Development Economics: Microeconomic issues and Policy Models

Transcription

1 MIT OpenCourseWare Development Economics: Microeconomic issues and Policy Models Fall 2008 For information about citing these materials or our Terms of Use, visit:

2 14.771: Firms and Contracts Lecture 2 Ben Olken October 2008 Olken () Firms/Contracts Lecture 2 10/08 1 / 30

3 Overview Last lecture: problems in contract enforcement lead to other types of contract enforcement mechanisms (e.g., reputations, networks) This lecture: what are the implications of weak contract enforcement for how rms are structured? Business groups. Some problems with business groups (tunneling) Family rms Olken () Firms/Contracts Lecture 2 10/08 2 / 30

4 Business Groups Weak contract enforcement suggests that more is likely to be done within the rm Olken () Firms/Contracts Lecture 2 10/08 3 / 30

5 Business Groups Weak contract enforcement suggests that more is likely to be done within the rm Other theories might also suggest integration across industries (i.e., unrelated production functions) Olken () Firms/Contracts Lecture 2 10/08 3 / 30

6 Business Groups Weak contract enforcement suggests that more is likely to be done within the rm Other theories might also suggest integration across industries (i.e., unrelated production functions) Access to nance also means more may be done within the rm in places where nance is less developed (Rajan and Zingales 1998) Branding/reputations (discussed at the end of last lecture) suggests reasons for rms to integrate across sectors Olken () Firms/Contracts Lecture 2 10/08 3 / 30

7 A diversi ed business group Diagram of the Slim Helu Group removed due to copyright restrictions. See Perkins, Morck, and Yeung (2006). Olken () Firms/Contracts Lecture 2 10/08 4 / 30

8 Conglomerate Size and Financial Development Cross-country evidence mixed Olken () Firms/Contracts Lecture 2 10/08 5 / 30

9 Conglomerate Size and Financial Development Cross-country evidence mixed Note that one shouldn t necessarily count cross-country evidence too much! One should view this as motivation for better micro studies. Olken () Firms/Contracts Lecture 2 10/08 5 / 30

10 Conglomerate Size and Financial Development Cross-country evidence mixed Note that one shouldn t necessarily count cross-country evidence too much! One should view this as motivation for better micro studies. Acemoglu, Johnson, and Mitton (2005) study vertical integration worldwide For each industry, they use US input-output tables to determine how much input from each industry is required to produce a given type of output They then calculate using each rm s SIC codes what percent of the rm s inputs are produced by industries in which the rm operates Olken () Firms/Contracts Lecture 2 10/08 5 / 30

11 Conglomerate Size and Financial Development Cross-country evidence mixed Note that one shouldn t necessarily count cross-country evidence too much! One should view this as motivation for better micro studies. Acemoglu, Johnson, and Mitton (2005) study vertical integration worldwide For each industry, they use US input-output tables to determine how much input from each industry is required to produce a given type of output They then calculate using each rm s SIC codes what percent of the rm s inputs are produced by industries in which the rm operates Findings: Vertical integration is greater in poorer countries, and in countries with greater cost of contract enforcement Also greater in countries with greater entry cost However, this is due almost entirely to industrial composition So it s not clear whether other factors cause these industries to be more appropriate for developing countries, or vice-versa Olken () Firms/Contracts Lecture 2 10/08 5 / 30

12 Acemoglu, Johnson, and Mitton Results Actual vertical integration 8 BGD 8 BGD Vertical integration index CHN LKA NPL IRY BOL URY TWN ECU HTI USA ITA VNM CZE GTM COL MEX BEL CHE NOR FINAUT DNK GBR CAN ARG RRT MYS ESP AUS IRSR VRN JAM PAK PER PLW PAN CRI IND CIV PHL VUT Contract enforcement cost Vertical integration index IND LKA PHL HTI EOU MEA GTM ANM SLV SLBSVK HND YEN MMR YUTSWE SUR PBR TTO CIV CRI QAT GUY DLZ BOL CZE BRB CHL FIN MAC BHS KNA ITA BEL DMA ATG CAN CRD AUS BR LCA NCR PAN LUX THA ESPSGP IRL AUT CHN DEU USA NLD GBR PRT MYS DNK CHE JPN Credit market development Panel A: Vertical integration and contracting costs Panel B: Vertical integration and credit market development 8 EGD 8 BGD LE Vertical integration index LKA CHN PAN TWN PHL USA ITA VNM CZE NLD MEX COL SVKCHI GBR BEL DOM CHE HUN SGP JPN POLMYS ESP AUS ISR RL MHL CRI PLW FIN NOR AUT DNK PAK PER SLB IND URY ECU GTM VUT NPL HND Vertical integration index PAK NPL MRT MMR HTI VNM CIV GUY IND CHN MAC LKA CYM IDA PRY BOL BLZ PAN URY BHS BMJ KNA TWN LUX PHL ECU ANT ITA GTM NLD USA COL MEX CZE SLB SLV BHK HNB DOM THA BRB DEU JAM GRD VEN HUN PRI ARG SWG CHE SUR DMA PER ESP SGP LCA CRI ISR AUS MCOSMR MNP PLW PYI FRO NOR BRN DNK Entry cost 3 6 DUM ADO Log GDP per capita Panel C: Vertical integration and entry costs Panel D: Vertical integration and per-capita GDP Figure by MIT OpenCourseWare. Olken () Firms/Contracts Lecture 2 10/08 6 / 30

13 Acemoglu, Johnson, and Mitton Results Vertical integration predicted by industry mix Vertical integration propensity BGD JPN THA AROITA HUN USA GBR MYS DNK CANNCD IRL ISR BEL CHE NOR BOL CHL SLVNIC GEM TWN COL MEX AUT MRT NPL LKA CHN VEN PAK URYVNM PRY HTI JAM HNDPAN DOM PER PLW CRI Contract enforcement cost IND PHL CIV VUT Panel A: Vertical integration propensity and contracting costs Vertical integration propensity BGD MRT NPL CHN PAK GUV DOL MAC SLV GTM ECU PRY DMA COL VNM CHL MEX HTI PHL URY DOM IND ELZ PAN SUR MMR TTO BRB THA VEN ARC PER ITA HUN GRD LUX GBR USA CRI SVK CZEVCT AUS MYS ESP DEV DNK SLB POL SWE CAN IRL RBD ISR SGP BEL FIN NOR AUT CHE Credit market development Panel B: Vertical integration propensity and credit market development JPN Vertical integration propensity -8 BGD NPL LKA CHN IND PAK ECU GTM -11 CHL PHL VNM TWN DOL URY DOM MEX JAM PAN VUT HND THAJPN ARG -12 GBR PLW VEN PER HUN USA CZE ESP CRI ISR IRU SLB POLMHL BEL FIN -13 CHE NOR AUT Entry cost Panel C: Vertical integration propensity and entry costs Vertical integration propensity BGD MRT NPL IND LKA CHN PAK BOL GUY MAC ECU VNM HTI NIC IDN GTM PHL VUT CIV TWN HNDBLZ PAN MEX MNP MMR CYM SURLCA BHS BMU THATTO ITA JPN VCT PER VEN MYS GUN GBR USA CRI SLB SPK POL ISR BRN FIN BEL CHE GUM NOR ADO CRL AUT Log GDP per capita Panel D: Vertical integration propensity and per-capita GDP Figure by MIT OpenCourseWare. Olken () Firms/Contracts Lecture 2 10/08 7 / 30

14 Khwaja, Mian and Qamar (2008) What are the bene ts of being in a network? Olken () Firms/Contracts Lecture 2 10/08 8 / 30

15 Khwaja, Mian and Qamar (2008) What are the bene ts of being in a network? Data on networks: Authors have data on directors of all Pakistani companies, public and private De ne two rms as connected if they share a common director De ne two rms are in the same network if they can be linked through connected rms Since they have the entire universe of rms, they can construct networks for the whole economy Olken () Firms/Contracts Lecture 2 10/08 8 / 30

16 Khwaja, Mian and Qamar (2008) What are the bene ts of being in a network? Data on networks: Authors have data on directors of all Pakistani companies, public and private De ne two rms as connected if they share a common director De ne two rms are in the same network if they can be linked through connected rms Since they have the entire universe of rms, they can construct networks for the whole economy They nd that there is one very large "super network" Contains 5% of rms But 66% of bank credit! Olken () Firms/Contracts Lecture 2 10/08 8 / 30

17 Khwaja, Mian and Qamar (2008) What are the bene ts of being in a network? Data on networks: Authors have data on directors of all Pakistani companies, public and private De ne two rms as connected if they share a common director De ne two rms are in the same network if they can be linked through connected rms Since they have the entire universe of rms, they can construct networks for the whole economy They nd that there is one very large "super network" Contains 5% of rms But 66% of bank credit! Empirical question: What is the value of being in the super-network? Olken () Firms/Contracts Lecture 2 10/08 8 / 30

18 Constructing a network Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 9 / 30

19 Networks in the economy Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 10 / 30

20 Empirical strategy Compare super-network vs. non super-network rms. Olken () Firms/Contracts Lecture 2 10/08 11 / 30

21 Empirical strategy Compare super-network vs. non super-network rms. Problem? Sign of bias? Olken () Firms/Contracts Lecture 2 10/08 11 / 30

22 Empirical strategy Compare super-network vs. non super-network rms. Problem? Sign of bias? Do the same, but with rm xed e ects Olken () Firms/Contracts Lecture 2 10/08 11 / 30

23 Empirical strategy Compare super-network vs. non super-network rms. Problem? Sign of bias? Do the same, but with rm xed e ects Where does variation come from? Problem? Sign of bias? Olken () Firms/Contracts Lecture 2 10/08 11 / 30

24 Empirical strategy Compare super-network vs. non super-network rms. Problem? Sign of bias? Do the same, but with rm xed e ects Where does variation come from? Problem? Sign of bias? Empirical idea: use incidental rm entry and exits from the super-network Olken () Firms/Contracts Lecture 2 10/08 11 / 30

25 Empirical strategy Compare super-network vs. non super-network rms. Problem? Sign of bias? Do the same, but with rm xed e ects Where does variation come from? Problem? Sign of bias? Empirical idea: use incidental rm entry and exits from the super-network I.e., not whether your rm entered or exited the super-network, but whether another rm in your network entered or exited the supernetwork Problem? Sign of bias? Olken () Firms/Contracts Lecture 2 10/08 11 / 30

26 Empirical strategy Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. 10/08 9 / 30 Olken () Firms/Contracts Lecture 2 10/08 12 / 30

27 10 Results on Borrowing Estimate Y it = α i + α kt + α t + γ Y i,t 1 + β 1 ENTRY it + β 1 ENTRY it Direct i + ε i Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. Olken () Firms/Contracts Lecture 2

28 Results on Probability of Default Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. Note: coe cients multiplied by /0 Olken () Firms/Contracts Lecture 2 10/08 14 / 30

29 10/0 Mechanisms Courtesy of Asim Ijaz Khwaja, Atif Mian, and Abid Qamar. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 15 / 30

30 Bertrand, Mehta, and Mullainathan (2002) What is the downside of being in a network? Olken () Firms/Contracts Lecture 2 10/08 16 / 30

31 Bertrand, Mehta, and Mullainathan (2002) What is the downside of being in a network? Control rights over a rm and cash ow rights over rm s pro ts are not identical: Control rights are awarded to whoever has a majority Cash ow rights are awarded in proportion to ownership Olken () Firms/Contracts Lecture 2 10/08 16 / 30

32 Bertrand, Mehta, and Mullainathan (2002) What is the downside of being in a network? Control rights over a rm and cash ow rights over rm s pro ts are not identical: Control rights are awarded to whoever has a majority Cash ow rights are awarded in proportion to ownership With pyramid ownership structures, these can be totally separated: Principal owns 51% of company i Company i owns 51% of company i + 1 As i! principal retains complete control but has 0 cash ow rights Olken () Firms/Contracts Lecture 2 10/08 16 / 30

33 Tunneling With these types of corporate structures, those with control rights have incentives to expropriate minority shareholders Olken () Firms/Contracts Lecture 2 10/08 17 / 30

34 Tunneling With these types of corporate structures, those with control rights have incentives to expropriate minority shareholders How? Give loans to other rms in groups at arti cially high/low interest rates Sell assets to other rms in the group at arti cially high/low prices Etc Olken () Firms/Contracts Lecture 2 10/08 17 / 30

35 Tunneling With these types of corporate structures, those with control rights have incentives to expropriate minority shareholders How? Give loans to other rms in groups at arti cially high/low interest rates Sell assets to other rms in the group at arti cially high/low prices Etc Why do we care? If minority shareholders will be expropriated, means that business groups will have trouble attracting equity nance for their entities This o sets the potential bene ts of business groups discussed above Olken () Firms/Contracts Lecture 2 10/08 17 / 30

36 Tunneling With these types of corporate structures, those with control rights have incentives to expropriate minority shareholders How? Give loans to other rms in groups at arti cially high/low interest rates Sell assets to other rms in the group at arti cially high/low prices Etc Why do we care? If minority shareholders will be expropriated, means that business groups will have trouble attracting equity nance for their entities This o sets the potential bene ts of business groups discussed above Point of this paper is to detect tunneling Olken () Firms/Contracts Lecture 2 10/08 17 / 30

37 Methodology Idea: Consider external shock to predicted pro ts, and examine how actual pro ts respond to predicted pro ts Predictions: Actual pro ts should respond less to predicted pro ts if rm is in a group Response is smaller the lower the cash ow rights of the controlling rm Controlling rm s pro ts should be more responsive to the bottom rm s shocks than their cash ow rights would imply Response is greater if they have low cash ow rights (this I don t see seems to ignore actual pro ts) Asymmetry: bottom rms pro ts are not sensitive to top rm s shocks This distinguishes tunneling from insurance Olken () Firms/Contracts Lecture 2 10/08 18 / 30

38 Data Outcome: Pro ts Before Interest Depreciation and Taxes (PBIDT) Shocks: Average asset-weighted industry returns (excluding your rm) Why exclude your rm? Cash ow rights: Measure direct cash ow rights with several proxy variables: Cash ow rights of directors (likely to be from the controlling group) Cash ow rights of "other shareholders" (not directors, nancial instituions, government bodies, corporate bodies, nor top fty shareholders) No measure of indirect cash ow rights (i.e., cash ow through intermediate rms) Does this matter? Olken () Firms/Contracts Lecture 2 10/08 19 / 30

39 Regressions and Results Question 1: sensitivity to own shocks π kt = a + b (pred kt ) + c (cash k pred kt ) + dx kt + α k + α t + ε kt Courtesy of MIT Press. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 20 / 30

40 Regressions and Results Question 2: sensitivity to amount of director equity Courtesy of MIT Press. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 21 / 30

41 Regressions and Results Question 5: Is there asymetry, i.e., do pro ts move towards the top rm in the chain? Courtesy of MIT Press. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 22 / 30

42 Family rms Many rms are by family members of the original founder. A priori, this seems ine cient: why would we think that managerial talent is hereditary? Shouldn t the market nd a better manager? Why might this be? Olken () Firms/Contracts Lecture 2 10/08 23 / 30

43 Burkart, Panunzi, and Shleifer (2003) Tunneling! Olken () Firms/Contracts Lecture 2 10/08 24 / 30

44 Burkart, Panunzi, and Shleifer (2003) Tunneling! Assume no superior manager has resources to buy rm outright Olken () Firms/Contracts Lecture 2 10/08 24 / 30

45 Burkart, Panunzi, and Shleifer (2003) Tunneling! Assume no superior manager has resources to buy rm outright Then: If shareholder protections are strong, then you can sell all your stock in the company, and it is run with diversi ed ownership. If shareholder protections are intermediate, you sell some stock but continue to be a large shareholder, and monitor the professional manager to limit expropriation. If shareholder protections are very weak, so even a manager can expropriate a large shareholder, you retain control within the family. Olken () Firms/Contracts Lecture 2 10/08 24 / 30

46 Perez-Gonzalez (2006) What is the impact of inherited management on rm performance? Is it actually negative (as above model suggests)? Olken () Firms/Contracts Lecture 2 10/08 25 / 30

47 Perez-Gonzalez (2006) What is the impact of inherited management on rm performance? Is it actually negative (as above model suggests)? Idea: Look at rms that were initially controlled by a family, and where there was a CEO succession Compare stock returns for those rms that announce family member will be new CEO with those that announce external new CEO Similarly compare change in actual pro ts before and after new CEO takes over Olken () Firms/Contracts Lecture 2 10/08 25 / 30

48 Stock-market event studies Stock market event studies: Basic idea: e cient markets hypothesis implies that the full long run value of new information on a rm is incorporated in the stock price immediately So the change in a stock s price right around the time of new information tells you the value of that new information Olken () Firms/Contracts Lecture 2 10/08 26 / 30

49 Stock-market event studies Stock market event studies: Basic idea: e cient markets hypothesis implies that the full long run value of new information on a rm is incorporated in the stock price immediately So the change in a stock s price right around the time of new information tells you the value of that new information Development examples: Fisman (2001) studies e ect of Suharto s health on connected rms to determine the value of political connections Guidolin and La Ferrara (2007) studies impact of con ict shocks on mineral rms to detect illegal diamond trade Olken () Firms/Contracts Lecture 2 10/08 26 / 30

50 Stock-market event studies Estimation: Estimate a market model to nd "abnormal returns" for a rm, i.e. take the residuals from r f = α + βr m + ε f De ne a window around the event e. Then estimate average abnormal returns during the event window e and test the null that they are equal to 0. What do we learn from these models? When might they be reasonable? When might they not be reasonable? Olken () Firms/Contracts Lecture 2 10/08 27 / 30

51 Results Courtesy of the American Economic Association. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 28 / 30

52 Results Also examines changes in accounting pro ts Courtesy of the American Economic Association. Used with permission. Olken () Firms/Contracts Lecture 2 10/08 29 / 30

53 Concluding thoughts Firms are important engines of economic growth Problems with contracting and credit lead to unusual corporate stuctures, with some bene ts but also some costs But I think there s much more about rms that hasn t been explored much. Some things I think are interesting: Business clusters Branding Endogenous adoption of technology Internal rm capital markets Political capture Firm behavior Olken () Firms/Contracts Lecture 2 10/08 30 / 30