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Abstract:
In many instances, �independently minded� top ranking executives can imposestrong discipline on their CEO, even though they are formally under his authority.This paper argues that the use of such a disciplining mechanism is a key feature ofgood corporate governance.

Abstract:
In many instances, 'independently-minded' top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as 'independent from the CEO' - a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.

Abstract:
In many instances, 'independently-minded' top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as 'independent from the CEO' a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.

Corporate governance, corporate performance, acquisition, executives

Abstract:
In many instances, "independently-minded" top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance. We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as "independent from the CEO" a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.

Corporate Governance, Organization

Abstract:
This paper empirically documents the performance and behavior of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the firms are widely held, another third are founder-controlled and the remaining third are heir-controlled family firms. We find that, in the cross section, family firms largely outperform widely held corporations. This result holds for founder controlled firms, professionally managed family firms, but more surprisingly also for firms run by descendants of the founder.

We then propose explanations that differ according to the identity of the management in the family firm. First, we offer evidence of a more efficient use of labor in heir-managed firms. These firms pay lower wages, even allowing for skill and age structure within the firm. We also find that descendants smooth out industry shocks and manage to honor implicit labor contracts. Secondly, we present evidence consistent with outside CEOs in family firms making a more parsimonious use of capital. They employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions.

Family firms, management style, corporate performance

Abstract:
We look at the corporate performance of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the firms are widely held, another third are founder controlled and the remaining third are heir-controlled family firms. We find that, in cross section, family firms largely outperform widely held corporations. This result holds for founder-controlled firms, but more surprisingly also for heir-managed firms. To explain this, we provide evidence consistent with the fact that, because of their different time horizons, heir-managed corporations have a comparative advantage when enforcing implicit insurance contracts with their labor force. More specifically, we find that: (1) employment in heir-managed firms is less sensitive to industry shocks; and (2) heirs pay lower wages. Finally, we discuss issues related to the endogeneity of performance/family regressions looking both at delisting and transitions from family to non-family status. We conclude that these issues may lead us to overestimate the performance of heirs compared to professionally-managed firms, but to underestimate the performance of heirs when compared to widely held firms.

Family firms, management style, corporate performance

Abstract:
We investigate the relationship between ownership structure of financial assets and non-fundamental risk. We define an asset to be fragile if it susceptible to non-fundamental trading shocks. An asset can be fragile because of concentrated ownership, or because its owners face correlated liquidity shocks, ie., they must buy or sell at the same time. Two assets are “co-fragile” if their owners have correlated trading needs, even if the holdings of these owners do not directly overlap. We formalize this idea and apply it to the ownership of US stocks between 1990 and 2007. Consistent with our predictions, fragility strongly predicts future price volatility, and co-fragility predicts cross-stock return comovement.

Abstract:
This paper looks at the effects of entrepreneurial optimism on financial contracting and corporate performance. Optimism may increase effort, but is bad for adaptation decisions as the entrepreneur underweights negative information. The first-best contract with an optimist uses contigencies for two distinct purposes: (1) bridging the gap in beliefs by letting the entrepreneur take a bet on his project's success, and (2) imposing adaptation decisions in bad states. When the contract space is restricted to debt, there may exist a separating equilibrium where optimists self-select in short-term debt and realists in long-term debt.

We confront our theory to a large dataset of entrepreneurs. First, we find that differences in beliefs may be (partly) explained by usual determinants put forward in psychology and management literature. Second, in line with the two main predictions of our model, we find that (1) optimists tend to borrow more short term and (2) those optimists that borrow more short term perform better. Last, we find that firms run by optimists tend to grow less, die sooner and be less profitable, which we view as a confirmation that our measure of optimism does not proxy high risk - high return projects.

Abstract:
This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a unique dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) differences in unobserved directors' "abilities" and (2) the unobserved propensity of firms to hire directors from particular networks, irrespective of the CEO's identity. We then show that the governance of firms run by former civil servants is relatively worse on many dimensions. Former civil servants are less likely to leave their CEO job when their firm performs badly. Secondly, CEOs who are former bureaucrats are more likely to accumulate directorships, and the more they do, the less profitable is the firm they run. Thirdly, the value created by acquisitions made by former bureaucrats is lower. All in all, these firms are less profitable on average.

Social networks, corporate governance, board of directors

Abstract:
This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a unique dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) differences in unobserved directors' "abilities" and (2) the unobserved propensity of firms to hire directors from particular networks, irrespective of the CEO's identity. We then show that the governance of firms run by former civil servants is relatively worse on many dimensions. Former civil servants are less likely to leave their CEO job when their firm performs badly. Secondly, CEOs who are former bureaucrats are more likely to accumulate directorships, and the more they do, the less profitable is the firm they run. Thirdly, the value created by acquisitions made by former bureaucrats is lower. All in all, these firms are less profitable on average.

networks, corporate governance

Abstract:
We test the hypothesis that individual investors contribute to the idiosyncratic volatility of stock returns because they act as noise traders. To this end, we consider a reform that makes short selling or buying on margin more expensive for retail investors relative to institutions, for a subset of French stocks. If retail investors are noise traders, theory implies that the volatility of stocks affected by the reform should decrease relative to other stocks. This prediction is borne out by the data. Moreover, around the reform, we observe a significant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio for the stocks affected by the reform relative to other stocks. We show that these findings are also consistent with models in which individual investors, acting as noise traders, are a source of volatility.

Idiosyncratic volatility, Noise trading, Retail investors

Abstract:
We test the hypothesis that retail trading activity contributes to the idiosyncratic volatility of stock returns. To this end, we consider a reform that increases the cost of speculative trading for retail investors in a subset of French stocks. For this reason, the reform triggers a drop in the activity of individual investors in the stocks affected by the reform relative to other stocks. As implied by our hypothesis, this drop coincides with a decline in the volatility of these stocks. Moreover, around the reform, we find a significant decrease in the magnitude of returns reversals and the Amihud ratio for the stocks affected by the reform relative to stocks unaffected by the reform. We show that these findings are predicted by theories in which noise trading is a source of volatility.

Idiosyncratic Volatility, Retail Trading, Noise Trading

Abstract:
This paper is a theoretical exploration on the costs and benefits of passive resistance in the chain of command. In our model, the organization consists of two employees: an informed decision maker (she) in charge of selecting a project, and an uninformed implementer (he) in charge of its execution. Both employees have intrinsic and possibly differing preferences over projects. Overall success depends on both project selection and its implementation.

We find that a certain level of disagreement in the chain of command may be useful to (1) prevent bad decisions from being taken and (2) give credibility to the accuracy of the decision maker's orders. Hence, there is an optimal level of dissent in organizations, which is larger when the extent of the decision maker's private information is higher.

We apply our analysis to two questions: (1) the political independence of government agencies and (2) the current debate on corporate governance.

Organization Design, Corporate Governance, Authority

Abstract:
This paper finds statistical evidence that LBOs may serve to finance corporate growth when they act as a substitute for weak capital markets. Using a large dataset on 830 deals in France, we look at the change in corporate behaviour following a leveraged ownership transfer, compared to an adequately chosen control group. We find that in the three years following an LBO, targets tend to grow faster than their peer group: the excess job growth is about 13%. We run various robustness checks to ensure that the methodology and sample are comparable with previous studies. We then provide evidence consistent with LBOs alleviating capital constraints in France. First, former divisions of larger firms, who were likely not constrained before the transaction, do not experience any post LBO growth. Second, the strongest post LBO growth is observed in financially dependent industries, i.e. industries where firms are usually reliant on external finance to grow.

LBO, Employment, Financial Constraints

Abstract:
We present a model where arbitrageurs operate on an asset market that can be hit by information shocks. Before entering the market, arbitrageurs are allowed to optimize their capital structure, in order to take advantage of potential underpricing. We find that, at equilibrium, some arbitrageurs always receive funding, even in low information environments. Other arbitrageurs only receive funding in high information environments. The model makes two easily testable predictions: first, arbitrageurs with stable funding should experience more mean-reversion in returns, in particular following low performance. Second, this larger mean-reversion should be lower, if many other funds have stable fundings. We test these predictions on a sample of hedge funds, some of which impose impediments to withdrawal to their investors.

arbitrageur, capital structure

Abstract:
We present a model where arbitrageurs operate on an asset market that can be hit by information shocks. Before entering the market, arbitrageurs are allowed to optimize their capital structure, in order to take advantage of potential underpricing. We find that, at equilibrium, some arbitrageurs always receive funding, even in low information environments. Other arbitrageurs only receive funding in high information environments. The model makes two easily testable predictions: first, arbitrageurs with stable funding should experience more mean-reversion in returns, in particular following low performance. Second, this larger mean-reversion should be lower, if many other funds have stable fundings. We test these predictions on a sample of hedge funds, some of which impose impediments to withdrawal to their investors.

Limits of Arbitrage, Capital Structure, Market Efficiency

Abstract:
This paper looks at the effect of shareholder horizon on corporate behavior. In perfect capital markets, corporate behavior should be insensitive to shareholder horizon, but when investment opportunities are not well valued by the market, shareholder horizon matters. We first present a simple framework to show that shareholder horizon should be looked at in conjunction with stock misvaluation. We build on this insight to design a novel empirical strategy to assess the impact of investor short-termism. Consistent with our simple framework, we find that, when a firm is undervalued, the presence of more short-term investors is associated with bigger shareholder payout, less equity issue, less external financing, and as a result, less investment and less R&D spending. Under our interpretation, long-term investors are not more involved in corporate governance, yet, they affect corporate policy.

Investor Horizon, Payouts, Financing, Investment

Abstract:
This Paper empirically investigates the impact of distortions in the banking sector on the structure and dynamics of product markets, as well as on firm level outcomes. Our analysis suggests that an increase in the efficiency of the banking industry can have first-order effects not only on the lending relationship between banks and firms, but also on the structure and dynamics of product markets overall. The particular reform we consider is the deregulation of the French banking industry in the mid 1980s. This deregulation eliminated government interference in bank lending decisions and allowed French banks to compete more freely in the credit market. Post deregulation, we find that banks are less willing to bail out poorly performing firms and that these firms experience a steeper increase in the cost of capital. Subsequently, firms in the more bank-dependent industries have a somewhat higher propensity to undertake restructuring measures. At the industry-level, we observe an increase in asset and job reallocation in the bank dependent sectors, mostly due to higher entry and exit rates of firms. We also find an improvement in allocative efficiency across firms, as well as a decline in industry concentration ratios. Overall, these findings are consistent with a model where distortions in bank lending create artificial barriers to entry in the real sectors of the economy. A more efficient banking sector, therefore, appears to play an important role in fostering a Schumpeterian process of 'creative destruction'.

Banking deregulation, industry structure, economic development

Abstract:
This article studies some aspects of organisation choice while explicitly accounting for the fact that firms compete on the product market. Firms compete by introducing drastic innovations, while organisation choice results from a tradeoff between productive efficiency and reactivity. We show that the adoption of information technologies and the choice of reactive organisations are complements via an industry-level equilibrium effect. This view contrasts with the existing literature which emphasises the existence of similar complementarities at the firm level. Consistently with our model, we find that industry-level, rather than firm-level, diffusion of information technologies explains firms' organisational practices.

Abstract:
This Paper argues that shareholder activism can be considered as similar to the adoption of increasing returns-to-scale technology by financial institutions. I start from this mechanism to build a model designed to assess the long-run consequences of shareholder pressure. I then use this model to analyse the interaction between shareholder pressure, savings dynamics and growth. The main consequence is that the economy exhibits multiple steady state equilibria. Two important implications are derived: first, temporary population changes have long lasting effects. Second, small technology improvements may lead to large changes in welfare. I then feed the model with an additional assumption: managers are employment friendly. This allows us to study the relation between corporate control, growth and the demand for skill. It also allows us to address concerns raised by the proponents of the stakeholder society in a formal framework. Finally, I provide some empirical evidence that shareholder pressure actually has a macroeconomic impact on growth and labour demand, in line with some of the model predictions.

Corporate governance, capital assumption, demography, inequality

Abstract:
This Paper shows that international trade affects the demand for skill through an export-based channel. Our working hypothesis is that the very act of exporting requires an effort of skill upgrading, in particular among occupations related to marketing and development. Using firm level data, we estimate a model that breaks down production into two stages: product development and marketing, and actual production. Once we correct for biases arising from the endogeneity of export decision, we find strong support for our hypothesis. The skill requirement in development/marketing occupations increases with the share of exported output. Overall skill upgrading is as important among firms exporting to OECD countries as among those exporting outside of the OECD to the LDCs.

Trade, exportations, labour demand, organization of production

Abstract:
This Paper posits that firms can choose the degree of risk inherent to their technological/marketing/organizational strategies. Financial market development, by improving risk sharing between owners of listed firms, increases the willingness of these firms to take risky bets. This in turn increases firm level uncertainty in sales, employment and profits. In equilibrium, this effect diffuses to non-listed firms, a group not directly involved in risk sharing. The effect is larger when competition increases, and when labor market institutions are flexible. This Paper thus provides a finance-based, instead of technology-based, rationale for the increase of firm level uncertainty that has recently been documented in France and the US. We then use the French stock market reforms of the late 1980s to test our predictions, using listed firms as the treated group and privately held firms as a control group. Consistent with our model's testable predictions, we find that (1) for listed firms, firm sales volatility has increased markedly after the reforms; and (2) this effect is stronger where product market competition is the strongest. Such evidence holds in front of various robustness checks. In particular, we seek to control for the exposure to international competition and the adoption of new technologies, two forces that may have affected our treatment and control groups differently.

Financial development, firm-level uncertainty, risk sharing

Abstract:
By choosing their organizations, firms trade-off productive efficiency and time spent in implementing innovation. We embed such a productivity/reactivity trade-off in a growth model with creative destruction. We first highlight the specific impact of time in firm competition: in addition to weighing costs and benefits of late adoption, firms use time as a strategic variable through the possibility of overtaking their competitors. Due to this very specificity of time competition, multiple equilibria may emerge: when firms adopt quickly, their stock market valuation is larger, and they innovate more and produce less. Moreover, the IT revolution is shown to favour quick implementation via a general equilibrium feedback on organizational choice.

Firm organisation, reactivity, innovation, competition

Abstract:
We describe and analyse the changes in the occupational structure of French manufacturing firms between 1984 and 1995. Firms employ a much greater proportions of engineers and researchers working on the design and marketing of new products and a much lower proportion of high-skilled experts working in administration-related activities. Firms have also reduced the share of production-related activities at both the levels of high-skilled and low-skilled workers. We develop a very simple labour demand model that shows the role played by technological change. By reducing the costs of activities that are the easiest to program in advance (notably for product fabrication), new information technologies make it possible to allocate more human and material resources to the activities that are the most difficult to program in advance, notably for the conception and marketing of new products. We show that this is the main channel through which new information technologies increase the demand for skill.

Skill, tasks, technological change

Abstract:
We model an organization as a two-agent hierarchy: an informed Decision Maker in charge of selecting projects and a (possibly) uninformed Implementer in charge of their execution. Both have intrinsic preferences over projects. This paper models the costs and benefits of divergence between their preferences, that is, dissent within the organization. Dissent is useful to (1) foster the use of objective (and sometimes private) information in decision making and (2) give credibility to the Decision Maker’s choices. However, dissent comes at the cost of hurting the Implementer’s intrinsic motivation, thereby impairing organizational efficiency. We show that dissent can be optimal, in particular, when information is useful and uncertainty is high. Moreover, dissent remains an optimal organizational form even when Implementers can choose their employer or when Decision Makers have real authority over hiring decisions.

Abstract:
This paper is a theoretical exploration on the costs and benefits of 'passive resistance' in the chain of command. In our model, the organization consists of two employees: an informed decision maker (she) in charge of selecting a project, and an uninformed implementer (he) in charge of its execution. Both employees have intrinsic and possibly differing preferences over projects. Overall success depends on both project selection and its implementation. We find that a certain level of disagreement in the chain of command may be useful to (1) prevent bad decisions from being taken and (2) give credibility to the accuracy of the decision maker's orders. Hence, there is an optimal level of dissent in organizations, which is larger when the extent of the decision maker's private information is higher. We apply our analysis to two questions: (1) the political independence of government agencies and (2) the current debate on corporate governance.

Abstract:
Over the past decades, the real and financial volatility of listed firms has increased, while the volatility of private firms has decreased. We first provide panel data evidence that, at the firm level, sales and employment volatility are impacted by changes in the degree of ownership concentration. We then construct a model with private and listed firms where risk taking is a choice variable at the firm-level. Due to general equilibrium feedback, we find that an increase in stock market participation or integration in international capital markets generate opposite trends in volatility for private and listed firms. This pattern cannot be replicated by alternative comparative statics exercises, such as an increase in product market competition, an increase in product market size, an increase in the fraction of listed firms, or a decrease in aggregate volatility.

Financial Integration, Firm-level Volatility, Listed vs non-listed Firms, Stockmarket Participation

Abstract:
Optimistic beliefs are a source of nonpecuniary benefits for entrepreneurs that can explain the “Private Equity Puzzle.” This paper looks at the effects of entrepreneurial optimism on financial contracting. When the contract space is restricted to debt, we show the existence of a separating equilibrium in which optimists self-select into short-term debt and realists into long-term debt. Long-term debt is optimal for a realist entrepreneur as it smooths payoffs across states of nature. Short-term debt is optimal for optimists for two reasons: (i) “bridging the gap in beliefs” by letting the entrepreneur take a bet on his project’s success, and (ii) letting the investor impose adaptation decisions in bad states. We test our theory on a large data set of French entrepreneurs. First, in agreement with the psychology literature, we find that biases in beliefs may be (partly) explained by individual characteristics and tend to persist over time. Second, as predicted by our model, we find that short-term debt is robustly correlated with “optimistic” expectation errors, even controlling for firm risk and other potential determinants of short-term leverage.

G32, D86

Abstract:
Augustin Landier, David Thesmar and Mathias ThoenigThere are two non-mutually exclusive theories of individual variations in pro-capitalism opinions. The first theory views pro-capitalism opinions as self-serving: Individuals are opposed to market forces when they threaten their economic rents. The second theory views differences in such opinions as reflecting genuine disagreement on the efficiency of various economic systems. Using individual data, we investigate the validity of both theories, focusing on attitudes toward private ownership, private profit and competition. We find evidence that the first theory explains some of the variations in attitudes. However, consistent with the second theory, we also find evidence of individual learning about the comparative virtues of economic systems. The learning is slow, home-biased and path-dependent. Long-run cultural and historical determinants of pro-market attitudes, such as religion and legal origins, explain more than 40% of the cross-country variations in capitalism aversion. Last, we provide tentative evidence that at the country level, pro-market opinions affect the nature of economic institutions. Our results suggest that the feasibility of economic reform does not depend solely on its impact on the distribution of rents; ideological a-prioris are likely to be important as well.

Abstract:
In this paper, we analyse the non parametric identification of dynamic discrete choice models using short-panel data. Our identification methodology is based on the ideas explored in the seminal paper of Hotz and Miller (1993) that Bellman equations can be interpreted as moment conditions. We derive the exact degree of underidentification of these models both in the case where random shocks on preferences are independent over time and in a case with correlated fixed effects. We investigate the necessity and power of various identifying restrictions.

Dynamic discrete choice processes, identification