Debt contracts in the presence of performance manipulation

Empirical evidence suggests that firms often manipulate reported numbers to avoid debt covenant violations. We study how a firm’s ability to manipulate reports affects the terms of its debt contracts and the resulting investment and manipulation decisions that the firm implements. Our model generates novel empirical predictions regarding the use and the level of debt covenant, the interest rate, the efficiency of investment decisions, and the likelihood of covenant violations. For example, the model predicts that the optimal debt contract for firms with relatively strong (weak) corporate governance (i.e., cost of manipulation) induces overinvestment (underinvestment). Moreover, for firms with strong (weak) corporate governance, an increase in corporate governance quality leads to tighter (looser) covenant, more (less) frequent covenant violations and lower (higher) interest rate. Our model highlights that the interest rate, which is a common proxy for the cost of debt, neither accounts for the distortion of investment efficiency nor the expected manipulation costs arising under debt financing. We propose a measure of cost of debt capital that accounts for these effects.     

Capital controls in Brazil – Stemming a tide with a signal?

Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent emerging markets implementing them in recent years. We focus on Brazil, which instituted five changes in its capital account regime in 2008–2011. Using the synthetic control method, we construct counterfactuals (i.e., Brazil with no policy change) for each of these changes. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls were relaxed. We hypothesize that price-based capital controls’ only perceptible effect is to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. In the case of Brazil, its left-of-center government’s willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.     

Managing micropolitical risk: A cross‐sector examination

This article stresses the need for today's multinational firms to adopt their own political risk‐assessment and risk‐mitigation strategies. A comparative study of the energy, financial, and automobile sectors illustrates the need for all companies in these sectors to undertake comprehensive risk‐assessment strategies. Risk‐assessment models established by leading multinationals like British Petroleum, Bank of America, and General Motors are examined as examples that other companies in these sectors can build upon. The consistent micropolitical risk variables then lead to a proposed practical framework for examining sector‐specific micropolitical risk. © 2006 Wiley Periodicals, Inc.     

Telecommuting: The employee's perspective

Available telecommunication technology enables the substitution of commuting by “telecommuting”, or working at home, for a wide range of white collar occupations. Research on the potential of this phenomenon along with some ongoing experiments point at an array of social and personal benefits that may be realized by this working arrangement. An assessment of the possible implications of work-at-home on the individual employee indicate that the burden on him or her may be greater than the benefits accrued and, therefore, the journey to work may be a more desirable act than traditionally perceived by transportation planners. This paper focuses on two aspects of the work-at-home arrangement. Previous research on the sociology of work as well as preliminary empirical results indicate that 1) social interaction at work and 2) the need to separate home and work roles are important elements for the individual worker. The fact that work-at-home will affect these attributes, is likely to discourage wide-scale transition to this arrangement, despite the availability of the technology. Most research published to date on the subject is qualitative in nature, as only little empirical evidence is available. The objective of this paper is to stress, based on a wide literature review, the need for a thorough behavioral evaluation of the available technology to provide a sound basis for decision making on implementation of the technology.     

Ordering,revenue and anchoring in art auctions

We estimate the effect of ordering by value on revenues in sequential art auctions held by Sotheby's and Christie's. We exploit a pre determined rotation of which of these two houses holds their auction first during auction week in New York City. When the house that goes first has relatively expensive paintings compared to the other house, we find that the sale premium for the week is around 21% higher relative to the mean sale premium, and the fraction of paintings sold during the week is around 11% higher. We provide evidence that this is due to an anchoring effect.     

R&D intensity and export performance: A micro view

Zusammenfassung F & E-Intensit?t und Exportleistung: Eine mikro?konomische Betrachtung. — Der Aufsatz besch?ftigt sich mit Unternehmen, die technische Neuerungen betreiben, um exklusive Informationen über neue Produkte oder Verfahren zu erwerben, mit denen sich auf den M?rkten Renten absch?pfen lassen. Die Eigentumsrechte an ihrem Wissen veranlassen die Unternehmen, sich wie Monopolisten zu verhalten. Wie sich innovatorische und nichtinnovatorische Unternehmen auf den Exportm?rkten verhalten, wird in einem theoretischen Rahmen dargelegt. Daraus ergibt sich die Hypothese einer positiven Korrelation zwischen Innovationsintensit?t und Exportwachstum. Diese These wird mit Hilfe von Daten getestet, die aus einer Stichprobe von über hundert Firmen gewonnen wurden, die in Israel zwischen 1975 und 1981 im zivilen Bereich Forschung und Entwicklung betrieben.

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Résumé Intensité de R&D et performance exportatrice: une micro-vue. - Cet article se concentre sur l’entreprise s’engageant à l’innovation technologique pour gagner l’information de propriétaire sur produit ou procédé de fabrication qu’on peut utiliser pour tirer des rentes du marché. Le savoir propriétaire incite les innovateurs de se comporter comme monopolistes. Les auteurs développent un cadre théorique qu’on applique pour comparer les politiques exportatrices des entreprises innovantes et non-innovantes et qui mène à l’hypothèse d’une positive correlation entre l’intensité d’innovation et la croissance exportatrice. Les auteurs testent cette thèse empiriquement en utilisant des données collectionnées d’un échantillon de plus que cent entreprises engagés à la recherche et le développement civile en Isra?l pendant la période 1975–1981.

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Resumen Intensidad de investigatión y desarrollo y exportaciones: un enfoque microeconómico. — Este trabajo se concentra en la empresa innovadora que participa en la innovation tecnológica con el fin de adquirir informaciones exclusivas sobre productos y procesos con los cuales podrìan extraerse rentas del mercado. Estas informaciones permiten que los innovadores se comporten como monopolios. En este trabajo se desarrolla un marco teórico que es utilizado para comparar la política de exportaciones de empresas innovadoras y no innovadoras; se predice una correlatión positiva entre la intensidad de innovatión y el crecimiento de las exportaciones. Esta predictión es sometida a un test empírico con datos de una muestra de más de cien empresas isrealíes activas en investigatión y desarrollo pertenecientes al período 1975–1981.

     

Hedge Fund Activism, Corporate Governance, and Firm Performance

Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.     

Fiscal and monetary policies and the cost of sudden stops

This article investigates the effects of monetary and fiscal policies on output growth during sudden-stop balance of payments crisis in emerging markets and developing countries. Sudden stops in capital flows, and subsequent deep recessions, are a frequent occurrence in these countries but there is no professional consensus, and little systematic empirical evidence, shedding light on the macroeconomic policy mix most likely to limit output losses during these episodes. To address this issue, we investigate 83 sudden-stop crisis in 66 countries using a baseline empirical model to control for the various determinants of output losses during sudden stops. We measure the marginal effects of policy on output losses, and find strong evidence that monetary tightening (rise in the discount rate or unsterilized rise in international reserves) and discretionary fiscal contraction are significantly correlated with larger output losses following a sudden stop. Fiscal expansion is associated with smaller output losses following a sudden stop, but monetary expansion has no discernable effect. The macroeconomic policy mix associated with the least output loss during a sudden-stop financial crisis is a discretionary fiscal expansion combined with a neutral monetary policy.     

International franchising in China with Kodak

According to Kodak, China poses unparalleled opportunities for low‐cost production and marketing of products to the world's largest nation. According to the company's estimate, China will become the largest market in the world for photographic products and services within the next ten years. This article reviews Kodak's operations in China and presents an interview with a local franchising manager in Shanghai—the largest city in China. It provides a unique glimpse into the inner working of the organization's franchising activities in China. © 2001 John Wiley & Sons, Inc.     

Individual and Group Behavior in the Ultimatum Game: Are Groups More “Rational” Players?

This article reports two experiments that compared the standard ultimatum game played by individuals with the same game played by three-person groups. In the group treatment, the members of the allocating group conducted a brief, face-to-face discussion in order to decide, as a group, on a proposed division, whereas the members of recipient group held a discussion on whether to accept or reject the proposal. If the proposal was accepted, each group member received an equal share of his group's payoff (the pie in the group condition was three times that in the individual condition). In both experiments, groups offered less than individuals. But as indicated by the low rejection rate in both treatments, groups were also willing to accept less.