Showing papers by "National Bureau of Economic Research published in 2003"

Managing with Style: The Effect of Managers on Firm Policies

Abstract: This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-e rm matched panel data set which enables us to track the top managers across different e rms over time. We e nd that manager e xed effects matter for a wide range of corporate decisions. A signie cant extent of the heterogeneity in investment, e nancial, and organizational practices of e rms can be explained by the presence of manager e xed effects. We identify specie c patterns in managerial decision-making that appear to indicate general differences in “ style” across managers. Moreover, we show that management style is signie cantly related to manager e xed effects in performance and that managers with higher performance e xed effects receive higher compensation and are more likely to be found in better governed e rms. In a e nal step, we tie back these e ndings to observable managerial characteristics. We e nd that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

The Skill Content of Recent Technological Change: An Empirical Exploration

Abstract: We apply an understanding of what computers do to study how computerization alters job skill demands. We argue that computer capital (1) substitutes for workers in performing cognitive and manual tasks that can be accomplished by following explicit rules; and (2) complements workers in performing nonroutine problem-solving and complex communications tasks. Provided these tasks are imperfect substitutes, our model implies measurable changes in the composition of job tasks, which we explore using representative data on task input for 1960 to 1998. We find that within industries, occupations and education groups, computerization is associated with reduced labor input of routine manual and routine cognitive tasks and increased labor input of nonroutine cognitive tasks. Translating task shifts into education demand, the model can explain sixty percent of the estimated relative demand shift favoring college labor during 1970 to 1998. Task changes within nominally identical occupations account for almost half of this impact.

Plants and Productivity in International Trade

Abstract: We reconcile trade theory with plant-level export behavior, extending the Ricardian model to accommodate many countries, geographic barriers, and imperfect competition. Our model captures qualitatively basic facts about U.S. plants: (i) productivity dispersion, (ii) higher productivity among exporters, (iii) the small fraction who export, (iv) the small fraction earned from exports among exporting plants, and (v) the size advantage of exporters. Fitting the model to bilateral trade among the United States and 46 major trade partners, we examine the impact of globalization and dollar appreciation on productivity, plant entry and exit, and labor turnover in U.S. manufacturing. (JEL F11, F17, O33)

Executive Compensation as an Agency Problem

Abstract: This paper provides an overview of the main theoretical elements and empirical underpinnings of a managerial power approach to executive compensation. Under this approach, the design of executive compensation is viewed not only as an instrument for addressing the agency problem between managers and shareholders but also as part of the agency problem itself. Boards of publicly traded companies with dispersed ownership, we argue, cannot be expected to bargain at arm's length with managers. As a result, managers wield substantial influence over their own pay arrangements, and they have an interest in reducing the saliency of the amount of their pay and the extent to which that pay is de-coupled from managers' performance. We show that the managerial power approach can explain many features of the executive compensation landscape, including ones that many researchers have long viewed as puzzling. Among other things, we discuss option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the observed relationship between CEO power and pay. We also explain how managerial influence might lead to substantially inefficient arrangements that produce weak or even perverse incentives.

Limited Attention, Information Disclosure, and Financial Reporting

Abstract: This paper models firms' choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.

The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market

Abstract: Immigration is not evenly balanced across groups of workers who have the same education but differ in their work experience, and the nature of the supply imbalance changes over time. This paper develops a new approach for estimating the labor market impact of immigration by exploiting this variation in supply shifts across education-experience groups. I assume that similarly educated workers with different levels of experience participate in a national labor market and are not perfect substitutes. The analysis indicates that immigration lowers the wage of competing workers: a 10 percent increase in supply reduces wages by 3 to 4 percent.

The band pass filter

Abstract: We develop optimal finite-sample approximations for the band pass filter. These approximations include one-sided filters that can be used in real time. Optimal approximations depend upon the details of the time series representation that generates the data. Fortunately, for U.S. macroeconomic data, getting the details exactly right is not crucial. A simple approach, based on the generally false assumption that the data are generated by a random walk, is nearly optimal. We use the tools discussed here to document a new fact: There has been a significant shift in the money–inflation relationship before and after 1960.

Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps

Abstract: Green and Hollifield (1992) argue that the presence of a dominant factor would result in extreme negative weights in mean-variance efficient portfolios even in the absence of estimation errors. In that case, imposing no-short-sale constraints should hurt, whereas empirical evidence is often to the contrary. We reconcile this apparent contradiction. We explain why constraining portfolio weights to be nonnegative can reduce the risk in estimated optimal portfolios even when the constraints are wrong. Surprisingly, with no-short-sale constraints in place, the sample covariance matrix performs as well as covariance matrix estimates based on factor models, shrinkage estimators, and daily data. MARKOWITZ'S (1952, 1959) PORTFOLIO THEORY is one of the most important theoretical developments in finance. Mean-variance efficient portfolios play an important role in this theory. Such portfolios constructed using sample moments often involve large negative weights in a number of assets. Since negative portfolio weights (short positions) are difficult to implement in practice, most investors impose the constraint that portfolio weights should be nonnegative when constructing mean-variance efficient portfolios. Green and Hollifield (1992) argue that because a single factor dominates the covariance structure, it would be difficult to dismiss the observed extreme negative and positive weights as being entirely due to the imprecise estimation of the inputs. They consider the global minimum variance portfolio to avoid the effect of estimation error in the mean on portfolio weights. They note that when returns are generated by a single factor model, minimum variance portfolios can be constructed in two steps. First, naively diversify over the set of high beta stocks and

A New Measure of Monetary Shocks: Derivation and Implications

Abstract: Conventional measures of monetary policy, such as the federal funds rate, are surely influenced by forces other than monetary policy. More importantly, central banks adjust policy in response to a wide range of information about future economic developments. As a result, estimates of the effects of monetary policy derived using conventional measures will tend to be biased. To address this problem, we develop a new measure of monetary policy shocks in the United States for the period 1969 to 1996 that is relatively free of endogenous and anticipatory movements. The derivation of the new measure has two key elements. First, to address the problem of forward-looking behavior, we control for the Federal Reserve's forecasts of output and inflation prepared for scheduled FOMC meetings. We remove from our measure policy actions that are a systematic response to the Federal Reserve's anticipations of future developments. Second, to address the problem of endogeneity and to ensure that the forecasts capture the main information the Federal Reserve had at the times decisions were made, we consider only changes in the Federal Reserve's intentions for the federal funds rate around scheduled FOMC meetings. This series on intended changes is derived using information on the expected funds rate from the records of the Open Market Manager and information on intentions from the narrative records of FOMC meetings. The series covers the entire period for which forecasts are available, including times when the Federal Reserve was not exclusively targeting the funds rate. Estimates of the effects of monetary policy obtained using the new measure indicate that policy has large, relatively rapid, and statistically significant effects on both output and inflation. We find that the effects using the new measure are substantially stronger and quicker than those using prior measures. This suggests that previous measures of policy shocks are significantly contaminated by forward-looking Federal Reserve behavior and endogeneity.

Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment

Abstract: Lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirial evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. We show that between 1977 and 1990 this rule caused banks to open relatively more rural branches in Indian states with lower initial financial development. The reverse is true outside this period. We exploit this fact to identify the impact of opening a rural bank on poverty and output. Our estimates suggest that the Indian rural branch expansion program significantly lowered rural poverty, and increased non-agricultural output.

Stages of Diversification

Abstract: This paper studies the evolution of sectoral concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that economic activity is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start specializing again. We discuss this finding in light of existing theories of trade and growth, which generally predict a monotonic relationship between income and diversification.

Investor Sentiment and the Cross-Section of Stock Returns

Abstract: We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with theoretical predictions and are unlikely to reflect an alternative explanation based on compensation for systematic risks.

Does Peer Ability Affect Student Achievement

Abstract: Empirical analysis of peer effects on student achievement has been open to question because of the difficulties of separating peer effects from other confounding influences. While most econometric attention has been directed at issues of simultaneous determination of peer interactions, we argue that issues of omitted and mismeasured variables are likely to be more important. We control for the most important determinants of achievement that will confound peer estimates by removing student and school-by-grade fixed effects in addition to observable family and school characteristics. The analysis also addresses the reciprocal nature of peer interactions and the interpretation of estimates based upon models using past achievement as the measure of peer group quality. The results indicate that peer achievement has a positive effect on achievement growth. Moreover, students throughout the school test score distribution appear to benefit from higher achieving schoolmates. On the other hand, the variance in achievement appears to have no systematic effect. Copyright © 2003 John Wiley & Sons, Ltd.

Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S.

Abstract: For a VAR with drifting coefficients and stochastic volatilities, the authors present posterior densities for several objects that are of interest for designing and evaluating monetary policy. These include measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and “activism coefficients” for monetary policy rules. Their posteriors imply substantial variation of all of these objects for post WWII U.S. data. After adjusting for changes in volatility, persistence of inflation increases during the 1970s then falls in the 1980s and 1990s. Innovation variances change systematically, being substantially larger in the late 1970s than during other times. Measures of uncertainty about core inflation and the degree of persistence covary positively. The authors use their posterior distributions to evaluate the power of several tests that have been used to test the null of time-invariance of autoregressive coefficients of VARs against the alternative of time-varying coefficients. Except for one test, they find that those tests have low power against the form of time variation captured by our model. That one test also rejects time invariance in the data.

Private Equity Performance: Returns, Persistence and Capital

Abstract: This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund in the market. At the industry level, we show that market entry in the private equity industry is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Aggregate industry returns are lower following a boom, but most of this effect is driven by the poor performance of new entrants, while the returns of established funds are much less affected by these industry cycles. Several of these results differ markedly from those for mutual funds.

Mother's Education and the Intergenerational Transmission of Human Capital: Evidence from College Openings

Abstract: We examine the effect of maternal education on birth outcomes using Vital Statistics Natality data from 1970 to 1999. We also assess the importance of four channels through which maternal education may improve birth outcomes: use of prenatal care smoking marriage and fertility. In an effort to account for the endogeneity of education attainment we use data about the availability of colleges in the womans country in her 17th year as an instrument for maternal education. We find that higher maternal education improves infant health as measured by birth weight and gestational age. It also increases the probability that a new mother is married reduces parity increases use of prenatal care and reduces smoking suggesting that may be important pathways for the ultimate effect on health. Our results add to the growing body of literature which suggests that estimates of the returns to education which focus only on increases in wages understate the total return.

Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets

Abstract: Product and labor market deregulation are fundamentally about reducing and redistributing rents, leading economic players to adjust in turn to this new distribution. Thus, even if deregulation eventually proves beneficial, it comes with strong distribution and dynamic effects. The transition may imply the decline of incumbent firms. Unemployment may increase for a while. Real wages may decrease before recovering, and so on. To study these issues, we build a model based on two central assumptions: Monopolistic competition in the goods market, which determines the size of rents; and bargaining in the labor market, which determines the distribution of rents between workers and firms. We then think of product market regulation as determining both the entry costs faced by firms, and the degree of competition between firms. We think of labor market regulation as determining the bargaining power of workers. Having characterized the effects of labor and product market deregulation, we then use our results to study two specific issues. First, to shed light on macroeconomic evolutions in Europe over the last twenty years, in particular on the behavior of the labor share. Second, to look at political economy interactions between product and labor market deregulation.

An essay on the revived bretton woods system

Abstract: The economic emergence of a fixed exchange rate periphery in Asia has reestablished the United States as the center country in the Bretton Woods international monetary system. We argue that the normal evolution of the international monetary system involves the emergence of a periphery for which the development strategy is export-led growth supported by undervalued exchange rates, capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country. The success of this strategy in fostering economic growth allows the periphery to graduate to the center. Financial liberalization, in turn, requires floating exchange rates among the center countries. But there is a line of countries waiting to follow the Europe of the 1950s/60s and Asia today sufficient to keep the system intact for the foreseeable future.

When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms

Abstract: We use a simple model to outline the conditions under which corporate investment will be sensitive to non-fundament al movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity dependent” – firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.

Capital Investments and Stock Returns

Abstract: Firms that substantially increase capital investments subsequently achieve negative benchmark-adjusted returns. The negative abnormal capital investment/return relation is shown to be stronger for firms that have greater investment discretion, i.e., firms with higher cash flows and lower debt ratios, and is shown to be significant only in time periods when hostile takeovers were less prevalent. These observations are consistent with the hypothesis that investors tend to underreact to the empire building implications of increased investment expenditures. Although firms that increase capital investments tend to have high past returns and often issue equity, the negative abnormal capital investment/return relation is independent of the previously documented long-term return reversal and secondary equity issue anomalies.

What Works in Securities Laws

Abstract: We examine the effect of securities laws on stock market development in 49 countries. We find almost no evidence that public enforcement benefits stock markets, and strong evidence that laws facilitating private enforcement through disclosure and liability rules benefit stock markets.

Price Informativeness and Investment Sensitivity to Stock Price

Abstract: Stock prices and real investments are highly correlated. Previous literature has offered two main explanations for this high correlation. The first explanation relies on price being informative about investment opportunities, the second one is based on financing constraints. In this paper we empirically examine the effect of price informativeness on the sensitivity of investment to stock price. Using price non-synchronicity and PIN as measures of price informativeness, we find that the degree of informativeness is positively correlated with the sensitivity of investment to stock price. Since, according to previous literature, these measures reflect private information, the result suggests that prices perform an active role, i.e., that managers learn from stock price when making investment decisions. This result is robust to the inclusion of various control variables (such as controls for managerial information) and to changes in specification.

Overconfidence and Speculative Bubbles

Abstract: Motivated by the behavior of internet stock prices in 1998-2000, we present a continuous time equilibrium model of bubbles where overconfidence generates disagreements among agents regarding asset fundamentals. With short-sale constraints, an asset owner has an option to sell the asset to other over-confident agents who have more optimistic beliefs. This re-sale option has a recursive structure, that is, a buyer of the asset gets the option to resell it. This causes a significant bubble component in asset prices even when small differences of beliefs are sufficient to generate a trade. Agents pay prices that exceed their own valuation of future dividends because they believe that in the future they will find a buyer willing to pay even more. The model generates prices that are above fundamentals, excessive trading, excess volatility, and predictable returns. However, our analysis shows that while Tobin's tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility. We give an example where the price of a subsidiary is larger than its parent firm. Finally, we show how overconfidence can justify the use of corporate strategies that would not be rewarding in a "rational" environment.

Public Sector Efficiency: An International Comparison

Abstract: We compute public sector performance (PSP) and efficiency (PSE) indicators, comprising a composite and seven sub-indicators, for 23 industrialised countries. The first four sub-indicators are "opportunity" indicators that take into account administrative, education and health outcomes and the quality of public infrastructure and that support the rule of law and a level playing-field in a market economy. Three other indicators reflect the standard "Musgravian" tasks for government: allocation, distribution, and stabilisation. The input and output efficiency of public sectors across countries is then measured via a non-parametric production frontier technique.

Stock Prices, News and Economic Fluctuations

Abstract: A common view in macroeconomics is that business cycles can be meaningfully decomposed into fluctuations driven by demand shocks - which are shocks that have no short- or long-run effects on productivity - and fluctuations driven by unexpected changes in technology. In this Paper we propose a means of evaluating this view and we show that it is strongly at odds with the data. In contrast, we show that the data favours a view of business cycles driven primarily by a shock that does not affect productivity in the short run - therefore it looks like a demand shock - but affects productivity in the long run. The structural interpretation we suggest for this shock is that it represents news about future technological opportunities. We show that this shock explains about 50% of business cycle fluctuations and therefore deserves to be acknowledged and further understood by macroeconomists.

The Quantity and Quality of Life and the Evolution of World Inequality

Abstract: Lack of income convergence for the world as a whole has led to concerns about the impact of globalization of markets on world inequality. GDP per capita is usually used to proxy for the quality of life of individuals living in different countries. However, well-being is also affected by quantity of life, as represented by longevity. This paper incorporates longevity into an overall assessment of the evolution of cross-country inequality. The absence of income convergence noticed in the growth literature is in stark contrast with the reduction in inequality after incorporating recent gains in longevity. The paper computes a full' income measure to value the life expectancy gains experienced by 49 countries between 1965 and 1995. Countries starting with lower income tended to grow more in terms of full' income than countries starting with higher income. The average growth rate of full' income is about 140% for developed countries, compared to 192% for developing countries. Additionally, we decompose changes in life expectancy into changes attributable to thirteen broad groups of causes of death. Infectious, respiratory and digestive diseases, congenital and perinatal conditions, and ill-defined' conditions are responsible for most of the mortality convergence observed between 1965 and 1995.