M&A Operations and Performance in Banking

This paper investigates whether M&A operations influence the performance of banks. Using a sample of 714 deals involving EU acquirers and targets located throughout the world over the period 1991–2005, we investigate whether M&A operations are associated with improved performance (using both standard accounting ratios and cost and alternative profit X-efficiency measures). Despite the extensive and ongoing consolidation process in the banking industry, we find that M&A operations are associated with a slight deterioration in return on equity, cash flow return and profit efficiency and with a marked improvement in cost efficiency. Hence, the improvements in cost efficiency appear to be transferred to bank clients. These changes in performance are directly attributable to the M&A operations, and would not have occurred in their absence. Moreover, these changes exhibit a particularly negative trend for cross-border deals to testify the importance of geographical relatedness in order to achieve better post-M&A performance. The environmental and bank-characteristics that make a deal successful or unsuccessful are finally identified.     

Imperfect Competition and Total Factor Productivity Growth

This article examines the role of imperfect competition in determining total factor productivity growth (TFPG) by bringing together a New Empirical Industrial Organization (NEIO) model and the TFPG model of Good, Nadiri and Sickles (1999). Application of the integrated model to 1973–1992 data from 29 food processing industries revealed that, overall, changes in markups, economies of scale, and demand growth contributed positively to TFPG while the disembodied technical change was a negative contributor. Furthermore, the factors underlying the TFPG estimates are interactive and their net effects are starkly different from the conventional Solow (1957) residual TFPG measures, underscoring the need to account for imperfect competition, returns to scale, and demand growth in analyses of this type.     

Implementation by Iterative Dominance and Backward Induction: An Experimental Comparison

We report experimental results on the relative performance of simultaneous and sequential versions of the Abreu-Matsushima mechanism. Under the simultaneous version, subjects typically use undominated strategies, but apply only a limited number of iterations of dominance. Consequently the unique strategy surviving iterative elimination of strictly dominated strategies is rarely observed. Under the sequential version, subjects also typically use undominated strategies, but apply only a limited number of steps of backward induction. Thus the backward induction outcome is also rarely observed. The sequential version results in fewer observed outcomes corresponding to the predicted outcome than the simultaneous version. Journal of Economic Literature Classification Number(s): C72, C92.     

The Impact of Sickness Absenteeism on Firm Productivity: New Evidence from Belgian Matched Employer–Employee Panel Data

Using rich longitudinal matched employer–employee data for Belgium, we provide a first investigation of the impact of sickness absenteeism on firms’ productivity. To do so, we estimate a production function augmented with a firm-level measure of sickness absenteeism that we constructed from worker-level information on nonworked hours due to illness or injury. We deal with the endogeneity of inputs and sickness absenteeism by applying a modified version of the semiparametric control function method developed by Ackerberg, Caves, and Fraser (2015), which explicitly takes firm fixed unobserved heterogeneity into account. Our main finding is that, in general, sickness absenteeism substantially dampens firms’ productivity. However, further analyses show that the impact varies according to several workforce and firm characteristics. Sickness absenteeism is more detrimental to firm productivity when absent workers are high tenure or blue collar. Moreover, it is especially harmful to industrial, capital-intensive, and small enterprises. These findings are consistent with the idea that sickness absenteeism is more problematic when absent workers have in-depth firm-/task-specific knowledge, when the employees’ work is highly interconnected (e.g., along the assembly line), and when firms face more organizational limitations in substituting absent workers.     

Protection for Sale: The case of oligopolistic competition and interdependent sectors

In Grossman‐Helpman's (1994) canonical “Protection for Sale” (PFS) model, political competition among industry lobbies is driven purely by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into the PFS framework to address the rivalry among lobbies stemming from product substitutability. It shows that increased substitutability weakens the interest groups' incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government's trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect the industry decision to organize.     

Inflation Expectations and Monetary Policy Surprises*

We estimate monetary policy surprises for European consumers over time, based on monetary policy changes that were unanticipated according to consumers’ stated beliefs. We find that such monetary policy surprises have the opposite impact on inflation expectations from the impact found when assuming that consumers are well informed. Relaxing the latter assumption by focusing on consumers’ stated beliefs, unanticipated increases in the interest rate raise inflation expectations before the 2008 financial crisis. This is consistent with imperfect information theoretical settings where interest rate hikes are interpreted as positive news about the state of the economy by consumers who know that policymakers have relatively more information.     

Enhanced Geospatial Validity for Meta-analysis and Environmental Benefit Transfer: An Application to Water Quality Improvements

Meta-regression models are commonly used within benefit transfer to estimate willingness to pay (WTP) for environmental quality improvements. Theory suggests that these estimates should be sensitive to geospatial factors including resource scale, market extent, and the availability of substitutes and complements. Valuation meta-regression models addressing the quantity of non-market commodities sometimes incorporate spatial variables that proxy for a subset of these effects. However, meta-analyses of WTP for environmental quality generally omit geospatial factors such as these, leading to benefit transfers that are invariant to these factors. This paper reports on a meta-regression model for water quality benefit transfer that incorporates spatially explicit factors predicted by theory to influence WTP. The metadata are drawn from stated preference studies that estimate per household WTP for water quality changes in United States water bodies, and combine primary study information with extensive geospatial data from external sources. Results find that geospatial variables are associated with significant WTP variations as predicted by theory, and that inclusion of these variables reduces transfer errors.     

Interest Rates and Stock Prices: Evidence from Central and Eastern European Markets

We provide empirical evidence regarding the responses of Central and Eastern European capital markets to monetary policy via domestic and international short-term interest rate shocks. The analysis is conducted using a four-variable structural vector error correction model identified by means of permanent-transitory restrictions. The results indicate a noticeable effect of the international interest rate on stock market indexes in the cases of the Czech Republic, Hungary, Poland, and Romania. Since no monetary policy autonomy exists in Bulgaria, Latvia, and Lithuania, we find support only for the inverse relationship between foreign interest rate and stock index prices.