Showing papers in "Social Science Research Network in 1996"

Law and Finance

Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

A Survey of Corporate Governance

Abstract: This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

The use of knowledge in society

Abstract: Many of the current disputes with regard to both economic theory and economic policy have their common origin, it seems to me, in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.

Financial Dependence and Growth

Abstract: Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

R&D Spillovers and the Geography of Innovation and Production

Abstract: Previous research has indicated that investment in R&D by private firms and universities can lead to knowledge spillover, which can lead to exploitation from other third-party firms. If the ability of these third-party firms to acquire knowledge spillovers is influenced by their proximity to the knowledge source, then geographic clustering should be observable, especially in industries where access to knowledge spillovers is vital. The spatial distribution of innovation activity and the geographic concentration of production are examined, using three sources of economic knowledge: industry R&D, skilled labor, and the size of the pool of basic science for a specific industry. Results show that the propensity for innovative activity to cluster spatially is more attributable to the influence of knowledge spillovers and not merely the geographic concentration of production. (SFL)

The Endogeneity of the Optimum Currency Area Criteria

Abstract: A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles. It follows that countries are more likely to satisfy the criteria for entry into a currency union after taking steps toward economic integration than before.

Trust in Large Organizations

Abstract: Several authors suggest that trust is an important determinant of cooperation between strangers in a society, and therefore of performance of social institutions. We argue that trust should be particularly important for the performance of large organizations. In a cross-section of countries, evidence on government performance, participation in civic and professional societies, importance of large firms, and the performance of social institutions more generally supports this hypothesis. Moreover, trust is lower in countries with dominant hierarchical religions, which may have deterred networks of cooperation trust hold up remarkably well on a cross-section of countries.

Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers

Abstract: The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

Social Exchange in Organizations: Perceived Organizational Support, Leader-Member Exchange, and Employee Reciprocity

Abstract: Whether Leader-Member Exchange (LMX) is a unidimensional or a multidimensional construct was assessed through the development and validation of a multidimensional measure. Item analysis involving 302 working students, followed by construct and criterion-related validation using 249 employees representing two organizations resulted in a multidimensional LMX scale. The results provided support for the affect, loyalty, and contribution dimensions identified by Dienesch and Liden (1986), as well as a fourth dimension, professional respect.

Resources and Relationships: Social Networks and Mobility in the Workplace

Abstract: This paper examines how the structure and content of individuals' networks on the job affect intraorganizational mobility. Consistent with prior research, we find that mobility is enhanced by having large, dense networks of informal ties for acquiring information and resources. However, studies of networks and organizational careers have overlooked the importance of informal ties in transmitting social identity and normative expectations within organizations, which is facilitated by networks with the opposite features: smaller size and greater density. We use this argument as the basis for developing a typology of network contents, and we document this interaction between network structure and content in analyses of mobility among employees of a high technology firm. We also show how the effects of tie duration on mobility vary across types of network ties. The implications of these findings for theory and research on networks and organizational mobility are discussed.

Where Has All the Education Gone

Abstract: How to explain the surprising finding that more education did not lead to faster economic growth? Cross-national data on economic growth rates show that increases in educational capital resulting from improvements in the educational attainment of the labor force have had no positive impact on the growth rate of output per worker. In fact, contends Pritchett, the estimated impact of growth of human capital on conventional nonregression growth accounting measures of total factor productivity is large, strongly significant, and negative. Needless to say, this at least appears to contradict the current conventional wisdom in development circles about education's importance for growth. After establishing that this negative result about the education-growth linkage is robust, credible, and consistent with previous literature, Pritchett explores three possible explanations that reconcile the abundant evidence about wage gains from schooling for individuals with the lack of schooling impact on aggregate growth: - That schooling creates no human capital. Schooling may not actually raise cognitive skills or productivity but schooling may nevertheless raise the private wage because to employers it signals a positive characteristic like ambition or innate ability. - That the marginal returns to education are falling rapidly where demand for educated labor is stagnant. Expanding the supply of educated labor where there is stagnant demand for it causes the rate of return to education to fall rapidly, particularly where the sluggish demand is due to limited adoption of innovations. - That the institutional environments in many countries have been sufficiently perverse that the human capital accumulated has been applied to activities that served to reduce economic growth. In other words, possibly education does raise productivity, and there is demand for this more productive educated labor, but demand for educated labor comes from individually remunerative but socially wasteful or counterproductive activities - a bloated bureaucracy, for example, or overmanned state enterprises in countries where the government is the employer of last resort - so that while individuals' wages go up with education, output stagnates, or even falls. This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to investigate the determinants of economic growth.

Globalization, Outsourcing, and Wage Inequality

Abstract: There is considerable debate over whether international trade has contributed to the declining economic fortunes of less skilled workers One issue that has become lost in the current discussion is how firms respond to import competition and how these responses, in turn, are transmitted to the labor market In previous work, we have argued that outsourcing, by which we mean the import of intermediate inputs by domestic firms, has contributed to an increase in the relative demand for skilled labor in the United States If firms respond to import competition from low-wage countries by moving non- skill-intensive activities abroad, then trade will shift employment towards skilled workers within industries In this paper, we extend our previous work by combining new import data from the revised NBER trade database with disaggregated data on input purchases from the Census of Manufactures We construct industry-by-industry estimates of outsourcing for the period 1972-1990 and reexamine whether outsourcing has contributed to an increase in relative demand for skilled labor Our main finding is that outsourcing can account for 31-51% of the increase in the relative demand for skilled labor that occurred in US manufacturing industries during the 1980s, compared to our previous estimate of 15-33%

Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations

Abstract: Using data for the G7 countries, I estimate conditional correlations of employment and productivity, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard Real Business Cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks, (b) the impulse responses show a persistent decline of employment in response to a positive technology shock, and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major postwar cyclical episodes. A simple model with monopolistic competition, sticky prices, and variable effort is shown to be able to account for the empirical findings.

Goods Prices and Exchange Rates: What Have We Learned?

Abstract: Import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country. Recent research indicates that common-currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets. This evidence suggests that incomplete pass-through is a consequence of third-degree price discrimination. While distance matters for market segmentation, borders have independent effects. The source of the border effect has not been clearly identified. Furthermore, there is little evidence yet to suggest substantial market power is implied by the observed price discrimination.

Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis

Abstract: An analysis of the quantitative effects of agency costs in a real business cycle model, showing that these costs can explain why output growth displays positive autocorrelation at short horizons.

Inequality and Growth

Abstract: Using two unifying models and an empirical exercise, this paper present and extends the main theories linking income distribution and growth, as well as the relevant empirical evidence. The first model integrates the political economy and imperfect capital markets theories. It allows for explicit departures from perfect democracy and embodies the tradeoff between the growth costs and benefits of redistribution through taxes, land reform or public schooling: such policies simultaneously depress savings incentives and ease wealth constraints which impede investment by the poor. The second model is a growth version of the prisoner's dilemma which captures the essence of theories where sociopolitical conflict reduces the security of property rights thereby discouraging accumulation. The economy's growth rate is shown to fall with interest groups' rent-seeking abilities, as well as with the gap between rich and poor. It is not income inequality per se that matters, but inequality in the relative distribution of earnings and political power. For each of the three channels of political economy, capital markets and social conflict, the empirical evidence is surveyed and discussed in conjunction with theoretical analysis. Finally, the possibility of multiple steady-states leads me to to raise and take up a new empirical issue: are cross-country differences in inequality permanent, or gradually narrowing? Equivalently, is there conver- gence not only in first moments (GDP per capita), but convergence in distribution?

Company-Scientist Locational Links: The Case of Biotechnology

Abstract: In recent years, the significance of geography among firms has declined due to the introduction of electronic methods of communication. However, with the increasing presence of the biotechnology industry, with its affiliated university-based scientists, the issue of geography is proposed as a significant issue for consideration. Most notably, researchers cite that the role of the scientist within the firm impacts the geographic proximity between the firm and the scientist. The types of links between scientists and firms are examined, drawing on a database of biotech firms that have issued IPOs. The data analyses indicate that firm proximity is often influenced not only by the scientist's role in the firm, but also by his or her status in the scientific community and by his or her age. Although past studies have cited the relationship between informal knowledge spillovers and proximity, the current research suggests that geographic proximity plays a less significant role when knowledge is transmitted through formal ties between scientists and corporations. Areas of future research are identified, including the impact of factors such as the proximity of other firm locations and research institutions, and how the role of geography differs between regions. (AKP)

Children and Their Parents' Labor Supply: Evidence from Exogenous Variation in Family Size

Abstract: Although theoretical models of labor supply and the family are well developed, there are few credible estimates of key empirical relationships in the work-family nexus. This study uses a new instrumental variable, the sex composition of the first two births in families with at least two children, to estimate the effect of additional children on parents' labor supply. Instrumental variables estimates using the sex mix are substantial but smaller than the corresponding ordinary least squares (OLS) estimates. Moreover, unlike the OLS estimates, the female labor supply effects estimated using sex-mix instruments appear to be absent among more educated women and women with high-wage husbands. We also find that married women who have a third child reduce their labor supply by as much as women in the full sample, while there is no relationship between wives' child-bearing and husbands' labor supply. Finally results to estimates produced using twins to generate instruments. Estimates using twins instruments are very close to the estimates generated by sex-mix instruments, once the estimators are corrected for differences in the ages of children whose birth was caused by the instruments. The estimates imply that the labor supply consequences of child-bearing disappear by the time the child is about 13 years old.

Why Do Firms Train? Theory and Evidence

Abstract: This paper offers and tests a theory of training whereby workers do not pay for general training they receive. The crucial ingredient in our model is that the current employer has superior information about the worker's ability relative to other firms. This informational advantage gives the employer an ex post monopsony power over the worker which encourages the firm to provide training. We show that the model can lead to multiple equilibria. In one equilibrium quits are endogenously high, and as a result employers have limited monopsony power and are willing to supply only little training, while in another equilibrium quits are low and training high. We also derive predictions from our model not shared by other explanations of firm sponsored training. Using microdata from Germany, we show that the predictions of the specific human capital model are rejected, while our model receives support from the data.

Cash Flow and Investment: Evidence from Internal Capital Markets

Abstract: Using data from the 1986 oil price decrease, I examine the capital expenditures of non-oil subsidiaries of oil companies. I test the joint hypothesis that 1) a decrease in cash/collateral decreases investment, holding fixed the profitability of investment, and 2) the finance costs of different parts of the same corporation are interdependent. The results support this joint hypothesis: oil companies significantly reduced their non-oil investment compared to the median industry investment. The 1986 decline in investment was concentrated in non-oil units that were subsidized by the rest of the company in 1985.

On the Association between Voluntary Disclosure and Earnings Management

Abstract: This paper investigates the association between corporate voluntary disclosure and management's discretion over accounting choices. In particular, it examines the role of earnings management in mitigating costs associated with management earnings forecast errors. The empirical results are consistent with the prediction that managers, fearing costly legal actions by shareholders and loss of reputation for credibility, use discretionary accruals to reduce their forecasting errors. Specifically, the paper documents that managers who overestimate the earnings number manage reported earnings upward, and that the extent of discretionary accruals is associated with various securities litigation cost factors and the amount of management's accounting flexibility. Having identified the role of accounting discretion in mitigating costs associated with management earnings forecast errors, the study raises the possibility that the degree of accounting discretion affects corporate voluntary disclosure policies.

Financial Crises in Emerging Markets: The Lessons from 1995

Abstract: In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.

Marketing and Discontinuous Innovation: The Probe and Learn Process

Abstract: The disappointing performance of U.S. firms during the 1980s in technology-intensive, global markets (such as consumer electronics, office and factory automation, and semiconductor memories) has been widely attributed to a failure to continuously and incrementally improve products and processes. In "The Breakthrough Illusion", Florida and Kenney wrote that "The United States makes the breakthroughs, while other countries, especially Japan, provide the follow-through" on which competitive advantage is built. Gomory made a similar point. contrasting "revolutionary" innovations with "another, wholly different, less dramatic, and rather grueling process of innovation, which is far more critical to commercializing technology profitably...Its hallmark is incremental improvement, not breakthrough. It requires turning products over again and again, getting the new model out, starting work on an even newer one. This may all sound dull, but the achievements are exhilarating." In "The Machine that Changed the World", the most influential work on the subject of the 1980s, Womack, Jones, and Roos measured the competitive effects of this lack of attention to continuous incremental improvement throiugh a benchmarking study of the global automobile industry. Other studies reinforce this message: compared to their Japanese competitors, U.S. firms lagged in cost, quality, and speed; and in large measure, the problem stemmed from a relative........

Power in a Theory of the Firm

Abstract: Transactions take place in the firm rather than in the market because the firm offers agents" who make specific investments power. Past literature emphasizes the allocation of ownership as the" primary mechanism by which the firm does this. Within the contractibility assumptions of this" literature, we identify a potentially superior mechanism, the regulation of access to critical resources. " Access can be better than ownership because: i) the power agents get from access is more contingent" on them making the right investment; ii) ownership has adverse effects on the incentive to specialize. " The theory explains the importance of internal organization and third party ownership. "

Financial Capital, Human Capital, and the Transition to Self-Employment:Evidence from Intergenerational Links

Abstract: The environment for business creation is central to economic policy, as entrepreneurs are believed to be forces of innovation, employment and economic dynamism. We use data from the National Longitudinal Surveys (NLS) to investigate the relative importance of financial and human capital exploiting the variation provided by intergenerational links. Specifically, we estimate the impacts of parental wealth and human capital on the probability that an individual will make the transition from a wage and salary job to self-employment. We find that young men's own financial assets exert a statistically significant, but quantitatively modest effect on the transition to self-employment. In contrast, the capital of parents exerts a large influence. Parents' strongest effect runs not through financial means, but rather through human capital, i.e., the intergenerational correlation in self-employment. This link is even stronger along gender lines.

Trade Credit: Theories and Evidence

Abstract: In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term trade credit may be routinely used to minimize transactions costs, medium term borrowing against trade credit is a form of financing of last resort. Suppliers lend to firms no one else lends to because they may have a comparative advantage in getting information about buyers cheaply, they have a better ability to liquidate goods, and they have a greater implicit equity stake in the firm's long term survival. We find some evidence consistent with the use of trade credit as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This suggests that firms may intermediate between institutional creditors and other firms who have limited access to financial institutions.

Altruism in Anonymous Dictator Games

Abstract: We conduct double-anonymous dictator experiments to explore the role of altruism in motivating subjects’ behavior. We vary the extent to which an anonymous recipient is deserving of aid and investigate its effect on the allocation of a fixed pie by student subjects. This is accomplished by including as treatments: (1) an anonymous student subject and (2) an established charity. We find that a significant increase in donations occurs when we increase the extent to which a donation goes to a recipient generally agreed to be “deserving.” We conclude that subjects are rational in the way they incorporate fairness into their decisions.

What Can New Survey Data Tell Us About Recent Changes in Distribution and Poverty

Abstract: Is it true that the poor have lost ground, even as average living standards have risen? No. Poor people typically share in rising average living standards. It has been claimed that in recent times the poor have lost ground, both relatively and absolutely, even as average standards of living were rising. Ravallion and Chen test that claim, using more than 100 household surveys for more than 40 countries. Overall there was a small decrease in poverty incidence in 1987-93, though experiences differed across regions and countries. There was no general tendency for inequality or polarization to increase with growth. Distribution improves as often as it worsens in growing economies, and negative growth often appears to be highly detrimental to distribution. Poor people typically do share in rising average living standards. This holds in all regions. This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to monitor progress in reducing poverty in the world.

Why Do Security Prices Change? A Transaction-Level Analysis of Nyse Stocks

Abstract: This paper develops a structural model of intraday price formation that embodies both information shocks and microstructure effects in an internally consistent, unified setting. The model allows us to better understand the observed intra-day patterns in bid-ask spreads, price volatility, transaction costs, as well as the autocorrelations of transaction returns and quote revisions. For example, the model simultaneously sheds light on why, over the day, (i) the variance of transaction price changes is U-shaped while the variance of ask price changes is declining, (ii) the bid-ask spread is U-shaped although information asymmetry and uncertainty over fundamentals is decreasing, and (iii) the autocorrelations of transaction price changes are large and negative, yet the autocorrelations of ask price changes are small and negative. In addition, the model s parameters also provide a natural metric of price discovery and effective trading costs, which may prove useful in future studies.

Institutions, Financial Markets and Firm Debt Maturity

Abstract: Do firms in developing countries use less long term debt than similar firms in industrial countries? This paper investigates the role of institutional factors in explaining firms' choice of debt maturity in a sample of 30 countries during 1980-91. Demirguc-Kunt and Maksimovic examine the maturity of firm debt in 30 countries during the period 1980-91. They find systematic differences in the use of long-term debt between industrial and developing countries and between small and large firms. In industrial countries, firms have more long-term debt and a greater proportion of their total debt is held as long-term debt. Large firms have more long-term debt, as a proportion of total assets and debt, than smaller firms do. The authors try to explain the variations in debt composition by differences in the effectiveness of legal systems, the development of stock markets and the banking sector, the level of government subsidies, and firm characteristics. In countries with an effective legal system, both large and small firms have more long-term debt relative to assets and their debt is of longer maturity. Both large and small firms in countries with a tradition of common law use less long-term debt, relative to their assets, than do firms in countries with a tradition of civil law. Large firms in common law countries also use less short-term debt. In countries with active stock markets, large firms have more long-term debt and debt of longer maturity. Neither the level of activity nor the size of the market is correlated with financing choices of small firms. By contrast, in countries with large banking sectors, small firms have less short-term debt and their debt is of longer maturity. Variation in the size of the banking sector does not have a corresponding correlation with the capital structures of large firms. Government subsidies to industry increase long-term debt levels of both small and large firms. For all firms, inflation is associated with less use of long-term debt. The authors also find evidence of maturity-matching for both large and small firms. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the impact of institutional constraints on firms' financing choices. The study was funded by the Bank's Research Support Budget under the research project Term Finance: Theory and Evidence (RPO 679-62).