MANAGERIAL INCENTIVES AND CORPORATE DIVERSIFICATION STRATEGIES

Because the break-up of conglomerates typically produces substantial increases in shareholder wealth, many commentators have argued that the conglomerate form of organization is inefficient. This article reports the findings of a number of recent academic studies, including the authors' own, that examine the causes and consequences of corporate diversification. Although theoretical arguments suggest that corporate diversification can have benefits as well as costs, several studies have documented that diversified firms trade at a significant discount from their single-segment peers. Estimates of this discount range from 10–15% of firm value, and are larger for “unrelated” diversification than for “related” diversification. If corporate diversification has generally been a value-reducing managerial strategy, why do firms remain diversified? One possibility, which the authors label the “agency cost” hypothesis, is that top executives without substantial equity stakes may have incentives to maintain a diversification strategy even if doing so reduces shareholder wealth. But, as top managers' ownership stakes increase, they bear a greater fraction of the costs associated with value-reducing policies and are therefore less likely to take actions that reduce shareholder wealth. Also, to the extent that outside blockholders monitor managerial behavior, the agency cost hypothesis predicts that diversification will be less prevalent in firms with large outside blockholders. Consistent with this argument, the authors find that companies in which managers own a significant fraction of the firm's shares, and in which blockholders own a large fraction of shares, are significantly less likely to be diversified. If agency problems lead managers to maintain value-reducing diversification strategies, what is it that leads some of these same firms to refocus? The agency cost hypothesis predicts that managers will reduce diversification only if pressured to do so by internal or external mechanisms that reduce agency problems. Consistent with this argument, the authors find that decreases in diversification appear to be precipitated by market disciplinary forces such as block purchases, acquisition attempts, and management turnover.     

Backtesting Value-at-Risk: A Duration-Based Approach

Financial risk model evaluation or backtesting is a key partof the internal model's approach to market risk management aslaid out by the Basle Committee on Banking Supervision. However,existing backtesting methods have relatively low power in realisticsmall sample settings. Our contribution is the exploration ofnew tools for backtesting based on the duration of days betweenthe violations of the Value-at-Risk. Our Monte Carlo resultsshow that in realistic situations, the new duration-based testshave considerably better power properties than the previouslysuggested tests.     

Beyond Self-Regulation: Towards A Critique of Self-Regulation As A Control Strategy For Hazardous Activities*

After highlighting some of the key issues and positions in the debate around appropriate preventive regulation, the paper presents a number of observations directed at the proponents of greater self-regulation. These observations confront directly a number of familiar, but often unchallenged, arguments for self-regulation. More centrally we address claims concerning, the extent to which the chemicals industries have a good and improving ‘safety’ record; and whether the sector consists of companies both motivated and capable in the context of effective crisis and disaster management. Lastly, the paper sets out some ‘new directions’ for the nature and role of regulation in the effective prevention of crises. Thus the paper indicates a number of regulatory developments which are distinct from any shift towards greater self-regulation, but which would result in more effective crisis and disaster prevention in the UK chemicals industries and, indeed, beyond that specific sector.     

Enforcing Emissions Trading when Emissions Permits are Bankable

We propose enforcement strategies for emissions trading programs with bankable emissions permits that guarantee complete compliance with minimal enforcement costs. Our strategies emphasize imperfect monitoring supported by a high unit penalty for reporting violations, and tying this penalty directly to equilibrium permit prices. This approach is quite different from several existing enforcement strategies that emphasize high unit penalties for emissions in excess of permit holdings. Our analysis suggests that a high penalty for excess emissions cannot be used to conserve monitoring effort, and that it may actually increase the amount of monitoring necessary to maintain compliance.The authors are grateful to Anthony Heyes and three anonymous referees for their valuable comments. Partial support for this research was provided by the Cooperative State Research Extension, Education Service, U. S. Department of Agriculture, Massachusetts Agricultural Experiment Station under Project No. MAS00871.     

Optimal mechanisms for siting noxious facilities

We study Bayesian mechanism design in the context of the siting of noxious facilities. Under incomplete information, we characterize optimal mechanisms facilitating the siting and cost sharing of the facility. These mechanisms are allocatively and Pareto efficient. However, it appears that transfers occur when the good is not provided. This result is due to the weakening of the incentive notion to Bayesian–Nash equilibrium and to the balanced budget condition. This phenomenon disappears if the setting is perfectly symmetric.      

On bivariate generalized binomial and negative binomial distributions

The present paper deals with two types of generalized general binomial (binomial or negative binomial) distributions: (i) a univariate general binomial generalized by a bivariate distribution and (ii) a bivariate general binomial generalized by two independent univariate distributions. The probabilities, moments, conditional distributions and regression functions for these distributions are obtained in terms of bipartitional polynomials. Moreover recurrence relations for the probabilities and moments, independent of the bipartitional polynomials, are given. Finally these general results are applied to the (i) Binomial-Bivariate Poisson and (ii) Bivariate Binomial-Poissons distributions.     

Towards the dual economy and emancipation from employment

We are slaves to employment and its institutions—employers, trade unions, government—no less than medieval man was to church, baron, and manor. The apparent failure of technology to liberate us from full-time jobs is due to our dependence on the institutional economy and the use of employment for social control. Universal employment is not only a dubious privilege, but one we cannot afford. Today there is a physical and psychological flight from modern employment. The growth of the informal or free economy offers a way forward. It promises greater opportunities for women, those with manual skills, and the permanent resident, although there is not much in it for the mobile executive on the make.     

Hispanic agencies and profits of distinction: an examination of the advertising industry as a field of cultural production

This project examines the advertising industry as a self-governing space that is guided by its own internal logics, but is nonetheless influenced by social dynamics at play in the larger social space. Using Bourdieu's theory of practice as a theoretical and analytical framework, this study explores the relationship between cultural capital and economic capital. Specifically, I examine the degree to which Hispanic practitioners have leveraged their knowledge of Latina(o) culture and their proficiency in Spanish as profits of distinction within the marketplace. Qualitative interviews conducted with Hispanic ad agents, general market ad agents and clients reveal that the position that Latinas(os) occupy within the social hierarchy has created both opportunities and boundaries for Hispanic agencies. This paper focuses on the practices that allow Hispanic agencies to isolate Latinas(os) from other consumers, distinguishing them institutionally and entitling them to dedicated marketing resources, but I also discuss the limitations to these practices and how such a narrow expression of the Hispanic agency's cultural capital ultimately limits their access to economic capital.     

Entrepreneurial cognition and internationalization speed: towards a potential moderating effect of experiential and rational information processing

This study explores the influence that entrepreneurial cognition, in terms of the dichotomy in human information processing, has on the earliness of internationalization and post-entry speed. Entrepreneurial cognition is investigated through the lens of the dual-process theory, which posits that human information processing is formed of two systems, the experiential cognitive system (System 1) and the rational and analytical cognitive system (System 2). The speed of the entire internationalization process is analyzed in terms of earliness (how soon after inception a company enters its first international market) and post-entry speed (how fast it enters new markets after the first internationalization). Drawing on ten cases, we find that companies that internationalized earlier and faster were managed by entrepreneurs with higher levels of the experiential cognitive system. In contrast, companies that internationalized later and more gradually were managed by entrepreneurs with higher levels of the rational cognitive system. Thus, our study reveals that the speed of the entire process of internationalization is governed, at least partially, by the entrepreneur’s cognition. On the basis of our findings, we introduce three propositions on the moderation that the entrepreneur’s cognition exerts on the well-established relations between environmental signals and both earliness of internationalization and post-internationalization speed.