Testing for inconsistencies in the estimation of UK capital structure determinants

This article analyses the determinants of the capital structure of 1054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, significant differences in the results are found. While the OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of the fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms, profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on the level of gearing, other than short-term bank borrowing, where a significant negative relationship is observed

Remarks on Income Contingent Loans: How Effective Can They Be at Mitigating Risk?

A well-known principle holds that equity provides better risk sharing opportunities than debt, but that there are greater enforcement problems associated with equity. Income contingent loans (ICL) represent an efficient (low transactions cost) way of implementing equity contracts for human capital.1 The amount the individual repays is dependent on his or her income. While it seems natural to link ICL with investments that increase the value of human capital — most notably education — there is no necessary reason to limit it to such investments

Whither Capitalism? Financial externalities and crisis

As with global warming, so with financial crises – externalities have a lot to answer for. We look at three of them. First the financial accelerator due to ‘fire sales’ of collateral assets -- a form of pecuniary externality that leads to liquidity being undervalued. Second the ‘risk- shifting’ behaviour of highly-levered financial institutions who keep the upside of risky investment while passing the downside to others thanks to limited liability. Finally, the network externality where the structure of the financial industry helps propagate shocks around the system unless this is checked by some form of circuit breaker, or ‘ring-fence’. The contrast between crisis-induced Great Recession and its aftermath of slow growth in the West and the rapid - and (so far) sustained - growth in the East suggests that successful economic progress may depend on how well these externalities are managed

Crises: Principles and Policies: With an Application to the Eurozone Crisis

Economies around the world have faced repeated crises — more frequently over the past thirty years. The fact that they have become more frequent and pervasive at the same time that we believe we have learned more about the management of the economy and as markets have seemingly improved poses a puzzle: shouldn't rational markets avoid these catastrophes, the costs of which outweigh, by an enormous amount, any benefit that might have accrued to the economy from the actions prior to the crisis that might have contributed to it? This is especially true of the large fraction of crises that can be called “debt crises,” precipitated by a country’s difficulty in repaying what it owes. The benefits of income smoothing (arising from the difference in the marginal utility of income in periods when income is low and when income is high) are overwhelmed by the social and economic costs of the ensuing crisis

How do banks assess entrepreneurial competence? The role of voluntary information disclosure

This research adds to the literature on relationship lending in the small business context by discussing the roles of entrepreneurial competence and voluntarily disclosed information as determinants of credit access. More specifically, we propose that the loan manager’s evaluation of the information voluntarily disclosed by the entrepreneur is an important complement to publicly available financial data and soft information collected through observation and third parties in framing the loan manager’s perception of the entrepreneur’s competence. Further, we argue that banks charge lower interest rates if the loan manager perceives the entrepreneur to be competent. Econometric analysis based on 433 bank-firm relationships supports these hypothesised relationships. The results imply that entrepreneurs need to communicate their competence effectively to loan managers, and that banks should utilise their loan managers’ personal evaluations as inputs to lending decisions

The regional economic impact of more graduates in the labour market: a “micro-to-macro” analysis for Scotland

This paper explores the system-wide impact of graduates on the regional economy. Graduates enjoy a significant wage premium, often interpreted as reflecting their greater productivity relative to non-graduates. If this is so there is a clear and direct supply-side impact of HEI activities on regional economies. We use an HEI-disaggregated computable general equilibrium model of Scotland to estimate the impact of the growing proportion of graduates in the Scottish labour force that is implied by the current participation rate and demographic change, taking the graduate wage premium in Scotland as an indicator of productivity enhancement. While the detailed results vary with alternative assumptions about the extent to which wage premia reflect productivity, they do suggest that the long-term supply-side impacts of HEIs provide a significant boost to regional GDP. Furthermore, the results suggest that the supply-side impacts of HEIs are likely to be more important than the expenditure impacts that are the focus of most HEI impact studies

Improving corporate governance in state-owned corporations in China: which way forward?

This article discusses corporate governance in China. It outlines the basic agency problem in Chinese listed companies and questions the effectiveness of the current mechanisms employed to improve their standards of governance. Importantly, it considers alternative means through which corporate practice in China can be brought into line with international expectations and stresses the urgency with which this task must be tackled. It concludes that regulators in China must construct a corporate governance model which is compatible with its domestic setting and not rush to adopt governance initiatives modelled on those in cultures which are fundamentally different in the hope of also reproducing their success

Potential migration and subjective well-being in Europe

By examining the preferences over migration destinations of those revealing a desire to permanently leave their country, this paper provides new evidence on the relevance of subjective measures for cross country comparisons. While hard statistics such as GDP per capita and unemployment rates are commonly used to measure a country’s success, this analysis reveals that people’s preferences over alternative migration destinations are better explained by average levels of life satisfaction in the destination country. Aggregated measures of subjective well-being are, therefore, useful for international comparisons as they better reflect what makes some countries more attractive than others

What explains electoral responses to the 'Great Recession in Europe?

The ?Great Recession? in Europe started in early 2008 and was the greatest economic crisis facing the continent since the Great Depression of the 1930s. It produced a largescale loss of support for many incumbent parties. The purpose of this paper is to explain responses to the crisis among European electorates with the assistance of three rival models of electoral choice. The first is the cleavages model associated with Rokkan and Lipset which highlights the importance of social groups as the sources of electoral support. The second is the spatial model of party competition which focuses on the ideological distance between voters and parties in relation to divisive issues in society. The third is the valence model which argues that voters will support parties that deliver policies over which there is widespread agreement about what should be done. The paper models electoral support for incumbent parties using data from the European Social Surveys of 2006, conducted prior to the recession, and again in 2012 some four years into the crisis. The results show that all three models are relevant for understanding mass political responses to the crisis. It is also apparent that an ideological shift to the right occurred in electoral support between the two periods and this happened among both the voters and also the incumbent parties in Europe