Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk?

Empirical reports of priced foreign exchange (FX) risk raise the question of whether managers should adjust their cost of equity estimates for FX risk. To study this question, we empirically compare the cost of equity estimates of several risk–return models, including some that have explicit FX risk premia and others that do not. We find that adjusting for FX risk makes little difference, on average, in the cost of equity estimates, even for small firms and firms with extreme FX exposure estimates.     

A Socio‐Psychological Perspective on Team Ambidexterity: The Contingency Role of Supportive Leadership Behaviours

In addressing the notion of team ambidexterity, we propose that socio‐psychological factors (i.e., team cohesion and team efficacy) may help team members to resolve paradoxical challenges and to combine exploratory and exploitative learning efforts. In addition, we theorize that senior executives may play an important role in facilitating the emergence of ambidexterity at lower hierarchical levels. In doing so, we develop a multilevel contingency framework and propose that the effectiveness of teams to achieve ambidexterity is contingent upon supportive leadership behaviours at the organizational‐level. Using multilevel, multisource, and temporally separated data on 87 teams within 37 high‐tech and pharmaceutical firms, we not only reveal how team cohesion and efficacy may matter for the emergence of team ambidexterity but also show that the effectiveness of supportive leadership behaviours from senior executives varies across cohesive and efficacious teams.     

Strategic Staffing and Small‐Firm Performance

Although staffing can be a critical determinant of whether small businesses succeed or fail, there has been less research in this area than might be expected, given the large numbers of such firms. While there has been some research on specific recruiting and selection practices, there has been little attention to the strategic aspects of staffing. We investigated relationships between strategic approaches to staffing and small‐firm performance using lagged survey data from 139 founders and owners of small firms. Results indicate that recruiting approaches imitating the practices (processes) of larger businesses are positively related to a perceptual measure of firm performance. Selection approaches stressing a growth orientation are also positively related to firm performance. Finally, founders’ and owners’ perceptions of the strategic importance of human resources moderate the relationship of firm performance with imitative recruiting practices as well as with growth‐oriented selection practices. An important contribution of this article is that contextual knowledge facilitates our understanding of the performance implications of staffing practices in small firms. © 2015 Wiley Periodicals, Inc.     

Econometric Methods for Modelling Systems With a Mixture of i(1) and i(0) Variables

This paper considers structural models with both I(1) and I(0) variables. The structural shocks associated with either set of variables could be permanent or transitory. We classify the shocks as (P1,P0) and (T1,T0), where P/T distinguishes permanent/transitory, while 1/0 means they are attached to structural equations with either I(1) or I(0) variables as their ‘dependent’ variable. We show that P0 shocks can affect cointegration analysis and provide a formula to compute the permanent component if they are present. Finally, we reformulate a well‐known empirical structural vector autoregression showing the impact of P0 shocks when there are just long‐run parametric and sign restrictions. Copyright © 2015 John Wiley & Sons, Ltd.     

Hysteresis in trade

The paper presents a model of hysteresis in trade which is based on the existence of sunk market-entry costs. The study concentrates on the aspect of two models. In both models an exchange rate overvaluation leads to additional entry by foreign firms. The models differ in their accounts of why the foreign firms do not exit after the exchange rate shock passes.     

The business cycle with nominal contracts

Summary In this paper we study the quantitative implications of nominal wage contracts for business cycle fluctuations. We address this issue using a model economy based on the neoclassical growth model supplemented by the assumption that cash is needed to purchase goods. We consider a variation of the standard recursive competitive equilibrium concept that is intended to capture the important features of wage contracting. We use this equilibrium construct to address three issues. First, we consider whether monetary shocks, propagated by nominal contracts, constitute a viable alternative to technology shocks as a source of aggregate fluctuations. Our results suggest that, while monetary shocks and nominal rigidities succeed in causing output volatility of the required magnitude, the resulting data have properties that are inconsistent with several key features of U.S. data. Second, we consider how the behavior of the economy varies with contract length. We find that the volatility induced by both monetary and technology shocks increases sharply with contract length. Finally we consider how much rigidity would be necessary to match the volatility of U.S. output. We find that only a very small amount of rigidity would be necessary to cause output volatility of the magnitude observed.We have received helpful comments from David Chapman, Paul Gomme, Jeremy Greenwood, Gary Hansen, Michael Keane, Tim Kehoe, Lee Ohanian, Edward Prescott, and Warren Weber. The usual disclaimer applies. This research is supported in part by NSF Grant SES-8921346 and the John M. Olin Foundation.     

Institutions,quality competition and public service provision: The case of public education

This paper contributes to the literature on integovernmental competition in two ways. First, the institutional setting within which public services are delivered is analyzed with respect to the impact on the quality of services provided. Previous studies have measured competition only in terms of governmental structure, ignoring the issue of service quality and the potential for differentiating local governmental jurisdictions along quality dimensions. Second, the outcome of competition is defined in terms of service quality. Previous studies generally have measured the outcome of competition by examining the fiscal effects of fragmentation and accountability through service costs or tax revenue impacts. School districts were used to empirically test quality competition. Student academic performance was modeled as a function of control variables and the degree of competition from neighboring school districts. Academic performance in public schools was positively associated with the performance of neighboring districts, although the effect was small. These findings, however, suggest that strategies to strengthen interjurisdictional competition may be useful in enhancing public service quality.