This paper is a comment on [6]. It is shown that: (1) their ‘profit-Luenberger’ productivity indicator (πL) appears to be identically equal to an empirical, profit-based Bennet quantity indicator, and (2) their ‘price effect’ (PE) is a residual without independent interpretation.
{"title":"Profit-Oriented Productivity Change: A Comment","authors":"B. Balk","doi":"10.2139/ssrn.2910361","DOIUrl":"https://doi.org/10.2139/ssrn.2910361","url":null,"abstract":"This paper is a comment on [6]. It is shown that: (1) their ‘profit-Luenberger’ productivity indicator (πL) appears to be identically equal to an empirical, profit-based Bennet quantity indicator, and (2) their ‘price effect’ (PE) is a residual without independent interpretation.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124110693","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}
Sequentially examining the full chain of events starting from the default of firms through the fire-sale of goods towards write-offs of bad loans, a new matrix of financial transactions was developed. It was shown that if firms have no equities, the cost of default of those firms is equal zero. Indeed, firms suffer from losses on fire-sales but at the same time, they have a benefit from write-offs of their loans. Whereas, banks incur only the losses on bad loans. This situation may restrain lending to the economy. The considered matrix of financial transactions was incorporated in the transactions-flows matrix of the closed economy consisting of households, firms, and banks. The obtained matrix significantly differs from Goodley’s and Lavoie’s matrix that the flows caused by write-offs of bad loans were taken to flows of incomes and expenses, not to the flows generated by changes in operating assets and liabilities. On the basis of the balance sheet and transactions-flows matrices, a mathematical model of the economy was developed. The used stock-flow consistent framework allows us to be sure that nothing will be lost neither in stocks nor in flows. The model allows studying how such the key parameters as the probability of default, the rate of fire-sales (new injected parameter), recovery rate, interest rates on loans and deposits affect the performance of banks and firms, observing economic dynamics in time under different macroprudential policy rules. Numerical simulation of the model was carried out. Under chosen parameters of the models, the net wealth of firms rises due to the cost of default is zero, while both the net wealth of banks and households at the beginning run high and then falls. Reasons for such behavior of the net wealth are significantly different. The net wealth of banks begins to fall due to the accumulation of credit losses. Whereas, the net wealth of households does begin to fall due to profit paradox, when workers of households have no sufficient money in order to buy out all produced goods, due to there is price markup.
{"title":"A Stock Flow Consistent Model of a Closed Economy with Defaults of Firms","authors":"I. Voloshyn","doi":"10.2139/ssrn.2905339","DOIUrl":"https://doi.org/10.2139/ssrn.2905339","url":null,"abstract":"Sequentially examining the full chain of events starting from the default of firms through the fire-sale of goods towards write-offs of bad loans, a new matrix of financial transactions was developed. It was shown that if firms have no equities, the cost of default of those firms is equal zero. Indeed, firms suffer from losses on fire-sales but at the same time, they have a benefit from write-offs of their loans. Whereas, banks incur only the losses on bad loans. This situation may restrain lending to the economy. The considered matrix of financial transactions was incorporated in the transactions-flows matrix of the closed economy consisting of households, firms, and banks. The obtained matrix significantly differs from Goodley’s and Lavoie’s matrix that the flows caused by write-offs of bad loans were taken to flows of incomes and expenses, not to the flows generated by changes in operating assets and liabilities. On the basis of the balance sheet and transactions-flows matrices, a mathematical model of the economy was developed. The used stock-flow consistent framework allows us to be sure that nothing will be lost neither in stocks nor in flows. The model allows studying how such the key parameters as the probability of default, the rate of fire-sales (new injected parameter), recovery rate, interest rates on loans and deposits affect the performance of banks and firms, observing economic dynamics in time under different macroprudential policy rules. Numerical simulation of the model was carried out. Under chosen parameters of the models, the net wealth of firms rises due to the cost of default is zero, while both the net wealth of banks and households at the beginning run high and then falls. Reasons for such behavior of the net wealth are significantly different. The net wealth of banks begins to fall due to the accumulation of credit losses. Whereas, the net wealth of households does begin to fall due to profit paradox, when workers of households have no sufficient money in order to buy out all produced goods, due to there is price markup.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"05 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127138846","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}
It is well known that the market-to-book equity ratio and total asset growth are negatively associated with future stock returns. Much less known is that the predictabilities are related through the mispricing channel. We show that the growth-value anomaly is governed by ex-ante total asset growth expectation errors, so is the asset growth anomaly. The anomalies are weak when the expectation errors are low and strong when the errors are high. Growth firms with high expectation errors generate low returns and possess strikingly higher distress risk. Gross profitability affects the growth-value anomaly via the expectation errors. Limits to arbitrage exacerbates the effect of the expectation errors on the growth-value anomaly.
{"title":"Is the Growth-Value Anomaly Related to the Asset Growth Anomaly?","authors":"Hung Wan Kot, F. Lam","doi":"10.2139/ssrn.2842516","DOIUrl":"https://doi.org/10.2139/ssrn.2842516","url":null,"abstract":"It is well known that the market-to-book equity ratio and total asset growth are negatively associated with future stock returns. Much less known is that the predictabilities are related through the mispricing channel. We show that the growth-value anomaly is governed by ex-ante total asset growth expectation errors, so is the asset growth anomaly. The anomalies are weak when the expectation errors are low and strong when the errors are high. Growth firms with high expectation errors generate low returns and possess strikingly higher distress risk. Gross profitability affects the growth-value anomaly via the expectation errors. Limits to arbitrage exacerbates the effect of the expectation errors on the growth-value anomaly.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114229571","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}
The importance of regimes containing an effective mechanism to enable the rescue of distressed but viable businesses is increasingly recognised. In the UK the importance of developing a rescue culture has been appreciated for some time and a number of different mechanisms exist which can be used to restructure the debt of distressed companies. The purpose of this paper is to assess the debt restructuring mechanisms currently available to companies in English law and to consider whether reform is needed. There have been a number of calls for the reform of English debt restructuring mechanisms in recent years, most recently by the UK Insolvency Service in 2016, and these reform proposals are analysed and assessed. It is suggested that reform is needed, but that these reforms will need to be introduced with skill and care in order to ensure that the UK’s regime remains fit for purpose for the future.
{"title":"The Future of UK Debt Restructuring","authors":"J. Payne","doi":"10.2139/ssrn.2848160","DOIUrl":"https://doi.org/10.2139/ssrn.2848160","url":null,"abstract":"The importance of regimes containing an effective mechanism to enable the rescue of distressed but viable businesses is increasingly recognised. In the UK the importance of developing a rescue culture has been appreciated for some time and a number of different mechanisms exist which can be used to restructure the debt of distressed companies. The purpose of this paper is to assess the debt restructuring mechanisms currently available to companies in English law and to consider whether reform is needed. There have been a number of calls for the reform of English debt restructuring mechanisms in recent years, most recently by the UK Insolvency Service in 2016, and these reform proposals are analysed and assessed. It is suggested that reform is needed, but that these reforms will need to be introduced with skill and care in order to ensure that the UK’s regime remains fit for purpose for the future.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124189043","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}
Research and development (R&D) investment affects future operating earnings. Behavioral theory claims that slack resources benefit innovation, whereas agency theory argues that they represent a form of inefficiency and inhibit innovation. This paper thus examines how slack resources affect the relationship between R&D investments and firm performance based on two dimensions of R&D: R&D capital and R&D expenses. R&D capital captures long-term R&D investment, whereas R&D expenses represent R&D investment in the current year. This study is undertaken in Taiwan using a large 5-year dataset within high-tech industries. Slack resources are broadly classified into absorbed slack with low managerial discretion and unabsorbed slack with high managerial discretion. We find that absorbed slack negatively affects the relationship between R&D investments and performance, as proposed by agency theory. We further find that unabsorbed slack has a slightly curvilinear effect on the positive relationship between R&D capital and firm performance. The proposal of behavioral theory thus is more valid when focusing on unabsorbed slack resources. Our findings suggest that it is necessary to identify the types of slack and R&D investments that are being considered when discussing the impacts of R&D investment on performance.
{"title":"How Do Slack Resources Affect the Relationship between R&D Expenditures and Firm Performance?","authors":"Chia-Ling Lee, Hsu-Che Wu","doi":"10.1111/radm.12141","DOIUrl":"https://doi.org/10.1111/radm.12141","url":null,"abstract":"Research and development (R&D) investment affects future operating earnings. Behavioral theory claims that slack resources benefit innovation, whereas agency theory argues that they represent a form of inefficiency and inhibit innovation. This paper thus examines how slack resources affect the relationship between R&D investments and firm performance based on two dimensions of R&D: R&D capital and R&D expenses. R&D capital captures long-term R&D investment, whereas R&D expenses represent R&D investment in the current year. This study is undertaken in Taiwan using a large 5-year dataset within high-tech industries. Slack resources are broadly classified into absorbed slack with low managerial discretion and unabsorbed slack with high managerial discretion. We find that absorbed slack negatively affects the relationship between R&D investments and performance, as proposed by agency theory. We further find that unabsorbed slack has a slightly curvilinear effect on the positive relationship between R&D capital and firm performance. The proposal of behavioral theory thus is more valid when focusing on unabsorbed slack resources. Our findings suggest that it is necessary to identify the types of slack and R&D investments that are being considered when discussing the impacts of R&D investment on performance.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128330350","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}
In many markets consumers form long-term relationships with firms. In such settings, a firm’s existing customers are valuable assets whose ‘loyalty’ must be maintained through continued investment. In this paper we assume that consumer loyalty is strengthened with repeated buying but may erode if the relationship is interrupted. In this context we show how a firm’s history of costs and sales and the size of its customer base determine the extent to which it invests in maintaining its long term customer relationships by satisfying demand even when this involves a short-term loss. In particular, our model shows that very young firms with small customer bases will prefer losing customers in the short run to absorbing losses in high cost periods, middling sized firms will take the opposite position, absorbing losses for the sake of continuing to build customer bases, while established firms with very large customer bases revert to a willingness to lose customers in the short run.
{"title":"Investing in Long-Term Customer Relationships","authors":"A. Fishman, Ziv Hellman, Avi Weiss","doi":"10.2139/ssrn.2837841","DOIUrl":"https://doi.org/10.2139/ssrn.2837841","url":null,"abstract":"In many markets consumers form long-term relationships with firms. In such settings, a firm’s existing customers are valuable assets whose ‘loyalty’ must be maintained through continued investment. In this paper we assume that consumer loyalty is strengthened with repeated buying but may erode if the relationship is interrupted. In this context we show how a firm’s history of costs and sales and the size of its customer base determine the extent to which it invests in maintaining its long term customer relationships by satisfying demand even when this involves a short-term loss. In particular, our model shows that very young firms with small customer bases will prefer losing customers in the short run to absorbing losses in high cost periods, middling sized firms will take the opposite position, absorbing losses for the sake of continuing to build customer bases, while established firms with very large customer bases revert to a willingness to lose customers in the short run.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-09-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114932426","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 the consequences of the declining power of business groups on firms’ financial decision-making. We use a dataset from Japan, where the power of the traditional keiretsu system and banks has been weakening in recent decades. In addition to the findings that firms in business groups have higher financial leverage and slower speed of adjustment, we find that as the banks’ power weakens, firms’ financial leverage decreases and their speed of adjustment increases. This is consistent with our prediction that as the power of the business group weakens, internal capital markets disappear. Several robustness checks ensure consistent results in the basic analyses such as: excluding firms with extreme financial leverage; controlling for firms’ financial distress; using multiple cut-off points representing different banks’ ownership levels; and whether there has been a shift from using bank loans to public bonds due to the decline of banking power.
{"title":"The Declining Power of Business Groups and Firms’ Financial Decision-Making","authors":"Izidin El Kalak, Kazuo Yamada","doi":"10.2139/ssrn.2830850","DOIUrl":"https://doi.org/10.2139/ssrn.2830850","url":null,"abstract":"This paper investigates the consequences of the declining power of business groups on firms’ financial decision-making. We use a dataset from Japan, where the power of the traditional keiretsu system and banks has been weakening in recent decades. In addition to the findings that firms in business groups have higher financial leverage and slower speed of adjustment, we find that as the banks’ power weakens, firms’ financial leverage decreases and their speed of adjustment increases. This is consistent with our prediction that as the power of the business group weakens, internal capital markets disappear. Several robustness checks ensure consistent results in the basic analyses such as: excluding firms with extreme financial leverage; controlling for firms’ financial distress; using multiple cut-off points representing different banks’ ownership levels; and whether there has been a shift from using bank loans to public bonds due to the decline of banking power.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130481765","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}
Financial flexibility is a firm's ability to deploy its financial resources to meet future financing needs. Flexibility-building firms' financial decisions are geared toward building up financial flexibility --- maintain low leverage by issuing equity in order to raise cash. As firms progress and start making investments, they utilize their financial resources --- flexibility-utilizing firms increase debt and use reserved cash in order to exercise investment options. As more cash flows are generated and investment opportunities diminish, firms recharge their financial flexibility by repaying debt and increasing cash using internal funds. The findings have important implications for previously documented empirical regularities.
{"title":"Financial Flexibility Demand on Corporate Financial Decisions","authors":"Soku Byoun","doi":"10.2139/ssrn.2817972","DOIUrl":"https://doi.org/10.2139/ssrn.2817972","url":null,"abstract":"Financial flexibility is a firm's ability to deploy its financial resources to meet future financing needs. Flexibility-building firms' financial decisions are geared toward building up financial flexibility --- maintain low leverage by issuing equity in order to raise cash. As firms progress and start making investments, they utilize their financial resources --- flexibility-utilizing firms increase debt and use reserved cash in order to exercise investment options. As more cash flows are generated and investment opportunities diminish, firms recharge their financial flexibility by repaying debt and increasing cash using internal funds. The findings have important implications for previously documented empirical regularities.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133459150","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 investigates whether business groups can harm the capital allocation efficiency of non-business group firms. From a sample of Korean firms (1987 to 2010), we compute an annual index of the collective strength and dominance of large business groups (LBG) per industry. We find that this index is negatively associated with the industry-level capital allocation efficiency of non-LBG firms during a period characterized by underdeveloped financial markets and weak investor protection. The association is stronger in industries that may lack collateral or internal equity capital. Results are robust to different measures of the index and investment opportunity.
{"title":"Do Business Groups Harm Capital Allocation Efficiency Outside the Business Group?","authors":"Yunxiao Liu, Woochan Kim, Taeyoon Sung","doi":"10.2139/ssrn.2806024","DOIUrl":"https://doi.org/10.2139/ssrn.2806024","url":null,"abstract":"This study investigates whether business groups can harm the capital allocation efficiency of non-business group firms. From a sample of Korean firms (1987 to 2010), we compute an annual index of the collective strength and dominance of large business groups (LBG) per industry. We find that this index is negatively associated with the industry-level capital allocation efficiency of non-LBG firms during a period characterized by underdeveloped financial markets and weak investor protection. The association is stronger in industries that may lack collateral or internal equity capital. Results are robust to different measures of the index and investment opportunity.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124438106","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}
Pub Date : 2016-06-22DOI: 10.16980/JITC.12.3.201606.61
Jongcook Byun, Phan Thanh Bao Trung
This paper empirically investigated the effect of share repurchases announcement on the Vietnam stock market. Using a sample of share repurchases for the period 2005-2014, this paper provided evidences that the cumulative abnormal return (CAR) of firms’ stock repurchases gradually increased from -30 to 30 days around the stock repurchase announcement day. Examining if the announcement of stock repurchases would have more effect on small firms compared to large firm, this study found that there exist a temporary small firm effect but not over all period. To determine the motives of firms in implementing share repurchases, this study checked the CAR by using prior return, net operating cash flow (NOCF) and degree of leverage. The result supported the undervaluation hypothesis. In order to confirm this result after controlling firm characteristic variables, a regression analysis was used. From the regression results, it confirmed that the coefficient of EBIT is statistically significant at 5% level. This implies that undervaluation is the main reason why firms repurchase its stocks.
{"title":"Share Repurchases in Vietnam: Why Do Firms Repurchase Shares?","authors":"Jongcook Byun, Phan Thanh Bao Trung","doi":"10.16980/JITC.12.3.201606.61","DOIUrl":"https://doi.org/10.16980/JITC.12.3.201606.61","url":null,"abstract":"This paper empirically investigated the effect of share repurchases announcement on the Vietnam stock market. Using a sample of share repurchases for the period 2005-2014, this paper provided evidences that the cumulative abnormal return (CAR) of firms’ stock repurchases gradually increased from -30 to 30 days around the stock repurchase announcement day. Examining if the announcement of stock repurchases would have more effect on small firms compared to large firm, this study found that there exist a temporary small firm effect but not over all period. To determine the motives of firms in implementing share repurchases, this study checked the CAR by using prior return, net operating cash flow (NOCF) and degree of leverage. The result supported the undervaluation hypothesis. In order to confirm this result after controlling firm characteristic variables, a regression analysis was used. From the regression results, it confirmed that the coefficient of EBIT is statistically significant at 5% level. This implies that undervaluation is the main reason why firms repurchase its stocks.","PeriodicalId":236717,"journal":{"name":"ERN: Other Microeconomics: Intertemporal Firm Choice & Growth","volume":"158 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114359435","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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