Belgian Firms Research Articles

Empirically exploring the veracity of the new stakeholder perspective in strategy: Documenting workforce rents

AbstractResearch SummaryWithout compelling empirical proxies for economic profits, we may need to reconsider the decades of empirical research purporting to inform our theories of competitive advantage. The new stakeholder perspective suggests that stakeholders may capture significant shares of the firm's economic profits that should be incorporated into these proxies. In this article, we propose a novel empirical approach to measuring stakeholder rents and then apply our approach to measure workforce rents across the population of all Belgian firms employing workers from 2008 to 2016. Our results demonstrate substantial variance in workforce rents among firms, with some firms allowing most of the economic profits they generate to flow to the workforce. We discuss the implications of our findings in detail and lay out a pathway for future research.Managerial SummaryThis article examines the extent to which companies pay their workforces above (below) what the labor market demands as a way of exploring how much of the company's economic profits go to stakeholders other than shareholders. We demonstrate a wide range of over (under) payments to workforces in a large sample of Belgian firms from 2008 to 2016. One of the important contributions of our paper is developing a method to determine over (under) payments for the workforce, but our method can also be applied to other stakeholders. We hope our work provides an empirical approach for others to explore how stakeholders capture portions of the economic profits that companies create.

Price-Cost Margins, Fixed Costs and Excess Profits

Abstract This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (−5.9%) in the past three decades due to a combination of falling fixed costs (−4.0%) and decreasing excess profits (−1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.

Partner narcissism in a private market setting: Consequences for audit reporting decisions and audit pricing

This study investigates the association between audit engagement partners' narcissism (measured by the size of their signature) and audit reporting decisions and audit pricing in a private market setting. We analysed 133,267 (78,994) firm‐year observations from (financially distressed) Belgian firms audited by 795 individual engagement partners from 2008 to 2017. Our results suggest that narcissism is positively associated with the likelihood that audit partners issue going‐concern opinions to their financially distressed clients and with audit fees. An array of robustness checks corroborates these results. Additional results show that audit partner narcissism is positively associated with reporting conservatism. Interestingly, additional analyses also show that narcissism reverses the effect of gender on audit reporting decisions and audit pricing. Collectively, the evidence from this study suggests that partner narcissism is positively associated with conservative audit reporting decisions and audit pricing in a private market setting.

Have greed and rapidly rising wages triggered a profit-wage-price spiral? Firm-level evidence for Belgium

Our study of Belgian firms found that 2022 price increases were largely attributable to rising intermediate input costs. Wage increases also contributed to prices hikes. Interestingly, markups appeared to play no role in driving up prices and in fact decreased or even offset the contribution of wages. In a country with automatic wage indexation, this is an important point for discussion in the debate on the profit-price or wage-price spiral.

Unraveling Firms: Demand, Productivity and Markups Heterogeneity

Abstract We develop a novel framework that simultaneously allows recovering heterogeneity in demand, quantity total factor productivity and markups across firms while leaving the correlation between the three dimensions unrestricted. We accomplish this by explicitly introducing demand heterogeneity and systematically exploiting assumptions used in previous productivity estimation approaches. In doing so, we provide an exact decomposition of revenue productivity in terms of the underlying heterogeneities, thus bridging the gap between quantity and revenue productivity estimations. We use Belgian firms’ production data to quantify total factor productivity, demand and markups, and show how they are correlated with each other across time and with measures obtained from other approaches. In doing so, we find quantity total factor productivity and demand to be strongly negatively correlated with each other, so suggesting a trade-off between the quality of a firm’s products and their production cost. We also show how our framework provides deeper and sharper insights on the response of firms to increasing import competition from China. In particular, we find that changes in revenue productivity materialise as the outcome of complex and sometimes offsetting changes in quantity total factor productivity, demand, markups and production scale.

Does a tax deduction scheme matter for jobs and investment by multinational and domestic enterprises?

AbstractMany countries have reduced corporate income tax rates or introduced tax deductions, exclusions and credits to attract foreign direct investment. This paper analyzes the introduction of the notional interest deduction (NID) in Belgium, which allows companies to deduct from their taxable income an interest that is calculated based on the company's equity. We use an event type study approach to analyze the evolution of employment and investment of foreign affiliates in Belgium. We find that the tax deduction has increased employment and investment in the Belgian affiliates on average by 7.4 and 6.1%, respectively, in the period after the introduction of the NID. The NID, however, also provides a higher after‐tax return on investment to domestic Belgian firms. Using a matching analysis, we find that domestic Belgian firms with low external financial dependence also respond to the NID but somewhat less strongly, domestic firms with high external financial dependence do not show NID‐driven investment nor employment creation.

Documenting Workforce Rents: Exploring the Veracity of the New Stakeholder Perspective in Strategy

The new stakeholder theory perspective in strategy suggests that stakeholders may capture significant shares of the firm’s economic profits in the form of rents, but this work is primarily theoretical. In this paper we examine the extent to which we should be empirically concerned with this possibility. We focus on workforce rents as a special case of the broader class of stakeholder rents, and leverage unique longitudinal employment and financial data from the population of all Belgian firms from 1996 through 2016 to develop a novel empirical proxy for workforce rents. We find that one standard deviation in our workforce rents proxy amounts to 66 percent of the mean accounting profits in our sample suggesting that there may be substantive variance in workforce rents across firms. Further, we find that workforces in some firms actually capture the majority of the economic value the firm creates and illustrate that the relationship between economic value creation and workforce rents may be nonlinear. Collectively, these findings lend empirical credence to the theoretical issues raised by the new stakeholder perspective in strategy and suggest a need to reconsider some classic empirical findings in strategy with a more robust accounting for stakeholder rents.

Labor market rigidities and misallocation: Evidence from a natural experiment

This paper estimates the impact of labor market rigidities on labor misallocation. To this end, we use a recent policy change in Belgium, leading to an increase in employment protection for blue-collar workers and a decrease in employment protection for white-collar workers. The wedge between marginal product and marginal cost - the gap - is used as a measure for misallocation. Using a rich data set of the universe of Belgian firms, evidence shows that a firm with 90% blue-collar workers experienced after the policy change an increase in the gap of 3300 euro relative to a firm with 10% of blue-collar workers.

The firm size distribution: evidence from Belgium

ABSTRACT The firm size distribution (FSD) is one of the most well-known economic empirical regularity in market economies. Its functional form, postulated in macroeconomic models with heterogeneous firms, can be approximated by a parametric distribution. However, the parametric approximations proposed in the literature have long been contested due to the lack of unbiased databases and robust statistical methods. This paper addresses these shortcomings. First, a robust estimation method is proposed to test the fit of parametric distributions and to determine the one offering the best fit at different truncation thresholds. Then, by applying it to a comprehensive database of Belgian firms for the period 2006–2012, the results show that the lognormal distribution is a better approximation of the empirical FSD than the Pareto distribution. These results hold true at the aggregate, sectoral and regional levels establishing that the shape of the aggregate distribution is not an aggregation artefact arising from the potential distributional heterogeneity of sectoral or regional subsets. This empirical evidence is essential information for tracing the root causes of a plausible underlying stochastic model explaining firm dynamics.

User-generated reviews and the financial performance of restaurants

PurposeThis paper aims to examine the impact of selected characteristics (rating, volume and variability) of online user-generated reviews on the bottom-line profitability of restaurants.Design/methodology/approachRestaurant-level review data are extracted from TripAdvisor and matched with firm-level data from the financial reports gathered from the Belfirst database of Bureau van Dijk. The resulting sample contains data on 2,297 Belgian firms over the period 2007–2018, for which 134,831 reviews are investigated. The author’s regression model of firm-level profitability is estimated against online review characteristics and various financial control variables, including past profitability. This research model and estimation technique address the endogeneity concerns that typically weaken this kind of study.FindingsWhile comparable studies on hotels document a positive association between review characteristics and profitability, the authors find no relationship between review rating, volume and variability in the profitability of restaurants.Research limitations/implicationsDue to the format of the financial reports of small and medium-sized enterprises (SMEs), data on turnover and cost of materials/services was not available for most restaurants in the sample, limiting our potential for analysis. In addition, our assessment of electronic word of mouth (eWOM) was limited to measures derived from user-generated reviews on TripAdvisor.Practical implicationsIn the literature on eWOM, the importance of online reputation is hardly disputed, especially in the context of the hospitality sector. However, most research to date has focused on the hotel sector and top-line measures of success. This study uses restaurant-level financial data, focuses on bottom-line profitability, considers potential endogeneity issues and pays careful attention to the estimation technique. The results fail to establish a direct relationship between eWOM metrics and financial performance and are surprising, meriting further investigation to establish the underlying causes.Originality/valueIn contrast to prior studies on the impact of eWOM on restaurant performance at a group level, this study examines the impact on unit-level profitability, taking into account several potential sources of estimation bias. In addition, the authors challenge this finding with a battery of sensitivity tests, revalidating the absence of a relationship in each case.

Workers’ tenure and firm productivity: New evidence from matched employer‐employee panel data

AbstractUsing rich longitudinal matched employer‐employee data on Belgian firms, we explore the impact of workers’ tenure on firm productivity. To do so, we estimate production functions augmented with firm‐level measures of tenure. We deal with the endogeneity of standard inputs and tenure, which arises from unobserved firm heterogeneity and reverse causality, by applying a modified version of Ackerberg et al.’s (2015) control function method, which explicitly removes firm fixed effects. Consistently with recent theoretical predictions, our analyses point to positive, but decreasing, returns to tenure. We also find that the impact differs widely across several firm dimensions. Tenure is particularly beneficial for productivity in contexts characterized by a certain degree of routineness and low job complexity. Along the same lines, our findings indicate that tenure exerts stronger positive impacts in industrial and capital‐intensive firms, as well as in firms less reliant on ICT‐intensive and knowledge‐intensive processes.

Imperfect Competition in Firm-to-Firm Trade

Abstract This paper studies the implications of imperfect competition in firm-to-firm trade. Exploiting data on the universe of sales relationships between Belgian firms, we document that firms’ markups increase in the average input shares among their buyers. Motivated by this fact, we develop and estimate a model where firms charge buyer–supplier-specific markups that depend on the bilateral input shares. We find markup dispersion within firms across buyers creates substantial welfare loss: Aggregate welfare increases by around 6% when firms are banned from charging different markups across buyers.

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Abstract We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firm’s size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firm’s currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.

On external knowledge sources and innovation performance: Family versus non-family firms

External knowledge has been found to be vital in generating innovation. However, little is known about the conditions under which firms can benefit from utilizing specific external knowledge sources. Using the knowledge-based view as our theoretical underpinning, we empirically examine how the usage of knowledge gained from market- and science-based sources influences innovation performance differently between family and non-family firms. An analysis using panel data drawn from Belgian firms supports our hypothesis that the relationship between the use of knowledge gained from suppliers and customers and innovation outcomes is weaker for family firms than for non-family firms, while the relationship between the use of knowledge gained from universities and research institutes and innovation outcomes is stronger for family firms. This study extends the literature by revealing the role firm type (i.e., family versus non-family) plays in moderating the relationship between the use of knowledge obtained from distinct external sources and innovation performance.

Service characteristics and the choice between exports and FDI: Evidence from Belgian firms

The decision to serve foreign markets through exports or foreign direct investment (FDI) has been studied within proximity-concentration models of location, mainly in the context of trade in goods. This paper goes beyond this approach to account for the specific nature of services that are traded across borders in relation to market transaction costs. We show how services can be characterized by a bundle of attributes that collectively describe the service. These attributes are then tested to show how they affect the choice between exports and FDI using service-level data for firms in Belgium selling services abroad. Three different types of characteristic are shown to affect the export versus FDI decision: intangibility, the search-experience-credence framework and the requirement for either the supplier or the client to physically move to the point of production. Among other determinants, we find general and hard to evaluate complex services to be exported more than locally produced in foreign markets. The opposite holds for specialized (customized) and ‘experience’ services, or services that need close interaction with the buyer in their delivery.

How lockdown causes a missing generation of start-ups and jobs

This paper explores the impact of the COVID-19 lockdown on aggregate employment in Belgium. To this end, we use microdata of all Belgian firms and apply a machine learning-based approach to simulate the impact of the lockdown on employment growth under various economic scenarios. In doing so, we distinguish between start-ups and incumbent firms with both short and long-term effects. In the short term, we expect to see significant losses of employment coming mainly from mature incumbent firms. In the long term, the missing generation of start-ups formed during the lockdown will have a significant and growing effect of slowing down the employment growth even a decade after the lockdown.

The indirect distribution dilemma: assessing the financial impact of participation in Booking.com for hotels

The Indirect Distribution Dilemma: Assessing the Financial Impact of Participation in Booking.com for HotelsDiseño/metodología/enfoqueUna estimación GMM en dos pasos de un modelo de regresión del rendimiento de los activos (ROA) a nivel de empresa sobre una variable ficticia que indica si un establecimiento de alojamiento participa en Booking.com. La evaluación contenía diversas variables de control, como el tamaño, la edad, el apalancamiento, la liquidez y el ROA retardado. El efecto moderador de la edad y el tamaño de la empresa se estudió incluyendo variables de interacción entre la variable ficticia de Booking.com y la edad y el tamaño, respectivamente. El modelo se estimó utilizando datos de participación y financieros de 775 empresas belgas durante un periodo de 20 años (1999–2018).ObjetivoEvaluar si los beneficios superan los costes de la participación en agencias de viajes online (OTAs) como Booking.com.ConclusionesLos resultados indican que la participación en Booking.com está asociada a una mayor rentabilidad, siendo este efecto más importante y pronunciado desde el punto de vista económico para las propiedades hoteleras más pequeñas.Limitaciones/implicaciones de la investigaciónEl estudio proporciona un modelo empírico ampliamente aplicable para evaluar el impacto de la participación en la plataforma en los resultados financieros de las empresas turísticas, hoteleras o minoristas.Implicaciones prácticasEl estudio proporciona pruebas empíricas de que, desde la perspectiva de los costes de transacción, los beneficios de la participación en las OTAs superan los costes, lo que se traduce en una rentabilidad sustancialmente mayor. Las pruebas pueden utilizarse para justificar el uso de las OTAs como canales de distribución.Originalidad/valorAunque estudios anteriores han descrito y analizado conceptualmente la evolución y el papel de las OTAs en el sector hotelero, y han especulado sobre el efecto neto de la participación en las OTAs, hasta donde sabemos, éste es el primero que evalúa empíricamente si la participación en las OTAs crea valor para los propietarios e inversores de hoteles.

The impact of service and goods offshoring on employment: Firm‐level evidence

AbstractWe use a newly constructed database of Belgian firms that combines individual transaction‐level data on international trade in goods and services with annual financial accounts to produce fresh evidence on the impact of goods and service offshoring on employment and other firms’ outcomes for both the manufacturing industry and service sector. Our results show that: (i) goods offshoring has a positive impact on employment growth of both low‐ and high‐educated workers in manufacturing, but this effect is substantially reduced when controlling for scale effects, (ii) service offshoring has a negative impact on employment growth among high‐educated workers in the service sector and (iii) the substitutability between offshoring and domestic non‐labour inputs is higher than the one between offshoring and labour.

The Return on Information Technology: Who Benefits Most?

Information and communication technology (ICT) has continuously reshaped the way in which businesses operate. Yet opinions among economists about the returns to ICT, especially at the aggregate level, are divided. We exploit business-to-business transaction panel data from ICT producers to construct ICT capital stocks for a large sample of Belgian firms. This allows us to estimate the returns to ICT at the firm level and to investigate how firm-level ICT investments affected aggregate gross domestic product and productivity. We find large returns to ICT—more precisely, a firm investing an additional euro in ICT—increases value added by 1 euro and 35 cents on average. This marginal product of ICT investment increases with firm size and varies across sectors. Although we find substantial returns to ICT at the firm level, returns are much lower at the aggregate level. This is due to underinvestment in ICT (ICT capital deepening is low) and because firms with especially high returns are underinvesting.

Internal Capital Markets and the Debt Policy of Belgian Firms

Internal Capital Markets and the Debt Policy of Belgian Firms