Return on Investment
The Effect of Corporate Taxes on Investment and Entrepreneurship
Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho & Andrei Shleifer
American Economic Journal: Macroeconomics, July 2010, Pages 31-64
Abstract:
We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls.
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Can Industry Consolidation Lead to Greater Efficiencies? Evidence from the U.S. Defense Industry
Nayantara Hensel
Business Economics, July 2010, Pages 187-203
Abstract:
The question of whether mergers in various industries lead to greater market power or improved efficiencies has been the subject of numerous public policy debates. This analysis focuses on the impact of consolidation in the U.S. defense industry over the past 20 years and examines the reasons behind the wave of defense consolidation, the results in terms of the reduction in contractors, the antitrust response to mergers, and evidence on the impact of the mergers on weapons systems' total and per-unit costs. The analysis finds that merger activity was driven less by declines in spending following the Cold War than by a stronger economy and a vibrant financial market. The cost data show that 39 to 44 percent of systems experienced statistically significant change in either total costs or per-unit costs following a merger. Somewhat more systems were likely to exhibit lower postmerger per-unit costs than higher per-unit costs, suggesting improved efficiency. The analysis also examines the impact on weapon systems cost by type of weapons system, manufacturer, and service (Army, Navy, Air Force). The evidence suggested greater efficiencies following consolidation for many sectors. Army and Navy systems overall showed lower per-unit costs, but the Air Force weapons systems showed mixed results.
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Katja Seim & Joel Waldfogel
NBER Working Paper, August 2010
Abstract:
While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.
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Organizational designs and innovation streams
Michael Tushman, Wendy Smith, Robert Chapman Wood, George Westerman & Charles O'Reilly
Industrial and Corporate Change, forthcoming
Abstract:
This article empirically explores the relations between alternative organizational designs and a firm's ability to explore as well as exploit. We operationalize exploitation and exploration in terms of innovation streams; incremental innovation in existing products as well as architectural and/or discontinuous innovation. Based on in-depth, longitudinal data on 13 business units and 22 innovations, we describe the consequences of organization design choices on innovation outcomes as well as the ongoing performance of existing products. We find that ambidextrous organization designs are relatively more effective in executing innovation streams than functional, cross-functional, and spinout designs. Further, transitions to ambidextrous designs are associated with increased innovation outcomes, while shifts away from ambidextrous designs are associated with decreased innovation outcomes. We describe the nature of ambidextrous organizational designs - their characteristics, underlying processes, and boundary conditions. More broadly, we suggest that the locus of integration and degree of structural differentiation together affect a firm's ability to explore and exploit. We suggest that the senior team's ability to attend to and deal with contradictory internal architectures is a crucial determinant of a firm's ability to exploit in the short term and explore over time.
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The technological origins of radical inventions
Wilfred Schoenmakers & Geert Duysters
Research Policy, October 2010, Pages 1051-1059
Abstract:
This paper aims to trace down the origins of radical inventions. In spite of many theoretical discussions on the effect of radical inventions, the specific nature of radical inventions has received much less attention in the theoretical and empirical literature. We try to fill that void by an empirical investigation into the specific origins of radical inventions. We explore this issue by a close examination of 157 individual patents, which are selected from a pool of more than 300,000 patents. In contrast to the conventional wisdom that radical inventions are based less on existing knowledge, we find that they are to a higher degree based on existing knowledge than non-radical inventions. A further result that follows from our analysis is that radical inventions are induced by the recombination over more knowledge domains. The combination of knowledge from domains that might usually not be connected seems to deliver more radical inventions.
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Does offshoring create value for shareholders?
Alexandros Prezas, Karen Simonyan & Gopala Vasudevan
Review of Financial Economics, forthcoming
Abstract:
We study the wealth effect of offshoring by analyzing the announcement-period returns as well as the long-run operating and stock return performance of firms that offshored their activities in the period 2000-2005. Announcement-period stock returns are positive for firms that offshore activities primarily to reduce costs but are negative for firms that offshore activities for other reasons. Also, announcement-period stock returns are higher for firms with a larger size, better operating performance, lower growth potential, and a higher cost of goods sold in the year prior to the offshoring announcement. Firms that offshore activities primarily to reduce costs enjoy improved operating and stock return performance in the years following the offshoring. Overall, our findings indicate that not all firms enjoy the benefits of offshoring; rather, only those that offshore primarily to reduce costs do.
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The performance and impact of stock picks mentioned on 'Mad Money'
Bryan Lim & Joao Rosario
Applied Financial Economics, July 2010, Pages 1113-1124
Abstract:
We analyse both the market reaction and the long-term returns of stock picks mentioned on the Consumer News and Business Channel (CNBC) programme 'Mad Money', hosted by former hedge fund manager Jim Cramer. We find that Cramer's stock-picking style is consistent with a positive-feedback trading strategy, favouring stocks which have outperformed over an interval prior to the pick date. Subsequent to a pick, Cramer's immediate effect on a stock appears inversely proportional to the corresponding firm's market capitalization. The returns over a 6-month horizon provide some evidence in favour of Cramer's stock-picking ability. In particular, his recommendations on small-cap stocks accurately predict the long-run trends.
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Serena Sandri, Christian Schade, Oliver Mußhoff & Martin Odening
Journal of Economic Behavior & Organization, forthcoming
Abstract:
Disinvestment, in the sense of project termination and liquidation of assets including the cession of a venture, is an important realm of entrepreneurial decision-making. This study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non-entrepreneurs. Our experimental results reject the standard net present value approach as an account of observed behavior. Instead, most individuals seem to understand the value of waiting. Their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning. We also observe a pronounced ‘psychological inertia', i.e., most individuals hold on to a losing project for even longer than real options reasoning would predict. The study provides evidence for entrepreneurs and non-entrepreneurs being quite similar in their behavior.
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Copying, Superstars, and Artistic Creation
Francisco Alcalá & Miguel González-Maestre
Information Economics and Policy, forthcoming
Abstract:
We provide a new perspective on the impact of unauthorized copying and copy levies on artistic creation. Our analysis emphasizes three aspects of artistic markets: the predominance of superstars, the important role of promotion expenditures, and the difficulties of talent sorting. In the short run, piracy reduces superstars' earnings and market share and increases the number of niche and young artists. In the long run, copying can also have a positive effect on high-quality artistic creation by helping more young artists start their careers, which increases the number of highly talented artists in subsequent periods. The long-term impact of levies on copy equipment on artistic creation depends on whether their yields primarily accrue to superstars who already receive rents or are allocated to help young artists.
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Ashish Arora, Lee Branstetter & Matej Drev
NBER Working Paper, July 2010
Abstract:
This paper documents a shift in the nature of innovation in the information technology (IT) industry. Using comprehensive data on all IT patents granted by the USPTO from 1980-2002, we find strong evidence of a change in IT innovation that is systematic, substantial, and increasingly dependent on software. This change in the nature of IT innovation has had differential effects on the performance of the IT industries in the United States and Japan. Using a broad unbalanced panel of US and Japanese publicly listed IT firms in the period 1983-1999, we show that (a) Japanese IT innovation relies less on software advances than US IT innovation, (b) the innovation performance of Japanese IT firms is increasingly lagging behind that of their US counterparts, particularly in IT sectors that are more software intensive, and (c) that US IT firms are increasingly outperforming their Japanese counterparts, particularly in more software intensive sectors. The findings of this paper thus provide a fresh explanation for the relative decline of the Japanese IT industry in the 1990s. Finally, we provide suggestive evidence consistent with the hypothesis that human resource constraints played a role in preventing Japanese firms from adapting to the shift in the nature of innovation in IT.
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Jennifer Blouin, Jana Raedy & Douglas Shackelford
NBER Working Paper, June 2010
Abstract:
This paper jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. We find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new tax rules. We also find that firms adjusted their distribution policy (specifically, dividends versus share repurchases) in a manner consistent with the altered tax incentives for individual investors. To our knowledge, this is the first paper to employ simultaneous equations to estimate both investor and managerial responses to the 2003 rate reductions. We find that estimating a system of equations leads to different inferences.
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Skyscrapers and the Skyline: Manhattan, 1895-2004
Jason Barr
Real Estate Economics, Fall 2010, Pages 567-597
Abstract:
This article investigates the market for skyscrapers in Manhattan from 1895 to 2004. Clark and Kingston (1930) have argued that extreme height is a result of profit maximization, while Helsley and Strange (2008) posit that skyscraper height can be caused, in part, by strategic interaction among builders. I provide a model for the market for building height and the number of completions, which are functions of the market fundamentals and the desire of builders to stand out in the skyline. I test this model using time series data. I find that skyscraper completions and average heights over the 20th century are consistent with profit maximization; the desire to add extra height to stand out does not appear to be a systematic determinant of building height.
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Superstar effects on royalty income in a performing rights organization
Ivan Pitt
Journal of Cultural Economics, August 2010, Pages 219-236
Abstract:
This paper examines the economic accomplishments of individual members in a Performing Rights Organization (PRO), sometimes referred to as a Performing Rights Society. Today, there is the growing importance of intellectual property and copyright protection for authors and creators of literary, dramatic, musical, artistic and other intellectual works. The digital age has placed added pressure on songwriters, lyricists and composers in their ability to derive economic benefits from their intellectual creativity in the form of a copyright. Copyright laws protect and enable the creation of music by allowing authors and composers to license the control and use of their creations, and receive compensation in the form of royalty payments for their work. The PROs license, collect and distribute royalty payments for non-dramatic public performances of copyrighted musical works created and owned by its members or affiliates. In this paper, skewness and heavy tail of returns in the form of member royalty payments are estimated using the skew-normal and skew-t distributions in a parametric approach. We found strong evidence of the so-called ‘superstar effect' in which the average royalty payment made by a PRO is still dominated by extreme outcomes, and relatively few members earned a substantial share of royalty payments from blockbuster hits that have endured over time. There is little evidence of smaller niche members dominating or replacing the ‘superstars.' Economists and others will benefit from this empirical study which emphasizes a new understanding of the music industry from a PRO, member royalty payment and performance copyright perspective.