r d investments under endogenous cluster formation abstract we provide an innovative theory based explanation for the positive relationship between firms r d intensity and their degree of r d cooperation we show that when oligopolistic firms decide on long term r d investment before forming research clusters among competitors investment incentives are increased by the desire to become a member of an attractive cluster this can result in over investment compared to the welfare optimum and compared to a scenario where research clusters are ex ante fixed thereby as a theoretical contribution we fully characterize the equilibria of the unanimity game on cluster formation with heterogeneous firms

organizational change and hysteresis in british manufacturing industry a perspective from the donovan commission report labor productivity in british manufacturing industry rose significantly during the severe recession of the early 1980s contrary to historical and international parallels furthermore labor productivity continued to rise during the rest of the decade despite the return of output to its pre 1980 level the author explains these stylized facts by analyzing wage work rule negotiations as a three person noncooperative bargaining game in which workers with different skills negotiate independently this model attempts to capture the insights of a royal commission on industrial relations the author also argues that this explanation of the stylized facts is consistent with the available evidence copyright 1995 by the london school of economics and political science

cost reduction competition and industry performance in many markets firms compete over time by expending resources with the purpose of reducing their costs sometimes the cost reducing investments operate directly on costs in many instances they take the form of developing new products that deliver what customers need more cheaply therefore product development can have the same ultimate effect as direct cost reduction in fact if one thinks of the product as the services it delivers to the customer in the way that lancaster pioneered then product development often is just cost reduction

what has happened to union recognition in britain this paper examines the determinants of establishment level union recognition status using data from the three workplace industrial relations surveys of 1980 1984 and 1990 our theoretical approach argues that product and labour market variables dated at or around the establishment s setup should be considered the crucial determinants of recognition status confirmation of these predictions is found for private sector manufacturing establishments in the econometric analysis of particular interest are i the nonlinear relationship between historic industry quasi rents and recognition status and the stability of this aspect of the model over the three data sets and ii a marked downward shift in recognition probabilities that occurred during the 1980s which seems to be largely a consequence of the failure to organize new establishments set up in the 1980s

does privatization remove restrictive working practices evidence from uk establishments this study investigates the links between privatization and changes in working practices using data from the uk 1990 workplace employees relations survey privatization raises the probability of an establishment of experiencing reduced job demarcation and or increased flexibility in the use of the workforce by managers after exploration no clear association is found between ownership and the level of restrictive working practices

collective agreements wages and firms cohorts evidence from central europe using a large matched employer employee data set the authors investigate the impact of company and industry collective bargaining agreements on wages in the czech republic hungary and poland ce3 they also examine the changing characteristics of the union wage premium in different cohorts of establishments their results challenge the common idea of weak unions in the ce3 by revealing a union wage premium whose characteristics depend on the level at which collective bargaining occurs they find that industry agreements increase wages for low skilled workers while company agreements increase medium and high skilled wages their second finding is that the union wage premium is unevenly distributed between cohorts with substantial cross country variation wage premiums are concentrated in the transitional cohorts in the czech republic and poland and to a lesser extent in the pre transitional cohort in hungary

bargaining and the timing of investment the joint determination of the timing of investment and wage bargaining is modelled two cases are considered a there is an alternating offer bargaining game over binding wage contracts and production is possible only when agreement is reached b there are no binding contracts so revenue is divided in period by period bargaining post investment investment can occur earlier in case b than in case a and the equilibrium in case b can pareto dominate the equilibrium with binding contracts these conclusions depend on players discount factors

the effect of entry on r d networks we investigate the effect of potential entry on the formation and stability of r d networks considering farsighted firms we show that the presence of a potential entrant often alters the incentives of incumbent firms to establish an r d link in particular incumbent firms may choose to form an otherwise undesirable r d collaboration in order to deter the entry of a new firm moreover an incumbent firm may refrain from establishing an otherwise desirable r d collaboration expecting to form a more profitable r d link with the entrant finally potential entry may lead an inefficient incumbent to exit the market we also perform a welfare analysisand show that market and societal incentives are often misaligned

the impact of international outsourcing on unionization and wages evidence from the apparel export sector in central america it is often assumed that manufacturing workers in developing countries as recipients of outsourced jobs would achieve economic benefits and organizational power the author argues that job growth in developing countries through outsourcing to competing firms has often actually resulted in declining unionization and lower wage rates relative to traditional integrated manufacturing firms using time series data on union membership from 1980 2003 for honduras and el salvador as well as 2004 household survey data for el salvador he examines the determinants of unionization rates and wages in the manufacturing sectors he finds that that competitive outsourcing hurts labor at the plant level in three ways 1 it reduces labor s strike leverage by geographically dispersing the production process 2 it increases the threat of plant mobility by decreasing plant level investments and 3 it increases labor costs relative to total costs which creates an incentive for employers to keep wages low and unions out

influencing the influencers a theory of strategic diffusion the growth of the internet and assorted technologies has made it possible to collect and process detailed information on social networks this article investigates how firms and governments can harness the power of social networks to promote their goals we show that the optimal use of social networks leads to higher sales and greater profits however an increase in the level and dispersion of social interaction can increase or decrease the optimal influence strategy and profits of the player depending on the content of the interaction optimal influence strategies will target individuals with low or high connections depending on the content of interaction finally the returns to investing in market research on social networks are greater in more unequal networks

the price of innovation new estimates of drug development costs the research and development costs of 68 randomly selected new drugs were obtained from a survey of 10 pharmaceutical firms these data were used to estimate the average pre tax cost of new drug development the costs of compounds abandoned during testing were linked to the costs of compounds that obtained marketing approval the estimated average out of pocket cost per new drug is us 403 million 2000 dollars capitalizing out of pocket costs to the point of marketing approval at a real discount rate of 11 yields a total pre approval cost estimate of us 802 million 2000 dollars when compared to the results of an earlier study with a similar methodology total capitalized costs were shown to have increased at an annual rate of 7 4 above general price inflation 2003 elsevier science b v all rights reserved

union retreat and regional economic performance the uk experience monastiriotis v 2007 union retreat and regional economic performance the uk experience regional studies 41 1 14 a panel of regional data is used to investigate the impact the well documented decline in trade unionism in the uk had on the economic performance of its regions the analysis departs from the traditional firm level and cross sectional analyses and looks at the economy wide effects of unionism the findings provide evidence in line with theory that predicts that unions will increase wages and unemployment but they also indicate that unionism is positively related to productivity and incomes although in all cases the effects are non linear it is concluded that unionism is not necessarily a burden for the economy so long that the beneficial wage productivity effects outweigh the negative effects on employment monastiriotis v 2007 le declin syndical et la performance economique regionale etude de cas du r u regional studies 41 1 14 on emploie des donnees regionales provenant d un

manual wage differentials collective bargaining and multi locational firms an analysis using northern ireland nes data harris r 1994 manual wage differentials collective bargaining and multilocational firms an analysis using northern ireland nes data reg studies 28 483 493 a number of studies have appeared in the literature which consider the impact on the wage distribution of for example gender and ethnic differences of union membership or coverage by collective agreements of firm size of belonging to the private vis a vis public sector of being self employed as opposed to an employee another potentially important determinant of wages is whether the firm employing an individual is locally owned or whether it is part of a multiregional or multinational organization which operates branches in various locations this paper sets out to investigate the size of this locational wage differential across all sectors for a region of the uk using a bivariate sample selectivity model where the choice of firm type i e locally owned or externally owned and union coverage are endogenous the results confirm that

sources procedures and microeconomic effects of innovation fabio arcangeli paul david frank engelman christopher freeman massimo moggi richard nelson luigi orsenigo nathan rosenberg michele salvati g n von tunzelman two anonymous referees and the participants at the meeting of the committee on distribution growth and technical progress of the italian national research council cnr rome november 16 1985 have helped with various redraftings a particularly grateful acknowledgment is for the insightful and patient help of moses abramovitz this work has been undertaken at the science policy research unit spru university of sussex as part of the research program of the designated research centre sponsored by the economic and social research council esrc earlier support to the research that led to this paper by the italian national research council cnr is also gratefully acknowledged the statistical research has been undertaken with the assistance of stephano brioschi ilaria fornari and giovannu prennushi

the impact of capital market imperfections on investment cash flow sensitivity abstract we examine the investment cash flow sensitivity of us manufacturing firms in relation to five factors associated with capital market imperfections fund flows institutional ownership analyst following bond ratings and an index of antitakeover amendments we find a steady decline in the estimated sensitivity over time furthermore we find that investment cash flow sensitivity decreases with increasing fund flows institutional ownership analyst following antitakeover amendments and with the existence of a bond rating the overall evidence suggests that investment cash flow sensitivity decreases with factors that reduce capital market imperfections

the effects of unions on organisational change and employment this paper investigates the association between unionism organizational change and employment using british data over 1980 84 union plants were more likely to have experienced organizational change this is likely to be due to both the once for all removal of restrictive practices and union voice effects the oft cited negative relationship between unionism and employment growth may well arise from the differential extent to which restrictive practices were removed in union plants during 1980 84 more importantly the authors present evidence suggesting that unions were associated with faster employment growth during the late 1970s copyright 1991 by royal economic society

networks of collaboration in oligopoly abstract in an oligopoly prior to competing in the market firms have an opportunity to form pair wise collaborative links with other firms these pair wise links involve a commitment of resources and lead to lower costs of production of the collaborating firms we study the incentives of firms to form links and the architecture of the resulting collaboration network we find that incentives to form links are intimately related to the nature of market competition our analysis also suggests that collaborations are used by firms to generate competitive advantage and that strategically stable networks are often asymmetric with some firms having many links while others have few links or are isolated specifically we show that networks with the dominant group architecture stars and inter linked stars are stable we also present some results on the architecture of socially efficient networks

the effect of the union wage differential on management opposition and union organizing success that large union wage differentials increase organization is incorrect for the united states today it is incorrect because organization is the joint decision of workers and management not a worker s decision while potential wage increases are a plus to workers they reduce profits and thus are a minus to management in an institutional setting in which management allocates significant resources to convince workers to vote against unions it is erroneous to analyze the effect of the union wage differential on organizing solely from the workers side just as it is erroneous to analyze any economic outcome solely in terms of one blade of the market scissors my claim is threefold

financial fragility and distress propagation in a network of regions we investigate how the financial fragility in the real economy is affected by the average level of interdependence among agents across different regions of the economy to this end we develop a parsimonious agent based model of firms and banks organized in geographic regions the model is built on the framework of an existing class of models for business fluctuations the goal of our exercise is to clarify the effect on systemic failures of the interplay between network interconnectedness and financial acceleration in particular we investigate the probability of individual and systemic failures with varying levels of interconnectedness we find that in the absence of financial acceleration connectivity makes the system more resilient in contrast in the presence of financial acceleration the probability of both individual and systemic failures are minimized at intermediate level of diversification

british unions in decline determinants of the 1980s fall in union recognition this examination of establishment level data from the workplace industrial relations surveys of 1980 1984 and 1990 shows that the proportion of british establishments that is workplaces in both the private and public sector that recognized unions for collective bargaining over pay and working conditions fell by almost 20 between 1980 and 1990 largely accountable for this decline was a much lower rate of union recognition in establishments founded in the 1980s than in previous years particularly in the private sector citing these findings as well as recent structural changes in employment in the british labor market such as the shift from manufacturing to services from manual to non manual employment and from full time to part time work and a government that continues to enact anti union legislation the authors foresee no reversal of unions decline in the 1990s

union status of young men in britain a decade of change previous empirical studies of individual union status in britain have been cross sectional in contrast we use longitudinal data from the national child development study to estimate the determinants of male trade union membership over the period 1981 1991 as suggested by union theories we find that it is important to control for unobserved individual heterogeneity and our preferred model allows for correlation of individual heterogeneity with observable variables our estimates reveal that the observed decline in very large workplaces and the contraction of the public sector explain about one third of the predicted decline in union membership over the period

union wage differentials product market influences and the division of rents this paper examines the extent to which product market conditions limit the ability of trade unions to establish wage differentials over nonunion pay the mean union pay differential is estimated to be of the order of 8 percent to 10 percent in establishments with some degree of product market power but zero in establishments facing competitive product market conditions when competitive conditions are faced a preentry closed shop and high union coverage of the industry are both required it is estimated that only 5 percent of the establishments in which there are significant differentials over nonunion pay face generally competitive product market conditions copyright 1990 by royal economic society

union status and double breasting at multinational companies in three liberal market economies the relationships among employee representation formal union status and employer strategies within and across institutional regimes offer a variegated landscape in the context of globalization key questions remain as to the relative weight of macro and micro level influences on union status at subsidiaries of multinational companies mncs this study analyzes data gathered through coordinated surveys of mnc subsidiaries in canada ireland and the united kingdom and tests the extent to which union status and double breasting depend on home country variation host country influences and particular organizational characteristics the authors find support for a combination of effects on both union status and double breasting further analyses test explicit variations on union status within each host context and support arguments that effects depend on the particularities of national industrial relations regimes

union certification success under voting versus card check procedures evidence from british columbia 1978 1998 the author estimates the impact of compulsory election laws on certification success using data on over 6 500 private sector certifications from british columbia over the years 1978 98 a unique quasi experimental design is used by exploiting two changes in the union recognition law first in 1984 the introduction of mandatory elections and second in 1993 the repeal of elections and their replacement by the original card check procedure the author also estimates the effectiveness of management opposition tactics across union recognition regimes success rates declined by an average of 19 percentage points during the voting regime and then increased by about the same amount when card checks were re instituted the results indicate that the mandatory election law can account for virtually the entire decline in addition the findings suggest that management opposition was twice as effective under elections as under card checks

r d networks we develop a model of strategic networks that captures two distinctive features of interfirm collaboration bilateral agreements and nonexclusive relationships our analysis highlights the relationship between market competition firms incentives to invest in r d and the architecture of collaboration networks in the absence of firm rivalry the complete network where each firm collaborates with all others is uniquely stable industry profit maximizing and efficient by contrast under strong market rivalry the complete network is stable but intermediate levels of collaboration and asymmetric networks are more attractive from a collective viewpoint this suggests that competing firms may have excessive incentives to form collaborative links

core and periphery in networks abstract we study a model of network formation where the benefits from connections exhibit decreasing returns and decay with network distance we show that the unique equilibrium network is a periphery sponsored star where one player the center maintains no links and earns a high payoff while all other players maintain a single link to the center and earn lower payoffs both the star architecture and payoff inequality are preserved in an extension of the model where agents can make transfers and bargain over the formation of links under the condition that the surplus of connections increases in the size of agents neighborhoods our model thus generates two common features of social and economic networks 1 a core periphery structure 2 positive correlation between network centrality and payoffs

the value and ownership of intangible capital abstract intangible capital which relies on essential human inputs or organization capital presents a unique challenge for measurement organization capital cannot be fully owned by firms fina

investment cash flow sensitivity cannot be a good measure of financial constraints evidence from the time series abstract investment cash flow sensitivity has declined and disappeared even during the 2007 2009 credit crunch if one believes that financial constraints have not disappeared then investment cash flow sensitivity cannot be a good measure of financial constraints the decline and disappearance are robust to considerations of r d and cash reserves and across groups of firms the information content in cash flow regarding investment opportunities has declined but measurement error in tobin s q does not completely explain the patterns in investment cash flow sensitivity the decline and disappearance cannot be explained by changes in sample composition corporate governance or market power and remain a puzzle

why have measures of earnings quality changed over time the properties of earnings have changed dramatically over the past 40 years prior studies interpret this trend as a decline in earnings quality but disagree on whether it results from changes in the real economy or changes in accounting standards i find that each new cohort of listed firms exhibits lower earnings quality than its predecessors mainly because of higher intangible intensity i conclude that the trend of decline in earnings quality is due more to changes in the sample of firms than to changes in generally accepted accounting principles gaap or in the earnings quality of previously listed firms

human resource management as a substitute for trade unions in british workplaces the authors use british workplace data for 1980 98 to examine whether increased human resource management hrm practices coincided with union decline consistent with the hypothesis that such practices act as a substitute for unionization two initial analyses show no important differences between union and non union sectors or between newer workplaces which are likelier to be non union and older ones in the pattern of hrm practices over time and the study s longitudinal analysis picks up no evidence of faster union decline in workplaces or industries that adopted hrm practices than in those that did not not only is the hypothesized substitution effect thus not supported but the authors even uncover some evidence of a complementarity between unions and hrm practices the authors conclude that increased use of hrm practices is probably not an important factor underpinning union decline in britain

firm heterogeneity and the pattern of r d collaborations we consider an oligopoly setting in which firms form pairwise collaborative links in rd 2 some firms have more innovative capabilities than others these two situations provide clear insights about how firms heterogeneity affects both equilibrium and efficient networks we also show that the most valuable collaborative links do not always appear in equilibrium and a public policy that increases the value of the most valuable links may lead to a loss of social welfare

works councils and employment growth in german establishments using data from german manufacturing establishments this article examines the relationship between works councils and employment growth taking the endogeneity of councils into account the estimates show a positive growth effect of works councils this suggests that the performance enhancing voice role of german works councils dominates their monopoly role moreover the findings of this study support the hypothesis that workers are more likely to implement a council to protect their quasi rents when the establishment is facing a long term crisis copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

anti coordination and social interactions abstract this paper studies the first model of social interactions with anti coordination agents have fixed partners with whom they play a common bilateral game of anti coordination like the chicken game partnerships are represented as links of a network the paper asks how do social interactions interplay with the incentives to anti coordinate how does the social network affect individual choices in equilibrium the analysis shows that network effects are much stronger than when partners play a coordination game the network notably affects how agents respond when a strategy becomes more advantageous in the standard benchmark of complete interactions more agents play the strategy this result does not generally hold when the network is incomplete on bipartite networks agents choices are unaffected while on core periphery networks less agents may play the strategy

the thatcher miracle since 1979 productivity growth in britain has improved markedly compared with europe the turnaround in productivity growth has two main causes the british economy was subjected to a far more severe contraction of demand in 1980 81 than any other country this led to a new realism which was sustained by the legal changes in trade union power since 1979 there has been a worsening in the trade off between unemployment and inflation the poor unemployment inflation trade off is due to the neglect of skill training and education causing skill shortages and to the build up of long term unemployment which does little to restrain inflation this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed f this abstract was borrowed from another version of this item

the impact of negative cash flow and influential observations on investment cash flow sensitivity estimates abstract kaplan and zingales quart j econ 112 1997 169 and clearly j finance 54 2 1999 673 diverge from the large literature on investment cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms we examine if this result can be explained by the fact that when firms are in sufficiently bad shape incurring cash losses investment cannot respond to cash flow we find that while cleary s results can be explained by such negative cash flow observations the kaplan zingales results are driven more by a few influential observations in a small sample we also record a decline in investment cash flow sensitivity over the 1977 1996 period particularly for the most constrained firms

unionism and employment behaviour although there exists a large literature on the effects of trade unions upon wages there is no published work that uses microeconomic data on establishments to examine the employment consequences of unionism this paper addresses this issue with a recent british data set and shows that even after the addition of a substantial set of control variables there is a strong association between poor employment performance and the presence of trade unions the union employment growth differential is estimated at approximately 3 percent per annum copyright 1991 by royal economic society

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

productivity and trade unions in british manufacturing industry 1973 85 this paper uses panel data on british manufacturing industries between 1973 and 1985 to examine the relationship between productivity and labour organization it is shown that the relationship between unions and productivity levels is sensitive to the econometric specification the evidence points to there being no relationship in the 1970s when unions were more popular and a negative relationship from 1979 onwards we also find evidence that industrial concentration is associated with higher levels of productivity and this accounts for more of the productivity recovery after the recession in the early 1980s than the impact of trade unions the recession itself is shown to have had an impact on subsequent productivity growth we also suggest that the long run gains in productivity caused by the shakeout of 1980 81 may not have compensated for the loss in output at the time

trade unions and training practices in british workplaces the authors use british establishment level data from the 1991 employers manpower and skills practices survey emsps and individual level data from the autumn 1993 quarterly labour force survey qlfs to investigate the links between training provision and workplace unionization both the probability of receiving training and the amount of training received are found to have been substantially higher in unionized than in nonunion workplaces the authors view these results as showing that trade unions can play an important role in developing and boosting skill formation in britain

the efficiency and stability of r d networks we investigate the efficiency and stability of r d networks in a model with network dependent indirect spillovers we show that the efficient network structure critically depends on the marginal cost of r d collaborations when the marginal cost is low the complete graph is efficient while high marginal costs imply that the efficient network is asymmetric and has a nested structure regarding the stability of network structures we show the existence of both symmetric and asymmetric equilibria the efficient network is stable for small industry size and small cost in contrast for large industry size there is a wide region of cost in which the efficient network is not stable this implies a divergence between efficiency and stability in large industries

internal r d expenditures and external technology sourcing abstract the paper examines the two way relationship between external r d activities and internal r d expenditures on a cross section of flemish r d active companies the analysis extends the classical explanatory variables like size diversification ownership structure and technological opportunities to include the impact of various external sourcing strategies r d cooperation and to a lesser extent r d contracted out are found to have a significant positive effect on internal r d but only if the companies have absorptive capacity in the form of a full time staffed r d department at the same time firms are found to be more frequently engaged in r d cooperation the more they spend on internal r d

how do you measure a technological revolution it is hardly news that we are in the midst of rapid economic change the advances in infor mation and communication technology ict in the life and other sciences and their profusion of innovative products from the newest electronic devices to the latest drugs and treatments are ample evidence equally pervasive are new busi ness models in services big box retail online banking on demand media and the explosion in social networking and new business practices ushered in by the internet telework virtual meetings job boards given the magnitude of the changes brought on by these innovations it is useful to step back and ask what does eco nomic analysis have to say about the sources and mechanisms of these shifts and revolutions and what economic metrics are available to measure their overall size and impact the received theory of economic growth is the natural candidate for this job it came of age in the 1950s and 1960s with the neoclassi cal models and emergence of aggregate growth accounting the latter has become the work horse of empirical macroeconomic growth analysis and the basis for official productiv ity statistics put out by the bureau of labor statistics bls since 1983 a technological revolution appears in this framework as an increase in the fruits of innovation as measured by the shift in an aggregate production function termed multifactor productivity or mfp and possibly as an increase in the aggregate saving rate as reflected in an increased rate of capital formation mfp is an exogenous phenomenon

wage bargaining and monopsony this paper identifies three possible outcomes of higher relative firm bargaining power in a unionized firm facing an upward sloping labor supply curve the conventional regime with reduced wage and higher employment corresponds to firm bargaining power below a certain critical value a supply constrained regime where increased firm bargaining power reduces both wages and employment occurs when the bargaining power is above another critical level a novel result is that we identify a third regime with firm bargaining power between these critical levels where changes in relative bargaining power does not affect wages and employment

union effects on productivity profits and growth has the long run arrived this article interprets literature examining union effects on economic performance production function studies indicate small overall union impacts on productivity positive effects where they exist appear to result from management response to decreased profit expectations and from a natural selection process lower profitability among unionized firms is well established more interesting is the possibility that unions appropriate quasi rents deriving from long lived tangible and intangible capital the connection between unions investment behavior and productivity growth emerges as a particularly fruitful line of empirical inquiry although it does not encourage a sanguine view of unionism s long run impact

the decline of labour market institutions and the rise in wage inequality in britain abstract at the same time as the role of labour market institutions declined very dramatically in britain there was a very sharp rise in wage inequality that since 1980 has increased at a faster pace than in most advanced countries britain in the 1980s and early 1990s therefore provides a very good testing ground for evaluating the importance of labour market institutions in explaining the evolution of the wage structure i look at this in terms of two institutions that have traditionally propped up wage levels at the bottom end of the wage distribution unions and minimum wages i find that their weakening has played an important part in the rise in wage inequality in britain

the impact of cash flow volatility on discretionary investment and the costs of debt and equity financing abstract we show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures r d and advertising this association suggests that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment cash flow volatility also is associated with higher costs of accessing external capital moreover these higher costs as measured by some proxies imply a greater sensitivity of investment to cash flow volatility thus cash flow volatility not only increases the likelihood that a firm will need to access capital markets it also increases the costs of doing so

how sensitive is investment to cash flow when financing is frictionless i analyze the sensitivity of a rm s investment to its own cash ow in the benchmarkcase where nancing is frictionless this sensitivity has been proposed as a measure of nancing constraints in earlier studies i nd that the investment cash ow sensitivities that obtain in the frictionless benchmarkare very similar both in magnitude and in patterns they exhibit to those observed in the data in particular the sensitivity is higher for rms with high growth rates and low dividend payout ratios tobin s q is shown to be a more noisy measure of near term investment plans for these rms does a high sensitivityof a rm s investment to its own cash ow indicate that the rm is nancially constrained a large body of research starting with fazzari hubbard and petersen 1988 hereafter fhp suggests that rms facing nancing constraints should exhibit high investment cash ow sensitivities re ecting the wedge between the costs of external and internal funds empirical ndings seem to give support to this hypothesis since rms classi ed as constrained on a priori criteria such as size dividend payout or leverage do have higher cash ow sensitivities even after controlling for their investment opportunities by conditioning on tobin s q however the reliability of these results critically depends on whether q is a proper control for the investment opportunity set if q performs worse for certain classes of rms higher sensitivities may obtain for these rms simply because cash ow re ects information about investment opportunities this critique is not new in his discussion of fhp poterba 1988 was the rst to point out that measurement error in q may cloud the empirical results similar concerns have been raised in subsequent studies as well while the qualitative point is well known its quantitative impact on the investment cash ow sensitivity has not been analyzed can the linkbetween cash ow and the investment opportunity set account for the observed magnitudes of the sensitivity or are these magnitudes too large to be explained without nancing frictions