Cross-firm Differences Research Articles

Effects of heterogeneous SPS measures on agricultural growth: Evidence from China.

In order to explore the sustainable growth of Chinese agriculture, this paper assesses how the heterogeneous SPS measures affect China’s growth margins and quality upgrading in the agricultural sector. We estimate improved gravity-model that exploit the cross-country differences in SPS measures over the period from 2000 to 2014. Our findings show that the heterogeneous SPS measures restrict the intensive margin and extensive margin, but significantly promote the product quality-even with no significant effect on price index. Conditional on quality upgrading, the heterogeneous SPS measures decrease the extent of quality upgrading. On one hand, because of cross-country differences in SPS standards, standards from developed countries have less effective trade effect on China’s agri-products export quality upgrading; On the other hand, because of cross-firm differences in the ability to deal with SPS standards, the laggards in China have the higher probability to switch to lower entrance barrier countries. Therefore, it is possible for China to trap in the low-quality agricultural growth in the long term.

Can Shorts Predict Returns? A Global Perspective

Abstract Using multiple short-sale measures, we examine the predictive power of short sales for future stock returns in 38 countries from July 2006 to December 2014. We find that the days-to-cover ratio and the utilization ratio measures have the most robust predictive power for future stock returns in the global capital market. Our results display significant cross-country and cross-firm differences in the predictive power of alternative short-sale measures. The predictive power of shorts is stronger in countries with nonprohibitive short sale regulations and for stocks with relatively low liquidity, high shorting fees, and low price efficiency.

The Present Value of Future Market Power

This paper relates valuation ratios to future markups in a present-value framework for total firm assets. Expected future cash flows explain the majority of the cross-sectional variance of firms’ asset market-to-book ratio, while asset discount rates only account for a relatively small fraction, mirroring the decomposition of firm equity valuation ratios. We find that expected future markups are a key component of cash-flow news that explains more than a quarter of the cross-firm differences in asset market-to-book ratios by itself. Changes in asset valuation ratios strongly forecast future markup growth even after controlling for lagged markup growth. The forecasting result holds in the cross section of firms, in the aggregate time series, and is stable across industries. Asset prices encode important information about the future time path of market power.

Financial Reporting Comparability and Accounting-Based Relative Performance Evaluation in the Design of CEO Cash Compensation Contracts

ABSTRACTThis study examines how cross-firm differences in financial reporting practices affect how peer-firm accounting information is used to evaluate CEO performance. I propose that efficient relative evaluation using accounting performance requires peer firms to have comparable financial reporting systems, allowing boards to reduce the information processing costs associated with differences in firms' financial reporting practices. Supporting this view, when peer selection takes financial reporting comparability into account, I find evidence that the earnings of peer firms with high financial reporting comparability serve as a performance benchmark for determining CEOs' cash compensation. My paper empirically corroborates the substantial anecdotal evidence of the use of peer firms' accounting performance as a significant element in boards' evaluation of CEO performance.JEL Classifications: D8; G3; J33; M41.

Why do not all firms engage in tax avoidance?

Empirical evidence suggests that there is substantial cross-firm variation in tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing, and thus explaining, cross-firm differences in tax avoidance. We develop a formal model with two agents to analyze the incentives that lead firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax-planning costs, and the potential to increase earnings. If the potential to increase earnings is low, the tax-planning decision is determined by moral hazard problems. In contrast, when this potential is high, the tax-planning decision is mainly driven by tax-planning costs, such as reputational and political costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance: Severe problems of moral hazard make tax avoidance less likely. Our model can be a basis for testing differences in tax avoidance between different types of firms.

Exporting and Frictions in Input Markets: Evidence from Chinese Data

This paper investigates the impact of international trade on input market distortions. We focus on a specific friction, binding borrowing constraints in capital markets. We propose a theoretical model where a firm's demand for capital is constrained by an initial asset allocation and past sales. While the initial distribution of assets induces misallocation if the asset endowment at more productive firms does not fully cover their demand for capital, the dependence of the borrowing constraint from past sales proxies for cross-firm differences in the cost of default, which is empirically higher at larger firms. Overtime, an increase in sales relaxes the borrowing constraint; similarly, shocks to market access--such as opening to trade--contribute to easing the financial constraints, thus accelerating the convergence toward the frictionless allocation. To analyze the empirical relationship between market access and credit frictions, we draw on the annual surveys conducted by the Chinese National Bureau of Statistics (NBS) for 1998 to 2007, and we construct firm-level measures of distortions that control for firm heterogeneity. We find smaller labor and capital distortions across exporting firms; such distortions are even smaller in sectors where firms face lower tariffs or are more dependent on external financing, a proxy for the presence of binding financial constraints. Our empirical analysis also shows that export shocks significantly reduce the dispersion across input returns over time, with the effect mostly occurring at constrained firms. Our findings point to within-sector input reallocation as an important channel to overcome misallocation in open economies.

Looking Inside the Magic 8 Ball: An Analysis of Sales Forecasts using Italian Firm-Level Data

This paper explores firm forecasting strategies. Using Italian data, we focus on two aspects of the forecasting process: how firms forecast sales and how accurate their predictions are. We relate both outcomes to current conditions, firm experience, global factors, and other firm characteristics. We find that current conditions tend to explain most of the variability in the sales forecast. While past projection errors tend to account for cross-firm differences in models of expectation formation, they are a key explanatory variable in models of forecast accuracy. Among other controls, firm size, experience, and global conditions--through the effect of price changes that the firm anticipates--shape firm expectations and influence the projection errors. Our findings suggest that models of sales expectations should take firm characteristics and market heterogeneity into account.

Living Up to Expectations: Corporate Reputation and Persistence of Firm Performance

I develop a theory of corporate reputation as a source of persistence in firm performance. I show how a relatively simple and reasonable assumption regarding the dynamics of corporate reputation leads to a self-reinforcing process whereby cross-firm differences in corporate reputation (and performance) are significant and relatively permanent. Numerical simulations suggest that persistence in cross-firm differences is largely due to endogenous investment incentives: firms with higher corporate reputations invest more in corporate reputation. I provide a series of examples consistent with the model’s prediction.

Why Do Not All Firms Engage in Tax Avoidance?

Empirical evidence suggests that there is substantial cross-firm variation in the extent of tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing, and thus explaining, cross-firm differences in tax avoidance. We develop a formal model with two agents to analyze the incentives that lead firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax-planning costs, and the potential to increase earnings. If the potential to increase earnings is low, the tax-planning decision is determined by moral-hazard problems. In contrast, when this potential is high, the tax-planning decision is mainly driven by tax-planning costs, such as reputational and political costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance: Severe problems of moral hazard make tax avoidance less likely. Our model can be applied to test differences in tax avoidance between different types of firms.

Differences in the labor market entry of second-generation immigrants and ethnic Danes

Abstract Our study is one of the first to take search friction and cross-firm differences in factor productivity into account when investigating firm behavior towards second-generation immigrants in Denmark. We ensure sub-sample homogeneity in search models by matching second-generation immigrants to their ethnic Danish twins according to parental characteristics and informal network quality. We find that second-generation immigrants with a high-school or primary school education, in particular females, perform as well or better than their ethnic counterparts. Second generation immigrants with vocational education, in particular males, face lower arrival rates when unemployed and higher layoff rates than those of their twins.

Financing Frictions and the Substitution between Internal and External Funds

AbstractAmple evidence points to a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This relation has been interpreted as evidence supporting the pecking order theory. We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are least likely to face high external financing costs (firms that distribute large amounts of dividends, that are large, and whose debt is rated). For firms on the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to internal funds. These cross-firm differences hold separately for debt and equity, and they are magnified in the aftermath of macroeconomic movements that tighten financing constraints. We argue that the greater complementarity between internal funds and external financing for constrained firms is a consequence of the interdependence of their financing and investment decisions.

Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?

We develop a methodology to study how the subprime crisis spills over to the real economy. Does it manifest itself primarily through reducing consumer demand or through tightening liquidity constraint on non-financial firms? Since most non-financial firms have much larger cash holding than before, they appear unlikely to face significant liquidity constraint. We propose a methodology to estimate these two channels of spillovers. We first propose an index of a firm's sensitivity to consumer demand, based on its response to the 9/11 shock in 2001. We then construct a separate firm-level index on financial constraint based on Whited and Wu (2006). We find that both channels are at work, but a tightened liquidity squeeze is economically more important than a reduced consumer spending in explaining cross firm differences in stock price declines.

Financing Frictions and the Substitution Between Internal and External Funds

There is ample empirical evidence of a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This negative relation has been interpreted as evidence for external financing costs arising from capital market frictions such as asymmetric information (e.g., the pecking order theory). We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are \QTR{em}{least likely} to face high costs of external finance (firms that distribute large amounts of dividends, that are large, and whose bonds and commercial papers are rated). For firms in the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to innovations to internal funds. These cross-firm differences hold separately for debt and outside equity financing, and are magnified in the aftermath of macroeconomic movements that tighten financial constraints. We argue that the greater degree of complementarity between internal funds and external finance for constrained firms is a consequence of the interdependence of their financing and investment decisions. Our findings suggest that the negative relation between internal funds and external financing should not be interpreted as evidence for external financing costs.

Postprivatization corporate governance: The role of ownership structure and investor protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.

Postprivatization Corporate Governance: The Role of Ownership Structure and Investor Protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. We find that the government relinquishes control over time, mainly to the benefit of local institutions and foreign investors. We also show that private ownership tends to concentrate over time. In addition to firm-level variables, investor protection, political and social stability explain the cross-firm differences in ownership concentration. We find that the positive effect of ownership concentration on firm performance matters more in countries with weak investor protection and that private domestic ownership leads to higher performance.

An Empirical Examination of Moral Hazard in the Vehicle Inspection Market

Moral hazard arises in diagnosis-cure markets such as auto repair and health care when sellers have an incentive to misrepresent a buyer's condition in order to increase demand for the treatments they supply. This article examines the market for California vehicle emission inspections. Using transaction-level data, I investigate whether the market provides incentives that lead inspectors to help vehicles pass and how the behavior of inspectors varies with their firm's organizational characteristics. I find that consumers are generally able to provide firms and inspectors incentives to help them pass, and I find cross-firm differences that are consistent with agency theory.