Mergers, Spinoffs, and Employee Incentives
Paolo Fulghieri, Merih Sevilir
Review of Financial Studies,
No. 7,
2011
Abstract
This article studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives to innovate. In industries where value creation depends on innovation and development of new products, mergers are likely to be inefficient even though they increase the market power of the post-merger firm. In such industries, a stand-alone structure where independent firms compete both in the product market and in the market for employee human capital leads to a greater profitability. Furthermore, our analysis shows that multidivisional firms can improve employee incentives and increase firm value by reducing firm size through a spinoff transaction, although doing so eliminates the economies of scale advantage of being a larger firm and the benefits of operating an internal capital market within the firm. Finally, our article suggests that established firms can benefit from creating their own competition in the product and labor markets by accommodating new firm entry, and the desire to do so is greater at the intermediate stages of industry/product development.
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Exports Versus FDI Revisited: Does Finance Matter?
Claudia M. Buch
Bundesbank Discussion Paper 03/2010,
2010
Abstract
This paper explores the impact of financial constraints on the internationalization
strategies of firms. It contributes to the literature by focusing on three aspects: First, the paper studies the impact of financial constraints on exporting relative to FDI. Consistent with theory, the empirical results confirm that the impact of financial constraints is stronger for FDI than for exporting. Second, the paper analyzes the extensive and the intensive margins and finds that financial frictions matter for both. Third, the paper explores the impact on manufacturing as compared to service industries and shows that firms in service industries are affected more than firms in manufacturing. The paper also identifies a threshold effect: Financial constraints do not matter for small firms whose productivity seems to be too low to consider international expansions.
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Margins of international banking: Is there a productivity pecking order in banking, too?
Claudia M. Buch
Bundesbank Discussion Paper 12/2009,
2009
Abstract
Modern trade theory emphasizes firm-level productivity differentials to explain
the cross-border activities of non-financial firms. This study tests whether a
productivity pecking order also determines international banking activities. Using
a novel dataset that contains all German banks’ international activities, we
estimate the ordered probability of a presence abroad (extensive margin) and the
volume of international assets (intensive margin). Methodologically, we enrich the
conventional Heckman selection model to account for the self-selection of banks
into different modes of foreign activities using an ordered probit. Four main
findings emerge. First, similar to results for non-financial firms, a productivity
pecking order drives bank internationalization. Second, only a few non-financial
firms engage in international trade, but many banks hold international assets, and
only a few large banks engage in foreign direct investment. Third, in addition to
productivity, risk factors matter for international banking. Fourth, gravity-type
variables have an important impact on international banking activities.
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Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital
Paolo Fulghieri, Merih Sevilir
Journal of Financial and Quantitative Analysis,
No. 6,
2009
Abstract
This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.
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Barriers to Internationalization: Firm-Level Evidence from Germany
Claudia M. Buch
IAW Discussion Paper No. 52,
2009
Abstract
Exporters and multinationals are larger and more productive than their domestic
counterparts. In addition to productivity, financial constraints and labor market
constraints might constitute barriers to entry into foreign markets. We present new
empirical evidence on the extensive and intensive margin of exports and FDI based on detailed micro-level data of German firms. Our paper has three main findings. First, in line with earlier literature, we find a positive impact of firm size and productivity on firms’ international activities. Second, small firms suffer more frequently from financial constraints than bigger firms, but financial conditions have no strong effect on internationalization. Third, labor market constraints constitute a more severe barrier to foreign activities than financial constraints. Being covered by collective bargaining particularly impedes international activities.
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Banking Integration, Bank Stability, and Regulation: Introduction to a Special Issue of the International Journal of Central Banking
Reint E. Gropp, H. Shin
International Journal of Central Banking,
No. 1,
2009
Abstract
The link between banking integration and financial stability has taken center stage in the wake of the current financial crisis. To what extent is the banking system in Europe integrated? What role has the introduction of the common currency played in this context? Are integrated banking markets more vulnerable to contagion and financial instability? Does the fragmented regulatory framework in Europe pose special problems in resolving bank failures? What policy reforms may become necessary? These questions are of considerable policy interest as evidenced by the extensive discussions surrounding the design and implementation of a new regulatory regime and by the increasing attention coming from academia.
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The Euro and the Competitiveness of European Firms
Filippo di Mauro, Gianmarco Ottaviano, Daria Taglioni
Economic Policy,
No. 57,
2009
Abstract
Much attention has been paid to the impact of a single currency on actual trade volumes. Lower trade costs, however, matter over and beyond their effects on trade flows: as less productive firms are forced out of business by the tougher competitive conditions of international markets, economic integration fosters lower prices and higher average productivity. We assess the quantitative relevance of these effects calibrating a general equilibrium model using country, sector and firm-level empirical observations. The euro turns out to have increased the overall competitiveness of Eurozone firms, and the effects differ along interesting dimensions: they tend to be stronger for countries which are smaller or with better access to foreign markets, and for firms which specialize in sectors where international competition is fiercer and barriers to entry lower.— Gianmarco I.P. Ottaviano, Daria Taglioni and Filippo di Mauro
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