Existing methods for the measurement of technical efficiency in the dynamic production models obtain it from the implied distance functions without making use of the information about intertemporal economic behavior in the estimation beyond an indirect appeal to duality. The main limitation of such an estimation approach is that it does not allow for the dynamic evolution of efficiency that is explicitly optimized by the firm. This paper introduces a new conceptualization of efficiency that directly enters the firm's intertemporal production decisions and is both explicitly costly and endogenously determined. We build a moment-based multiple-equation system estimation procedure that incorporates both the dynamic and static optimality conditions derived from the firm's intertemporal expected cost minimization. We operationalize our methodology using a modified version of a Bayesian Exponentially Tilted Empirical Likelihood adjusted for the presence of dynamic latent variables in the model, which we showcase using the 1960-2004 U.S. agricultural farm production data. We find that allowing for potential endogenous adjustments in efficiency over time produces significantly higher estimates of technical efficiency, which is likely due to inherent inability of the more standard exogenous-efficiency model to properly credit firms for incurring efficiency-improvement adjustment costs. Our results also suggest material improvements in efficiency over time at an about 2.6% average annual rate, which contrasts with near-zero estimates of the exogenous efficiency change.
{"title":"Endogenous Dynamic Efficiency in the Intertemporal Optimization Models of Firm Behavior","authors":"M. Tsionas, Emir Malikov, S. Kumbhakar","doi":"10.2139/ssrn.3508450","DOIUrl":"https://doi.org/10.2139/ssrn.3508450","url":null,"abstract":"Existing methods for the measurement of technical efficiency in the dynamic production models obtain it from the implied distance functions without making use of the information about intertemporal economic behavior in the estimation beyond an indirect appeal to duality. The main limitation of such an estimation approach is that it does not allow for the dynamic evolution of efficiency that is explicitly optimized by the firm. This paper introduces a new conceptualization of efficiency that directly enters the firm's intertemporal production decisions and is both explicitly costly and endogenously determined. We build a moment-based multiple-equation system estimation procedure that incorporates both the dynamic and static optimality conditions derived from the firm's intertemporal expected cost minimization. We operationalize our methodology using a modified version of a Bayesian Exponentially Tilted Empirical Likelihood adjusted for the presence of dynamic latent variables in the model, which we showcase using the 1960-2004 U.S. agricultural farm production data. We find that allowing for potential endogenous adjustments in efficiency over time produces significantly higher estimates of technical efficiency, which is likely due to inherent inability of the more standard exogenous-efficiency model to properly credit firms for incurring efficiency-improvement adjustment costs. Our results also suggest material improvements in efficiency over time at an about 2.6% average annual rate, which contrasts with near-zero estimates of the exogenous efficiency change.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"10 33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124732436","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study attempts to asses firms’ financial conditions to explain why they use myopic R&D cuts. Contrary to prior literature, this study shows that the current financial indicators of firms are also significant determinants of R&D myopic management along with stock market. Financial indicators such as Leverage, cash holding, earned-to-capital ratio, market-to-book ratio, sales growth, dividend, tangibility, age, and size of firms significantly influence the probability of being myopic firms and R&D investment decisions. Further, we show that U-shaped and inverted U-shaped relationship of different determinants of R&D investments provide a better description for mix results of prior literature.
{"title":"Myopic Management Theory and R&D Investment Decisions","authors":"Suresh Kumar Oad Rajput, Jahanzeb Marwat, Udomsak Wongchoti","doi":"10.2139/ssrn.3491115","DOIUrl":"https://doi.org/10.2139/ssrn.3491115","url":null,"abstract":"This study attempts to asses firms’ financial conditions to explain why they use myopic R&D cuts. Contrary to prior literature, this study shows that the current financial indicators of firms are also significant determinants of R&D myopic management along with stock market. Financial indicators such as Leverage, cash holding, earned-to-capital ratio, market-to-book ratio, sales growth, dividend, tangibility, age, and size of firms significantly influence the probability of being myopic firms and R&D investment decisions. Further, we show that U-shaped and inverted U-shaped relationship of different determinants of R&D investments provide a better description for mix results of prior literature.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124080907","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I show that firms that face a reduction in credit supply reduce product creation, by using variation from US banks' exposure to the mortgage market to instrument for credit supply. The magnitude is substantial: firms facing a one-standard-deviation decrease in credit supply offered 10% fewer products. Furthermore, I show that the reduction in product offerings derives from the limited creation of new products rather than the destruction of existing ones. Motivated by these findings, I develop a model to investigate the equilibrium responses of consumers and firms. I estimate that the reduction in credit supply is responsible for a 1% drop in consumer welfare because of reduced product creation. Two types of equilibrium response are responsible for welfare loss that is smaller than a "naive" interpretation of the reduced form estimates: first, in equilibrium, consumers substitute products with other available products in the same category; and second, in equilibrium, firms' new products have lower "appeal" (quality or taste) relative to existing products.
{"title":"Consumer Welfare and Product Creation: The Credit Supply Channel","authors":"Poorya Kabir","doi":"10.2139/ssrn.3536665","DOIUrl":"https://doi.org/10.2139/ssrn.3536665","url":null,"abstract":"I show that firms that face a reduction in credit supply reduce product creation, by using variation from US banks' exposure to the mortgage market to instrument for credit supply. The magnitude is substantial: firms facing a one-standard-deviation decrease in credit supply offered 10% fewer products. Furthermore, I show that the reduction in product offerings derives from the limited creation of new products rather than the destruction of existing ones. Motivated by these findings, I develop a model to investigate the equilibrium responses of consumers and firms. I estimate that the reduction in credit supply is responsible for a 1% drop in consumer welfare because of reduced product creation. Two types of equilibrium response are responsible for welfare loss that is smaller than a \"naive\" interpretation of the reduced form estimates: first, in equilibrium, consumers substitute products with other available products in the same category; and second, in equilibrium, firms' new products have lower \"appeal\" (quality or taste) relative to existing products.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126001572","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a novel 10-K text-based model of product life cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the power of q to explain investment and reveals a natural ordering of investments over the life cycle. While R&D and CAPX sensitivity are high early in the cycle, acquisitions arise as firms mature, and divestitures and product extension investments arise as firms decline. q-sensitivities that condition on the life cycle can vary by as much as 400% from traditional sensitivities. The life cycle framework further reveals an enriched relationship between competition, investment, and corporate profits.
{"title":"Product Life Cycles in Corporate Finance","authors":"Gerard Hoberg, Vojislav Maksimovic","doi":"10.2139/SSRN.3182158","DOIUrl":"https://doi.org/10.2139/SSRN.3182158","url":null,"abstract":"\u0000 We develop a novel 10-K text-based model of product life cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the power of q to explain investment and reveals a natural ordering of investments over the life cycle. While R&D and CAPX sensitivity are high early in the cycle, acquisitions arise as firms mature, and divestitures and product extension investments arise as firms decline. q-sensitivities that condition on the life cycle can vary by as much as 400% from traditional sensitivities. The life cycle framework further reveals an enriched relationship between competition, investment, and corporate profits.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128424637","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a model to study firm relationships that endogenously determine the correlation structure of asset cash flows. Forming a relationship makes firms face the following trade-off in their valuations: On the one hand, collaboration generates an additional payoff component with a positive mean. On the other hand, a relationship makes the firms' cash flows more correlated, which lowers the investor's diversification benefit. We use our model to investigate the incentives of firms to form a relationship and to disclose their relationship to the general public. We show that disclosing relationship information can have real consequences on cash flows through affecting firm relationship at both the intensive and the extensive margins.
{"title":"Firm Relationships and Valuation","authors":"J. Mondria, Liyan Yang","doi":"10.2139/ssrn.3472332","DOIUrl":"https://doi.org/10.2139/ssrn.3472332","url":null,"abstract":"We propose a model to study firm relationships that endogenously determine the correlation structure of asset cash flows. Forming a relationship makes firms face the following trade-off in their valuations: On the one hand, collaboration generates an additional payoff component with a positive mean. On the other hand, a relationship makes the firms' cash flows more correlated, which lowers the investor's diversification benefit. We use our model to investigate the incentives of firms to form a relationship and to disclose their relationship to the general public. We show that disclosing relationship information can have real consequences on cash flows through affecting firm relationship at both the intensive and the extensive margins.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"92 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124858865","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study quantifies and decomposes the impact of increasing firm risk on different production factors. We find that a one standard deviation increase in firm-level risk reduces the total output growth rate of a firm by 1.19 percentage points, of which approximately 77% is from the reduction in total factor productivity growth, 21% is from slower labor growth and only 2% is from slower capital growth. We provide the first evidence of the relationship between firm risk and firm-level total factor productivity, and the transmission mechanisms are reduced human capital investment and a tightened financial constraint.
{"title":"How Does Firm-level Risk Affect Productivity?","authors":"Xiang Li, Dan Su","doi":"10.2139/ssrn.3637001","DOIUrl":"https://doi.org/10.2139/ssrn.3637001","url":null,"abstract":"This study quantifies and decomposes the impact of increasing firm risk on different production factors. We find that a one standard deviation increase in firm-level risk reduces the total output growth rate of a firm by 1.19 percentage points, of which approximately 77% is from the reduction in total factor productivity growth, 21% is from slower labor growth and only 2% is from slower capital growth. We provide the first evidence of the relationship between firm risk and firm-level total factor productivity, and the transmission mechanisms are reduced human capital investment and a tightened financial constraint.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128782072","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many of the most prosperous places in the U.S. are hotbeds of technology and also the home bases of companies which exercise monopoly power across much larger territories – nationally, or even globally. This paper makes four arguments about regional income disparities. First, monopoly, and the market for new prospective monopolies amplifies agglomeration economies, making locations invincible and inimitable. Second, the taxes imposed by the monopoly firms on a wide range of economic activity, together with the restrictions they are able to impose on the dissemination and use of technology, further inhibit local economic development in other places. Third, financialization – the power of the financial sector over both firms which are receiving financing and firms which are paying cash out – serves to feed these spatially concentrated monopolies at the expense of other places and industries. Finally, we conclude that the most efforts at local economic development would be best furthered by breaking up the concentrated economic power of technology and finance.
{"title":"Regional Income Disparities, Monopoly & Finance","authors":"M. Feldman, Frederick Guy, S. Iammarino","doi":"10.2139/ssrn.3463735","DOIUrl":"https://doi.org/10.2139/ssrn.3463735","url":null,"abstract":"Many of the most prosperous places in the U.S. are hotbeds of technology and also the home bases of companies which exercise monopoly power across much larger territories – nationally, or even globally. This paper makes four arguments about regional income disparities. First, monopoly, and the market for new prospective monopolies amplifies agglomeration economies, making locations invincible and inimitable. Second, the taxes imposed by the monopoly firms on a wide range of economic activity, together with the restrictions they are able to impose on the dissemination and use of technology, further inhibit local economic development in other places. Third, financialization – the power of the financial sector over both firms which are receiving financing and firms which are paying cash out – serves to feed these spatially concentrated monopolies at the expense of other places and industries. Finally, we conclude that the most efforts at local economic development would be best furthered by breaking up the concentrated economic power of technology and finance.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121251610","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates whether and how economic policy uncertainty affects corporate debt maturity. Using a cross-country firm-level dataset for France, Germany, Spain, and Italy from 1996 to 2010, we find that an increase in economic policy uncertainty is significantly associated with a shortened debt maturity. Specifically, a 1% increase in economic policy uncertainty is associated with a 0.22% decrease in the long-term debt-to-assets ratio and a 0.08% decrease in debt maturity. Moreover, the impacts of economic policy uncertainty are stronger for innovation-intensive firms. We use firms' flexibility in changing debt maturity and the deviation to leverage target to gauge the causal relationship, and identify the reduced investment and steepened term structure as transmission mechanisms.
{"title":"How Does Economic Policy Uncertainty Affect Corporate Debt Maturity?","authors":"Xiang Li, Dan Su","doi":"10.2139/ssrn.3404690","DOIUrl":"https://doi.org/10.2139/ssrn.3404690","url":null,"abstract":"This paper investigates whether and how economic policy uncertainty affects corporate debt maturity. Using a cross-country firm-level dataset for France, Germany, Spain, and Italy from 1996 to 2010, we find that an increase in economic policy uncertainty is significantly associated with a shortened debt maturity. Specifically, a 1% increase in economic policy uncertainty is associated with a 0.22% decrease in the long-term debt-to-assets ratio and a 0.08% decrease in debt maturity. Moreover, the impacts of economic policy uncertainty are stronger for innovation-intensive firms. We use firms' flexibility in changing debt maturity and the deviation to leverage target to gauge the causal relationship, and identify the reduced investment and steepened term structure as transmission mechanisms.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127096503","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Lypitka Melpomeni, Makrygiannakis Georgios, T. Papadogonas
In this paper, we investigated empirically the financial performance of energy firms in Greece for the time period 2012-2015 with the use of the well-known Altman test. The results indicated that all firms in the energy industry are financially distressed and are characterized by lack of liquidity, low productivity and high leverage for the whole time period under examination. This means that there is a clear danger of oligopoly formation in the energy market, with its negative outcomes in prices and energy provision stability. Certain policy measures are needed in order to obtain more sustainable and consumer-friendly results.
{"title":"The Performance of Energy Firms in Greece","authors":"Lypitka Melpomeni, Makrygiannakis Georgios, T. Papadogonas","doi":"10.33642/ijbass.v5n8p1","DOIUrl":"https://doi.org/10.33642/ijbass.v5n8p1","url":null,"abstract":"In this paper, we investigated empirically the financial performance of energy firms in Greece for the time period 2012-2015 with the use of the well-known Altman test. The results indicated that all firms in the energy industry are financially distressed and are characterized by lack of liquidity, low productivity and high leverage for the whole time period under examination. This means that there is a clear danger of oligopoly formation in the energy market, with its negative outcomes in prices and energy provision stability. Certain policy measures are needed in order to obtain more sustainable and consumer-friendly results.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122323567","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The increase in gold prices during the 2008-2009 financial crisis provided a positive shock to the collateral value of gold firms, in contrast to the average firm that experienced a negative liquidity shock. Using a difference-in-differences framework, we find that gold firms have more borrowing capacity with credit lines during the crisis than non-gold firms. However, this effect manifests only in non-distressed firms and firms with secured credit lines, consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior.
{"title":"Collateral, Risk, and Borrowing Capacity","authors":"Panos Markou, Ryan Williams, Jie-An Yang","doi":"10.2139/ssrn.2934447","DOIUrl":"https://doi.org/10.2139/ssrn.2934447","url":null,"abstract":"We examine the effect of risk-shifting incentives on the relation between collateral and corporate borrowing capacity. The increase in gold prices during the 2008-2009 financial crisis provided a positive shock to the collateral value of gold firms, in contrast to the average firm that experienced a negative liquidity shock. Using a difference-in-differences framework, we find that gold firms have more borrowing capacity with credit lines during the crisis than non-gold firms. However, this effect manifests only in non-distressed firms and firms with secured credit lines, consistent with lenders supplying credit to firms least likely to engage in risk-shifting behavior.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127813221","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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