Showing papers in "Social Science Research Network in 2008"
TL;DR: In this paper, the authors review the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it, and illustrate the dangers by replicating two early applications to economic growth: Forbes (2000) on income inequality and Levine, Loayza, and Beck (2000).
Abstract: The Difference and System generalized method of moments (GMM) estimators are growing in popularity, thanks in part to specialized software. But as implemented in these packages, the estimators easily generate results by default that are at once invalid yet appear valid in specification tests. The culprit is their tendency to generate instruments that are a) numerous and, in System GMM, b) suspect. A large collection of instruments, even if individually valid, can be collectively invalid in finite samples because they overfit endogenous variables. They also weaken the Hansen test of overidentifying restrictions, which is commonly relied upon to check instrument validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating two early applications to economic growth: Forbes (2000) on income inequality and Levine, Loayza, and Beck (2000) on financial sector development. Results in both papers appear driven by previously undetected endogeneity.
3,350 citations
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TL;DR: In this paper, the authors address the question of how and why corporate social responsibility (CSR) differs among countries and how it changes, and apply two schools of thought in institutional theory to conceptualize the differences between CSR in the USA and Europe.
Abstract: We address the question of how and why corporate social responsibility (CSR) differs among countries and how and why it changes. Applying two schools of thought in institutional theory we conceptualize, first, the differences between CSR in the USA and Europe and, second, the recent rise of CSR in Europe. We also delineate the potential of our framework for application to other parts of the global economy.
3,300 citations
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TL;DR: It is shown that more efficient sampling designs exist for making valid inferences, such as sampling all available events and a tiny fraction of nonevents, which enables scholars to save as much as 99% of their (nonfixed) data collection costs or to collect much more meaningful explanatory variables.
Abstract: We study rare events data, binary dependent variables with dozens to thousands of times fewer ones (events, such as wars, vetoes, cases of political activism, or epidemiological infections) than zeros ("nonevents"). In many literatures, these variables have proven difficult to explain and predict, a problem that seems to have at least two sources. First, popular statistical procedures, such as logistic regression, can sharply underestimate the probability of rare events. We recommend corrections that outperform existing methods and change the estimates of absolute and relative risks by as much as some estimated effects reported in the literature. Second, commonly used data collection strategies are grossly inefficient for rare events data. The fear of collecting data with too few events has led to data collections with huge numbers of observations but relatively few, and poorly measured, explanatory variables, such as in international conflict data with more than a quarter-million dyads, only a few of which are at war. As it turns out, more efficient sampling designs exist for making valid inferences, such as sampling all variable events (e.g., wars) and a tiny fraction of nonevents (peace). This enables scholars to save as much as 99% of their (nonfixed) data collection costs or to collect much more meaningful explanatory variables. We provide methods that link these two results, enabling both types of corrections to work simultaneously, and software that implements the methods developed.
3,170 citations
TL;DR: The authors summarizes and explains the main events of the liquidity and credit crunch in 2007-08, starting with the trends leading up to the crisis and explaining how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
Abstract: This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
3,033 citations
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TL;DR: This article offers an approach, built on the technique of statistical simulation, to extract the currently overlooked information from any statistical method and to interpret and present it in a reader-friendly manner.
Abstract: Social Scientists rarely take full advantage of the information available in their statistical results. As a consequence, they miss opportunities to present quantities that are of greatest substantive interest for their research and express the appropriate degree of certainty about these quantities. In this article, we offer an approach, built on the technique of statistical simulation, to extract the currently overlooked information from any statistical method and to interpret and present it in a reader-friendly manner. Using this technique requires some expertise, which we try to provide herein, but its application should make the results of quantitative articles more informative and transparent. To illustrate our recommendations, we replicate the results of several published works, showing in each case how the authors' own conclusions can be expressed more sharply and informatively, and, without changing any data or statistical assumptions, how our approach reveals important new information about the research questions at hand. We also offer very easy-to-use Clarify software that implements our suggestions.
2,938 citations
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TL;DR: The authors investigate how external and internal rewards work in concert to produce (dis)honesty and suggest that dishonesty governed by self-concept maintenance is likely to be prevalent in the economy, and understand it has important implications for designing effective methods to curb dishonesty.
Abstract: Dishonesty plays a large role in the economy. Causes for (dis)honest behavior seem to be based partially on external rewards, and partially on internal rewards. Here, we investigate how such external and internal rewards work in concert to produce (dis)honesty. We propose and test a theory of self-concept maintenance that allows people to engage to some level in dishonest behavior, thereby benefiting from external benefits of dishonesty, while maintaining their positive view about themselves in terms of being honest individuals. The results show that (1) given the opportunity to engage in beneficial dishonesty, people will engage in such behaviors; (2) the amount of dishonesty is largely insensitive to either the expected external benefits or the costs associated with the deceptive acts; (3) people know about their actions but do not update their self-concepts; (4) causing people to become more aware of their internal standards for honesty decreases their tendency for deception; and (5) increasing the "degrees of freedom" that people have to interpret their actions increases their tendency for deception. We suggest that dishonesty governed by self-concept maintenance is likely to be prevalent in the economy, and understanding it has important implications for designing effective methods to curb dishonesty.Former working paper titles:“(Dis)Honesty: A Combination of Internal and External Rewards” and "Almost Honest: Internal and External Motives for Honesty")
2,056 citations
TL;DR: The average cash-to-assets ratio for U.S. industrial firms more than doubled from 1980 to 2006 as mentioned in this paper, and the average firm can pay back all of its debt obligations with its cash holdings; in other words, the average firms has no leverage if leverage is measured as net debt.
Abstract: The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase in cash holdings is that at the end of the sample period, the average firm can pay back all of its debt obligations with its cash holdings; in other words, the average firm has no leverage if leverage is measured as net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, and it is much more pronounced for firms that do not pay dividends and for firms in industries whose cash flows became riskier. The average cash ratio increases over the sample period because firms change: their cash flows become riskier, they hold fewer inventories and accounts receivable, and they are increasingly RD in contrast, in our empirical tests, agency considerations are not successful in explaining the increase.
2,016 citations
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TL;DR: In this article, the authors present evidence from a survey of 872 employees of four firms that ethical cork climates are both multidimensional and multidetermined, and that there is variance in the ethical within organizations by position, tenure, and workgroup membership.
Abstract: Using a modification of a recently developed measure of ethical climates, this paper presents evidence from a survey of 872 employees of four firms that ethical cork climates are both multidimensional and multidetermined. The study demonstrates that organizations have distinct types of ethical climates and that there is variance in the ethical within organizations by position, tenure, and workgroup membership. Five empirically derived dimensions of ethical climate are described: law and code, caring, instrumentalism, independence, and rules. Analyses of variance reveal significant differences in ethical climates both across and within firms. A theory of ethical climates is developed from organizational and economic theory to describe the determinants of ethical climates in organizations. In particular, the sociocultural environment, organizational form, and organization-specific history are identified as determinants of ethical climates in organizations. The implications of ethical climate for organizational theory are also discussed.
2,000 citations
TL;DR: In this article, the authors provide a simple and intuitive measure of interdependence of asset returns and/or volatilities, and formulate and examine precise and separate measures of return spillovers and volatility spillovers.
Abstract: We provide a simple and intuitive measure of interdependence of asset returns and/or volatilities. In particular, we formulate and examine precise and separate measures of return spillovers and volatility spillovers. Our framework facilitates study of both non-crisis and crisis episodes, including trends and bursts in spillovers, and both turn out to be empirically important. In particular, in an analysis of sixteen global equity markets from the early 1990s to the present, we find striking evidence of divergent behavior in the dynamics of return spillovers vs. volatility spillovers: Return spillovers display a gently increasing trend but no bursts, whereas volatility spillovers display no trend but clear bursts.
1,743 citations
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TL;DR: This work adapts an algorithm and uses it to implement a general-purpose, multiple imputation model for missing data that is considerably faster and easier to use than the leading method recommended in the statistics literature.
Abstract: We propose a remedy for the discrepancy between the way political scientists analyze data with missing values and the recommendations of the statistics community. Methodologists and statisticians agree that "multiple imputation" is a superior approach to the problem of missing data scattered through one's explanatory and dependent variables than the methods currently used in applied data analysis. The discrepancy occurs because the computational algorithms used to apply the best multiple imputation models have been slow, difficult to implement, impossible to run with existing commercial statistical packages, and have demanded considerable expertise. We adapt an algorithm and use it to implement a general-purpose, multiple imputation model for missing data. This algorithm is considerably easier to use than the leading method recommended in statistics literature. We also quantify the risks of current missing data practices, illustrate how to use the new procedure, and evaluate this alternative through simulated data as well as actual empirical examples. Finally, we offer easy-to-use that implements our suggested methods.
1,691 citations
TL;DR: Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous as discussed by the authors.
Abstract: Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.
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TL;DR: A survey of the literature on flexibility in manufacturing can be found in this article, where several kinds of flexibilities in manufacturing are defined carefully along with their purposes, the means to obtain them, and some suggested measurements and valuations.
Abstract: This article is an attempt to survey the vast literature on flexibility in manufacturing that has accumulated over the last 10 to 20 years. The survey begins with a brief review of the classical literature on flexibility in economics and organization theory, which provides a background for manufacturing flexibility. Several kinds of flexibilities in manufacturing are then defined carefully along with their purposes, the means to obtain them, and some suggested measurements and valuations. Then we examine the interrelationships among the several flexibilities. Various empirical studies and analytical/optimization models dealing with these flexibilities are reported and discussed. The article concludes with suggestions for some possible future research directions.
TL;DR: In this paper, the authors examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation, and show that the tendency for firms to tradeoff real versus accruality-based earnings management activities around SEO's varies cross-sectionally.
Abstract: We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firms ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management. Third, we compare the economic costs of accrual versus real earnings management around SEOs, by examining the effect of each type of earnings management on the firms future performance. We provide the first evidence on this important issue by showing that the costs of real earnings management are likely greater than the costs of accrual earnings management, at least in the SEO context.
TL;DR: This article found that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees.
Abstract: We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that CEO turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.
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TL;DR: In this article, the authors present a new database on the timing of systemic banking crises and policy responses to resolve them, with detailed data on crisis containment and resolution policies for 42 crisis episodes, including currency crises and sovereign debt crises.
Abstract: This paper presents a new database on the timing of systemic banking crises and policy responses to resolve them. The database covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and sovereign debt crises. The database extends and builds on the Caprio, Klingebiel, Laeven, and Noguera (2005) banking crisis database, and is the most complete and detailed database on banking crises to date.
TL;DR: In this paper, the authors use an organizing framework based on institutional economics, in combination with lessons from cross-cultural psychology, to consider the social dimensions of entrepreneurship and find that entrepreneurs may partially overcome institutional deficiencies by relying on social networks that facilitate reputational bonding as a means for resource sharing.
Abstract: Schumpeter’s canonical depiction of the entrepreneur as an agent of social and economic change implies that entrepreneurs are especially sensitive to the social environment. We use an organizing framework based on institutional economics, in combination with lessons from cross-cultural psychology, to consider the social dimensions of entrepreneurship. The level and modes of entrepreneurial activity are affected by the surrounding culture and by legal rules. Entrepreneurs may partially overcome institutional deficiencies by relying on social networks that facilitate reputational bonding as a means for resource-sharing.
TL;DR: In this paper, the authors argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy.
Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.
TL;DR: In this paper, the authors investigated the ability of a two-sector model to quantify the contribution of the housing market to business fluctuations using U.S. data and Bayesian methods and found that a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector.
Abstract: The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.
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TL;DR: RMatching is an R package which provides functions for multivariate and propensity score matching and for finding optimal covariate balance based on a genetic search algorithm.
Abstract: Matching is an R package which provides functions for multivariate and propensity score matching and for finding optimal covariate balance based on a genetic search algorithm. A variety of univariate and multivariate metrics to determine if balance actually has been obtained are provided. The underlying matching algorithm is written in C++, makes extensive use of system BLAS and scales efficiently with dataset size. The genetic algorithm which finds optimal balance is parallelized and can make use of multiple CPUs or a cluster of computers. A large number of options are provided which control exactly how the matching is conducted and how balance is evaluated.
TL;DR: This article explored the interface between personality psychology and economics and examined the predictive power of personality and the stability of personality traits over the life cycle, and developed simple analytical frameworks for interpreting the evidence in personality psychology.
Abstract: This paper explores the interface between personality psychology and economics. We examine the predictive power of personality and the stability of personality traits over the life cycle. We develop simple analytical frameworks for interpreting the evidence in personality psychology and suggest promising avenues for future research.
TL;DR: The authors examined the factors behind the rapid increase in internationally traded food prices since 2002 and estimated the contribution of various factors such as the increased production of biofuels from food grains and oilseeds, the weak dollar, and the increase in food production costs due to higher energy prices.
Abstract: The rapid rise in food prices has been a burden on the poor in developing countries, who spend roughly half of their household incomes on food. This paper examines the factors behind the rapid increase in internationally traded food prices since 2002 and estimates the contribution of various factors such as the increased production of biofuels from food grains and oilseeds, the weak dollar, and the increase in food production costs due to higher energy prices. It concludes that the most important factor was the large increase in biofuels production in the U.S. and the EU. Without these increases, global wheat and maize stocks would not have declined appreciably, oilseed prices would not have tripled, and price increases due to other factors, such as droughts, would have been more moderate. Recent export bans and speculative activities would probably not have occurred because they were largely responses to rising prices. While it is difficult to compare the results of this study with those of other studies due to differences in methodologies, time periods and prices considered, many other studies have also recognized biofuels production as a major driver of food prices. The contribution of biofuels to the rise in food prices raises an important policy issue, since much of the increase was due to EU and U.S. government policies that provided incentives to biofuels production, and biofuels policies which subsidize production need to be reconsidered in light of their impact on food prices.
TL;DR: In this article, the authors used a large hand-collected dataset from 2001 to 2006 to find that hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two thirds of the cases.
Abstract: Using a large hand-collected dataset from 2001 to 2006, we find that activist hedge funds in the U.S. 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.
TL;DR: This paper reviewed the results from experimental measures of risk aversion for evidence of systematic differences in the behavior of men and women, and found that women are more averse to risk than men.
Abstract: Publisher Summary This chapter reviews the results from experimental measures of risk aversion for evidence of systematic differences in the behavior of men and women. In most studies, women are found to be more averse to risk than men. Studies with contextual frames show less consistent results. Whether men and women systematically differ in their responses to risk is an important economic question. If women are more sensitive to risk than men, this will be reflected in all aspects of their decision making, including choice of profession (and so earnings), investment decisions, and what products to buy. Several recent studies investigate this difference directly. Most experiments that investigate preferences over risky choices deal with the question of whether people make choices that are consistent with expected utility maximization.
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TL;DR: This article found that people's propensity to gamble and their investment decisions are correlated, and that individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns.
Abstract: This study shows that people's propensity to gamble and their investment decisions are correlated. At an aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, these investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks under-perform, gambling-related under-performance is greater among low-income investors who excessively overweight lottery-type stocks. Collectively, these results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.
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TL;DR: The authors examined the influence of analysts' influence on managers' earnings management decisions and found that firms followed by more analysts manage their earnings less, while firms with more experienced analysts perform better than firms with less experienced analysts.
Abstract: What is the role of information intermediaries in corporate governance? This paper examines equity analysts' influence on managers' earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address potential endogeneity problem of analyst coverage, I use two instrumental variables that are based on change in broker size and on firm's inclusion in the S&P 500 index, and find that the result is robust. Finally, given the size of coverage, analysts from top brokers and more experienced analysts have stronger effect against earnings management.
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TL;DR: In this paper, the authors examined the effect of environmental policies on technological innovation in the specific case of renewable energy, using patent data on a panel of 25 countries over the period 1978-2003.
Abstract: This paper examines the effect of environmental policies on technological innovation in the specific case of renewable energy. The analysis is conducted using patent data on a panel of 25 countries over the period 1978-2003. It is found that public policy plays a significant role in determining patent applications. Different types of policy instruments are effective for different renewable energy sources.
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TL;DR: In this article, the authors analyzed the impact of a leading entrepreneurship education program on college students' entrepreneurship skills and motivation using an instrumental variables approach in a difference-in-differences framework.
Abstract: This paper analyzes the impact of a leading entrepreneurship education program on college students’ entrepreneurship skills and motivation using an instrumental variables approach in a difference-in-differences framework We exploit that the program was offered to students at one location of a school but not at another location of the same school Location choice (and thereby treatment) is instrumented by the relative distance of locations to parents’ place of residence The results show that the program does not have the intended effects: the effect on students’ self-assessed entrepreneurial skills is insignificant and the effect on the intention to become an entrepreneur is even negative
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TL;DR: In this article, it is argued that no simple correlation can be established between corporate social performance and corporate financial performance, and it is suggested that corporate citizenship programs can be designed to help companies address reputational threats.
Abstract: It is argued that no simple correlation can be established between corporate social performance and corporate financial performance. The activities that generate CSP do not directly impact the company's financial performance, but instead affect the bottom line via its stock of reputational capital - the financial value of its intangible assets. It is suggested that corporate citizenship programs can be designed to help companies address reputational threats and opportunities to achieve reputational gains while mitigating reputational losses.
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TL;DR: In this paper, the authors use data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters of the model - the value of non-market activity and the bargaining weights.
Abstract: Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We use data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters of the model - the value of non-market activity and the bargaining weights. Our calibration implies that the model is, in fact, consistent with the data.
TL;DR: The authors argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model.
Abstract: It has become standard practice in the cross-sectional asset-pricing literature to evaluate models based on how well they explain average returns on size-B/M portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models don't work as well as originally advertised.