Three essays on a longitudinal analysis of business start-ups using the Kauffman Firm Survey

This dissertation focused on the longitudinal analysis of business start-ups using three waves of data from the Kauffman Firm Survey. ^ The first essay used the data from years 2004-2008, and examined the simultaneous relationship between a firm's capital structure, human resource policies, and its impact on the level of innovation. The firm leverage was calculated as, debt divided by total financial resources. Index of employee well-being was determined by a set of nine dichotomous questions asked in the survey. A negative binomial fixed effects model was used to analyze the effect of employee well-being and leverage on the count data of patents and copyrights, which were used as a proxy for innovation. The paper demonstrated that employee well-being positively affects the firm's innovation, while a higher leverage ratio had a negative impact on the innovation. No significant relation was found between leverage and employee well-being.^ The second essay used the data from years 2004-2009, and inquired whether a higher entrepreneurial speed of learning is desirable, and whether there is a linkage between the speed of learning and growth rate of the firm. The change in the speed of learning was measured using a pooled OLS estimator in repeated cross-sections. There was evidence of a declining speed of learning over time, and it was concluded that a higher speed of learning is not necessarily a good thing, because speed of learning is contingent on the entrepreneur's initial knowledge, and the precision of the signals he receives from the market. Also, there was no reason to expect speed of learning to be related to the growth of the firm in one direction over another.^ The third essay used the data from years 2004-2010, and determined the timing of diversification activities by the business start-ups. It captured when a start-up diversified for the first time, and explored the association between an early diversification strategy adopted by a firm, and its survival rate. A semi-parametric Cox proportional hazard model was used to examine the survival pattern. The results demonstrated that firms diversifying at an early stage in their lives show a higher survival rate; however, this effect fades over time.^

Three Essays on the Interrelationships Among Financial Restatements, Corporate Governance, Market Microstructure and the Firm's Rate of Return

The increase in the number of financial restatements in recent years has resulted in a significant decrease in the amount of market capitalization for restated companies. Prior literature does not differentiate between single and multiple restatements announcements. This research investigates the inter-relationships among multiple financial restatements, corporate governance, market microstructure and the firm's rate of return in the form of three essays by differentiating between single and multiple restatement announcement companies. First essay examines the stock performance of companies announcing the financial restatement multiple times. The postulation is that prior research overestimates the abnormal return by not separating single restatement companies from multiple restatement companies. This study investigates how market penalizes the companies that announce restatement more than once. Differentiating the restatement announcement data based on number of restatement announcements, the results support for non persistence hypothesis that the market has no memory and negative abnormal returns obtained after each of the restatement announcements are completely random. Second essay examines the multiple restatement announcements and its perceived resultant information asymmetry around the announcement day. This study examines the pattern of information asymmetry for these announcements in terms of whether the bid-ask spread widens around the announcement day. The empirical analysis supports the hypotheses that the spread does widen not only around the first restatement announcement day but around every subsequent announcement days as well. The third essay empirically examines the financial and corporate governance characteristics of single and multiple restatement announcements companies. The analysis shows that corporate governance variables influence the occurrence of multiple restatement announcements and can distinguish multiple restatements announcement companies from single restatement announcement companies.

Firm-level utilization rates of regional trade agreements : importers' perspective

While previous theoretical studies have examined exporters' choice of tariff schemes without considering explicit heterogeneity of importers, an empirical analysis on regional trade agreement (RTA) utilization is, in general, possible by employing trade data covering the importers' side. To better link the empirical analysis with a theoretical model, this study develops a model that sheds light on the role of both importers' and exporters' characteristics in RTA utilization. The model enables us to replicate stylized facts concerning importers' RTA utilization. Based on this model, we derive some propositions on the determinants of RTA utilization rates (i.e., share of imports under RTA schemes out of total imports) at an import firm-product level. Finally, we found that these theoretical predictions are supported by highly detailed import data in Thailand from Australia from 2007 to 2009.

Economising, Strategising and the Vertical Boundaries of the Firm

Acknowledgments: We are grateful to Celine Azemar, Ron Davies, Rodolphe Desbordes, Hartmut Egger, Holger Görg, Michael Moore, Ali Naghavi, Peter Neary, Pascalis RaimondosMøller, Ian Wooton and two anonymous referees for useful comments and suggestions. The usual disclaimer applies.

Ann Mentor, owner of P.R. Firm in New York

General note: Title and date provided by Bettye Lane.

Consumer Behavior and Firm Competition

Understanding consumer behavior is critical for firms' decision making. How consumers make decisions about what they want and buy directly affect the profits of firms. Therefore, it is important to consider consumer behaviors and incorporate them into the model when studying the optimal strategy of firms and competition between firms. In this dissertation, I study rich and interesting consumer behaviors and their impact on firms' strategy in two essays. The first essay considers consumers' shopping cost which leads to their preference for one-stop shopping. I examine how store visit costs and consumer knowledge about a product affect the strategic store choice of consumers and, in turn, the pricing, customer service and advertising decisions of competing retailers. My analysis offers insights on how specialty stores can compete with big-box retailers. In the second essay, I focus on a well-established psychology phenomenon, cognitive dissonance. I incorporate the idea of cognitive dissonance into a model of spatial competition and examine its implications for selling strategy. I provide new insight on the profitability of advance selling and spot selling as well as the pricing of bundle and its components. Collectively, two essays in this dissertation introduce novel ways to model consumer behaviors and help to understand the impact of consumer behaviors on firm profitability and strategy.

Essays in Firm Responses to Demand and Competition Shocks

The aim of this dissertation is to examine, model and estimate firm responses to

demand shocks by focusing on specific industries where demand shocks are well

identified. Combining reduced-form evidence and structural analysis, this dissertation

extends the economic literature by focusing on within-firm responses of firms

to two important demand shocks that are identifiable in empirical settings. First,

I focus on how firms respond to a decrease in effective demand due to competition

shocks coming from globalization. By considering China's accession to the World

Trade Organization in 2001 and its impact on the apparel industry, the aim of these

chapters is to answer how firms react to the increase in Chinese import competition,

what is the mechanism behind these responses, and how important they are in explaining

the survival of the Peruvian apparel industry. Second, I study how suppliers'

survival probability relates to the sudden disruption of their main customer-supplier

relationships with downstream manufacturers, conditional on suppliers' own idiosyncratic

characteristics such as physical productivity.

Essays on Firm Heterogeneity with Empirical Applications in Economic History and Agricultural Economics

This thesis uses models of firm-heterogeneity to complete empirical analyses in economic history and agricultural economics. In Chapter 2, a theoretical model of firm heterogeneity is used to derive a statistic that summarizes the welfare gains from the introduction of a new technology. The empirical application considers the use of mechanical steam power in the Canadian manufacturing sector during the late nineteenth century. I exploit exogenous variation in geography to estimate several parameters of the model. My results indicate that the use of steam power resulted in a 15.1 percent increase in firm-level productivity and a 3.0-5.2 percent increase in aggregate welfare. Chapter 3 considers various policy alternatives to price ceiling legislation in the market for production quotas in the dairy farming sector in Quebec. I develop a dynamic model of the demand for quotas with farmers that are heterogeneous in their marginal cost of milk production. The econometric analysis uses farm-level data and estimates a parameter of the theoretical model that is required for the counterfactual experiments. The results indicate that the price of quotas could be reduced to the ceiling price through a 4.16 percent expansion of the aggregate supply of quotas, or through moderate trade liberalization of Canadian dairy products. In Chapter 4, I study the relationship between farm-level productivity and participation in the Commercial Export Milk (CEM) program. I use a difference-in-difference research design with inverse propensity weights to test for causality between participation in the CEM program and total factor productivity (TFP). I find a positive correlation between participation in the CEM program and TFP, however I find no statistically significant evidence that the CEM program affected TFP.

To what extent has research conducted by the GaWC Research Network aided our understanding of large EU law firm geography?

This thesis explores whether a specific group of large EU law firms exhibited multiple common behaviours regarding their EU geographies between 1998 and 2009. These potentially common behaviours included their preferences for trading in certain EU locations, their usage of law firm alliances, and the specific reasons why they opened or closed EU branch offices. If my hypothesis is confirmed, this may indicate that certain aspects of large law firm geography are predictable – a finding potentially of interest to various stakeholders globally, including legal regulators, academics and law firms. In testing my hypothesis, I have drawn on research conducted by the Globalization and World Cities (GaWC) Research Network to assist me. Between 1999 and 2010, the GaWC published seven research papers exploring the geographies of large US and UK law firms. Several of the GaWC’s observations arising from these studies were evidence-based; others were speculative – including a novel approach for explaining legal practice branch office change, not adopted in research conducted previously or subsequently. By distilling the GaWC’s key observations these papers into a series of “sub-hypotheses”, I been able to test whether the geographical behaviours of my novel cohort of large EU law firms reflect those suggested by the GaWC. The more the GaWC’s suggested behaviours are observed among my cohort, the more my hypothesis will be supported. In conducting this exercise, I will additionally evaluate the extent to which the GaWC’s research has aided our understanding of large EU law firm geography. Ultimately, my findings broadly support most of the GaWC’s observations, notwithstanding our cohort differences and the speculative nature of several of the GaWC’s propositions. My investigation has also allowed me to refine several of the GaWC’s observations regarding commonly-observable large law firm geographical behaviours, while also addressing a key omission from the group’s research output.

Agency, Financial Flexibility, and Firm Value: Evidence from REITs

We show empirically that the use of unsecured debt, whose standard covenants commit management to the preservation of debt capacity, leads to lower and more stable leverage. We then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. Our results support a liquidity-centric version of Jensen's (1986) free cash flow argument. In this version, self-serving managerial tendencies are reigned in without raising leverage indiscriminately, so that financial flexibility is preserved.

Inter-industry differences in local banks' effect on new firm formation : A regional study of entrepreneurship in Sweden

Formation of new firms is important, since new firms create jobs and economic growth. When entrepreneurs lack the financial resources which are needed to start a firm, they often turn to banks to borrow money. Previous research has shown that relationships between banks and new business borrowers most often are local and that the dependence on banks differs across industries. In light of this, the purpose of this paper is to investigate if local access to banks has a stronger relationship with the rate of new firm formation in some industries than in others. Based on cross-sectional data on all Swedish municipalities in 2009, a series of OLS regressions are estimated to test if variables used to describe the bank market in a municipality are related with the new firm formation rate, both in total and in different industry categories. The results show that the number of bank branches per capita is positively related with the total new firm formation rate. In regards to the inter-industry differences, the findings indicate that local access to banks is more important for new firm formation in some industries than in others. 

Capital structure of Finnish firms – Estimating the effects of firm characteristics on capital structure

One of the most disputable matters in the theory of finance has been the theory of capital structure. The seminal contributions of Modigliani and Miller (1958, 1963) gave rise to a multitude of studies and debates. Since the initial spark, the financial literature has offered two competing theories of financing decision: the trade-off theory and the pecking order theory. The trade-off theory suggests that firms have an optimal capital structure balancing the benefits and costs of debt. The pecking order theory approaches the firm capital structure from information asymmetry perspective and assumes a hierarchy of financing, with firms using first internal funds, followed by debt and as a last resort equity. This thesis analyses the trade-off and pecking order theories and their predictions on a panel data consisting 78 Finnish firms listed on the OMX Helsinki stock exchange. Estimations are performed for the period 2003–2012. The data is collected from Datastream system and consists of financial statement data. A number of capital structure characteristics are identified: firm size, profitability, firm growth opportunities, risk, asset tangibility and taxes, speed of adjustment and financial deficit. A regression analysis is used to examine the effects of the firm characteristics on capitals structure. The regression models were formed based on the relevant theories. The general capital structure model is estimated with fixed effects estimator. Additionally, dynamic models play an important role in several areas of corporate finance, but with the combination of fixed effects and lagged dependent variables the model estimation is more complicated. A dynamic partial adjustment model is estimated using Arellano and Bond (1991) first-differencing generalized method of moments, the ordinary least squares and fixed effects estimators. The results for Finnish listed firms show support for the predictions of profitability, firm size and non-debt tax shields. However, no conclusive support for the pecking-order theory is found. However, the effect of pecking order cannot be fully ignored and it is concluded that instead of being substitutes the trade-off and pecking order theory appear to complement each other. For the partial adjustment model the results show that Finnish listed firms adjust towards their target capital structure with a speed of 29% a year using book debt ratio.