulation and the human capital matters significantly. Vice‐versa, under a strict layoff regulation, when the financial capital is relatively more important, the effects of worker participation devices may be reduced or inverted. Our results may help in understanding why there is no one‐size‐fits‐all optimal strategy in the design of worker financial participation mechanisms for knowledge‐intensive productions.     

The impact of national culture on integrated reporting quality. A stakeholder theory approach

Integrated reporting (IR) is a new corporate‐reporting system that aims to represent the firm's value creation in the short, medium, and long term. In contrast to other disclosure systems focusing on non‐financial dimensions, including social and environmental aspects, IR is characterized by information connectivity. In recent years, integrated reporting has received increasing interest, both academic and professional. However, report quality is still a critical aspect of IR. Although several studies investigate IR, few focus on quality and its determinants. This study aims to fill this gap by investigating the impact of national culture, an external determinant, from a stakeholder theory perspective. The results show that IR quality is related to five dimensions of Hofstede—power distance, individualism, masculinity, and indulgence negatively and uncertainty avoidance positively. This study contributes to the relevant literature by analysing an additional factor that influences the quality of corporate reports, namely, national culture. This is the first study that investigates national culture as a determinant of integrated‐reporting quality.     

Are happiness and productivity lower among young people with newly-divorced parents? An experimental and econometric approach

High rates of divorce in western society have prompted much research on the repercussions for well-being and the economy. Yet little is known about the important topic of whether parental divorce has deleterious consequences upon adult children. By combining experimental and econometric survey-based evidence, this study attempts to provide an answer. Under controlled conditions, it measures university students’ subjective well-being and productivity (in a standardized laboratory task). It finds no evidence that either of these is negatively associated with recent parental divorce. If anything, happiness and productivity appear to be slightly greater, particularly among males, if their parents have divorced. Using longitudinal data from the British Household Panel Survey—to control for so-called fixed effects—we then cross-check this result, and confirm the same finding, on various random samples of young British adults.     

Performance estimation of a wind farm with a dependence structure between electricity price and wind speed

This paper aimed to estimate the income generated by a wind turbine over a given time interval. The income depends on two main variables: the wind speed that determines the produced energy and electricity price. Both wind speed and electricity price evolve randomly in time and are correlated. To consider this dependency, we applied a vector autoregressive process (VAR) that links both variables. An application was performed using real data from a hypothetical wind turbine located in Sardinia (Italy). The income simulated by using the VAR model was closer to the empirical value compared with that obtained by simulating wind speed and electricity prices as independent variables. The results were also discussed in relation to the introduction of the SAPEI submarine cable, which produces a significant change in the income value.     

A multilevel structural equation modelling approach to study segregation of deprivation: an application to Bolivia

Quality & Quantity - The study of segregation of deprivation can provide a tool to determine the economic, social and institutional factors associated with spatial unevenness in the...     

Rating and capital structure: How do the signs affect the speed of adjustment?

Standard and Poor's ratings can be modified by the addition of a plus (+) or minus (?) sign to show the relative standing within each major rating category. In this paper, we analyze the influence of these signs on the speed of leverage adjustment for listed European companies in the 2004–2014 period. Our results indicate that (a) when a qualification is accompanied by a minus sign, it adjusts more slowly than qualifications either with a plus sign or without a sign; (b) when a rating has a plus sign, the adjustment is slower than when it has no sign; and (c) when a qualification is BBB‐, the speed of its leverage adjustment is close to zero. These results suggest that companies with signs in their ratings decrease their speed of adjustment to the target leverage ratio. In addition, such companies are especially concerned about a credit rating downgrade when it implies a possible loss of the degree of investment (BBB‐).