Managerial discretion and optimal financing policies with cash flow uncertainty

Building on the work of Stulz (1990), this paper analyzes the impact of managerial discretion on optimal leverage within an agency cost model of corporate financing. Under the assumption that stockholders do not know with certainty the mean of the cash flow distribution, we argue that leverage fails to control for the amount of cash the manager can misappropriate in personal projects. We develop a model of a firm’s value maximization problem that predicts that as expected earnings uncertainty increases the firm will decrease its optimal level of borrowing. In a second part, we test this proposition on a panel of non–financial UK firms, by investigating the determinants of firms’ performance and allowing for endogeneity of capital structure decisions. The estimates confirm that earnings uncertainty, as measured by the volatility in monthly consensus forecasts of individual companies’ earnings per share, negatively affects corporate leverage. Furthermore, new empirical support is found to the agency cost view that corporate performance is positively correlated with leverage when poorly managed firms are selected.

Culture Clash: The Costs and Benefits of Homogeneity

This paper develops an economic theory of the costs and benefits of corporate culture -- in the sense of shared beliefs and values -- in order to study the effects of 'culture clash' in mergers and acquisitions. I first use a simple analytical framework to show that shared beliefs lead to more delegation, less monitoring, higher utility (or satisfaction), higher execution effort (or motivation), faster coordination, less influence activities, and more communication, but also to less experimentation and less information collection. When two firms that are each internally homogenous but different from each other, merge, the above results translate to specific predictions how the change in homogeneity will affect firm behavior. The paper's predictions can also serve more in general as a test for the theory of culture as homogeneity of beliefs.

Measurement in marketing

We distinguish three senses of the concept of measurement (measurement as the selection of observable indicators of theoretical concepts, measurement as the collection of data from respondents, and measurement as the formulation of measurement models linking observable indicators to latent factors representing the theoretical concepts), and we review important issues related to measurement in each of these senses. With regard to measurement in the first sense, we distinguish the steps of construct definition and item generation, and we review scale development efforts reported in three major marketing journals since 2000 to illustrate these steps and derive practical guidelines. With regard to measurement in the second sense, we look at the survey process from the respondent's perspective and discuss the goals that may guide participants' behavior during a survey, the cognitive resources that respondents devote to answering survey questions, and the problems that may occur at the various steps of the survey process. Finally, with regard to measurement in the third sense, we cover both reflective and formative measurement models, and we explain how researchers can assess the quality of measurement in both types of measurement models and how they can ascertain the comparability of measurements across different populations of respondents or conditions of measurement. We also provide a detailed empirical example of measurement analysis for reflective measurement models

Autonomy and the Ethics of Biological Behaviour Modification

Much disease and disability is the result of lifestyle behaviours. For example, the contribution of imprudence in the form of smoking, poor diet, sedentary lifestyle, and drug and alcohol abuse to ill-health is now well established. More importantly, some of the greatest challenges facing humanity as a whole – climate change, terrorism, global poverty, depletion of resources, abuse of children, overpopulation – are the result of human behaviour. In this chapter, we will explore the possibility of using advances in the cognitive sciences to develop strategies to intentionally manipulate human motivation and behaviour. While our arguments apply also to improving prudential motivation and behaviour in relation to health, we will focus on the more controversial instance: the deliberate targeted use of biomedicine to improve moral motivation and behaviour. We do this because the challenge of improving human morality is arguably the most important issue facing humankind (Persson and Savulescu, forthcoming). We will ask whether using the knowledge from the biological and cognitive sciences to influence motivation and behaviour erodes autonomy and, if so, whether this makes it wrong

MEASURING FOREST RESOURCE VALUES: AN ASSESSMENT OF CHOICE EXPERIMENTS AND PREFERENCE CONSTRUCTION METHODS AS PUBLIC INVOLVEMENT TOOLS

Human values arising from forests include market and non-market values. Timber values and values of non-timber forest products traded in markets (berries, wild rice, etc.) are considered market values. Among non-market values are recreation values and values associated with wildlife harvesting by Aboriginal People. These are considered non-market because participation in these activities does not require the purchase of market based permits; prices do not function as rationing devices in these activities. In addition to non-market values arising from activities, individuals may also have values associated with forest conditions (biodiversity, etc.). These are referred to as passive use values since the value is not associated with any specific use of the resource or activity related to the forest. Since forests in Canada are largely on public land, these passive use values are particularly relevant to Canadian forest management. These values reveal the preferences of the public for components of forest management. Eliciting these values is a form of public involvement in that the public is engaged in assessing forest management options and providing opinions and sentiments regarding these options. Ideally, values arising from forests would be collected from a broad range of the public and examined to provide guidance to forest managers. However, values over forest outputs and conditions may be very poorly formed when people have little experience with the range and complexity of forest ecology and management. In addition, eliciting values without framing them in a trade-off setting can result in misleading estimates. In this project we attempt to elicit passive use values in a manner that allows for poorly defined initial notions of value through an approach known as preference construction. Preference construction essentially provides for education and information processing in the development of passive use values. These estimates are also developed using a trade-off approach (choice experiments). The project focuses on the values of the local public within the NorSask forest. More formally, the objectives of this research are to: 1) ascertain the passive use values held by local people associated with forests in the NorSask Forest Management License Area; 2) explore differences in preferences based on the degree and frequency of formal preference construction exercises; and 3) evaluate this approach as a method of public involvement. A total of 43 individuals from the local community were involved in the valuation exercise. They participated in 3 groups or treatments, each with a different level of involvement in the valuation assessment. The first group was involved in three separate sessions, allowing for significant preference construction and information acquisition. The second group was involved in only one session and the third group was involved only minimally through a telephone contact and the completion of a survey delivered through the mail. The hypothesis being examined was that the degree of involvement in the exercise would affect the responses either in terms of the variances of the responses or the actual preferences. Not all forest values can be examined in a single valuation task. In this case values associated with key game species (moose), wildlife species reflecting biodiversity or threatened species (caribou), old age classes of forest, protected areas and local employment were assessed. These were selected based on the preference construction sessions with the first group. A general trend was found in the ranking of forest values. The values were highest for increases in older forest age classes and protected areas and lower for caribou and moose levels (expressed in percentage changes relative to current levels). The lowest value arose from the local jobs generated by forestry activity. Monetary measures of these values were also developed. The scenario choices made by the individuals revealed that a 5% increase in moose and caribou populations would be worth approximately $10 and$12 per year. A 5% increases in old age classes or protected areas was worth approximately 4 to 5 times as much. They were willing to pay approximately $7 per year in increased taxes for increases in local employment. The hypothesis that the group preferences would differ was not accepted. The preferences of the first and third groups, while expected to be very different, were in fact quite similar. The second group did appear to be different from these other two but it is possible that significant variation in demographic characteristics was driving that difference, rather than the level of preference construction effort. The sample in the third group did however exhibit more resistance to completing the exercise and registered more protests to the value assessment. In conclusion, the approach employed was successful in eliciting passive use values for components of forest management. These values alone provide interesting information for managers to consider in the development of management plans. Evidence supporting the hypothesis that preference construction approaches improve these valuation exercises was not found in this study although this result must be tempered by the limitations arising from sample size and demographic composition of the study groups.Resource /Energy Economics and Policy,

Addiction, compulsion, and weakness of the will: A dual process perspective

How should addictive behavior be explained? In terms of neurobiological illness and compulsion, or as a choice made freely, even rationally, in the face of harmful social or psychological circumstances? Some of the disagreement between proponents of the prevailing medical models and choice models in the science of addiction centres on the notion of “loss of control” as a normative characterization of addiction. In this article I examine two of the standard interpretations of loss of control in addiction, one according to which addicts have lost free will, the other according to which their will is weak. I argue that both interpretations are mistaken and propose therefore an alternative based on a dual-process approach. This alternative neither rules out a capacity in addicts to rationally choose to engage in drug-oriented behavior, nor the possibility that addictive behavior can be compulsive and depend upon harmful changes in their brains caused by the regular use of drugs

Trade credit defaults and liquidity provision by firms

Using a unique data set on trade credit defaults among French firms, we investigate whether and how trade credit is used to relax financial constraints. We show that firms that face idiosyncratic liquidity shocks are more likely to default on trade credit, especially when the shocks are unexpected, firms have little liquidity, are likely to be credit constrained or are close to their debt capacity. We estimate that credit constrained firms pass more than one fourth of the liquidity shocks they face on to their suppliers down the trade credit chain. The evidence is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate the consequences of credit constraints. In addition, we show that the chain of defaults stops when it reaches firms that are large, liquid, and have access to financial markets. This suggests that liquidity is allocated from large firms with access to outside finance to small, credit constrained firms through trade credit chains

Why paper mills clean up : determinants of pollution abatement in four Asian countries

The authors find strong evidence that despite weak or nonexistent formal regulation and enforcement of environmental standards, many plants in South and Southeast Asia are clean. At the same time, many plants are among the world's worst polluters. To account for the extreme variation among plants, the authors review evidence from a survey of pollution abatement by 26 pulp and paper plants in four countries: Bangladesh, India, Indonesia, and Thailand. They incorporate 3 sets of factors affecting pollution intensity: plant characteristics, economic considerations, and external pressure from the government and private stakeholders. They find that the level of pollution abatement is positively associated with scale and competitiveness, negatively associated with public ownership, and unaffected by foreign links (in ownership or financing). Informal regulation, or community pressure on plants works to abate pollution, with high income being a powerful predictor of effectiveness. Privatization, to the extent that it increases plant efficiency, can significantly improve environmental performance. To prevent environmental injustice in poor or marginalized communities, the authors conclude, governments may want to consider strategies for improving their participation, and may want to target regulation to address pollution problems among them.Environmental Economics&Policies,Water and Industry,Water Conservation,Pollution Management&Control,Sanitation and Sewerage,Environmental Economics&Policies,Water and Industry,Pollution Management&Control,Sanitation and Sewerage,TF030632-DANISH CTF - FY05 (DAC PART COUNTRIES GNP PER CAPITA BELOW USD 2,500/AL

Using Surveys to Compare the Public’s and Decisionmakers’ Preferences for Urban Regeneration: The Venice Arsenale

In this paper, we illustrate how surveys can be used to elicit the preferences of the public and of policymakers and city officials for regeneration projects at urban sites. Our methodology uses rating exercises, coupled with conjoint-choice stated preferences for the general public and with ranking exercises for the public officials and other stakeholders, and is then applied to investigate alternative reuses of the Venice Arsenale, Italy, and their economic, environmental and social impacts. One interesting feature of the conjoint choice questions for members of the public is that the responses to these questions can be used to estimate the social benefits of regeneration projects, i.e., how much people are willing to pay for these urban transformations. Another advantage of our approach is that it can be used seek and foster broader public participation into urban decisionmaking processes.Land Use, Decision-Making, Cleanup, Sustainable Development, Local Economic Development, Choice Experiments

Rationalism in Regulation

This Review follows the structure of Retaking Rationality. In Part I we criticize the book’s narrative (summarized above) as cartoonish and unhistorical—we think it is confusing rather than helpful to understanding recent developments and controversies in cost-benefit analysis and the organization of regulatory decisionmaking within the executive branch. In Part II we consider the book’s “Eight Fallacies of Cost-Benefit Analysis.” We find that these discussions are generally well informed and interesting but suffer from the effort to squeeze cost-benefit issues into the antiregulation-versusproregulation narrative; moreover the discussions are often excessively abstract and ambitious concerning the function of cost-benefit analysis, and they entirely fail to support the thesis that cost-benefit fallacies have been used to defeat beneficial regulations. Finally, in Part III we discuss the authors’ arguments about the need for and practice of OMB/OIRA oversight of agency rulemaking. Here we criticize as naïve the book’s argument that there is no need for an institutional counterweight to agency parochialism and that OIRA’s role should be recast as one of coordination, calibration, and promotion of a proregulatory agenda against the forces of agency sloth. A concluding Part sums up our arguments.