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Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application
January 2010
Working Paper Number:
CES-10-02
This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.
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Credit Market Competition and the Nature of Firms
April 2009
Working Paper Number:
CES-09-07
Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm's founding has a profound effect on that firm's nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture. Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations.
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Bank Crises and Investor Confidence
January 2009
Working Paper Number:
CES-09-02
In addition to their direct effects, episodes of financial instability may decrease investor confidence. Measuring the impact of a crisis on investor confidence is complicated by the fact that it is difficult to disentangle the effect of investor confidence from coincident direct effects of the crisis. In order to isolate the effects of financial crises on investor confidence, we study the investment behavior of immigrants in the U.S. Our findings indicate that systemic banking crises have important effects on investor behavior. Immigrants who have experienced a banking crisis in their countries of origin are significantly less likely to have bank accounts in the U.S. This finding is robust to including important individual controls like wealth, education, income, and age. In addition, the effect of crises is robust to controlling for a variety of country of origin characteristics, including measures of financial and economic development and specifications with country of origin fixed effects.
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Gender Differences in Business Performance: Evidence from the Characteristics of Business Owners Survey
December 2008
Working Paper Number:
CES-08-39
Using confidential microdata from the U.S. Census Bureau, we investigate the performance of female-owned businesses making comparisons to male-owned businesses. Using regression estimates and a decomposition technique, we explore the role that human capital, especially through prior work experience, and financial capital play in contributing to why female-owned businesses have lower survival rates, profits, employment and sales. We find that female-owned businesses are less successful than male-owned businesses because they have less startup capital, and business human capital acquired through prior work experience in a similar business and prior work experience in family business. We also find some evidence that femaleowned businesses work fewer hours and may have different preferences for the goals of their business.
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On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms
May 2008
Working Paper Number:
CES-08-13
We use a new data set that tracks U.S. firms from their birth over two decades to understand the life cycle dynamics and outcomes (both successes and failures) of VC- and non-VC financed firms. We first ask to what market-wide and firm-level characteristics venture capitalists respond in choosing to make their investments and how this differs for firms financed solely by non-VC sources of entrepreneurial capital. We then ask what are the eventual differences in outcomes for firms that receive VC financing relative to non-VC-financed firms. Our findings suggest that VCs follow public market signals similar to other investors and typically invest largely in young firms, with potential for large scale being an important criterion. The main way that VC financed firms differ from matched non-VC financed firms, is they demonstrate remarkably larger scale both for successful and failed firms, at every point of the firms' life cycle. They grow more rapidly, but we see little difference in profitability measures at times of exit. We further examine a number of hypotheses relating to VC-financed firms' failure. We find that VC-financed firms' cumulative failure rates are lower than non-VC-financed firms but the story is nuanced. VC appears initially 'patient' in that VC-financed firms are less likely to fail in the first five years but conditional on surviving past this point become more likely to fail relative to non-VC-financed firms. We perform a number of robustness checks and find that VC does not appear to have more stringent survival thresholds nor do VC-financed firm failures appear to be disguised as acquisitions nor do particular kinds of VC firms seem to be driving our results. Overall, our analysis supports the view that VC is 'patient' capital relative to other non-VC sources of entrepreneurial capital in the early part of firms' lifecycles and that an important criterion for receiving VC investment is potential for large scale, rather than level of profitability, prior to exit.
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Financial Intermediation and Late Development: The Case of Meiji Japan, 1868 to 1912
January 2008
Working Paper Number:
CES-08-01
Was nineteenth century Japan an example of finance-led growth? Using a new panel dataset of startup firms from the Meiji Period (1868-1912), I test whether financial sector development influenced the emergence of modern industries. Results from multiple econometric models suggest that increased financial intermediation, particularly from banks, is associated with greater firm establishment. This corresponds with the theory of late development that industrialization requires intermediaries to mobilize and allocate financing. The effect is pronounced in the second half of the period and for heavy industries, which may be due to improved institutions and larger capital requirements, respectively.
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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship
December 2007
Working Paper Number:
CES-07-33
We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.
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Determinants of Business Success: An Examination of Asian-Owned Businesses in the United States
December 2006
Working Paper Number:
CES-06-32
Using confidential and restricted-access microdata from the U.S. Census Bureau, we find that Asian-owned businesses are 16.9 percent less likely to close, 20.6 percent more likely to have profits of at least $10,000, and 27.2 percent more likely to hire employees than whiteowned businesses in the United States. Asian firms also have mean annual sales that are roughly 60 percent higher than the mean sales of white firms. Using regression estimates and a special non-linear decomposition technique, we explore the role that class resources, such as financial capital and human capital, play in contributing to the relative success of Asian businesses. We find that Asian-owned businesses are more successful than white-owned businesses for two main reasons . Asian owners have high levels of human capital and their businesses have substantial startup capital. Startup capital and education alone explain from 65 percent to the entire gap in business outcomes between Asians and whites. Using the detailed information on both the owner and the firm available in the CBO, we estimate the explanatory power of several additional factors.
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Using the MEPS-IC to Study Retiree Health Insurance
April 2006
Working Paper Number:
CES-06-13
This paper discusses using the restricted-access Medical Expenditure Panel Survey- Insurance Component (MEPS-IC) to study employer-sponsored retiree health insurance (RHI). This topic is particularly interesting given current events such as the aging of baby boomers, rising health care costs, new prescription drug coverage under Medicare, and changes in accounting standards for reporting liabilities related to RHI offerings. Consequently, employers are grappling with an aging workforce, evaluating Medicare subsidies to employers for offering retiree drug plans, facing rising premium costs as a result of rising health care costs, and trying to show profitability on financial reports. This paper provides technical information on using the MEPS-IC to study RHI and points out data issues with some of the measures in the database. Descriptive statistics are provided to illustrate the types of retiree estimates possible using the MEPS-IC and to show some of the trends in this subject area. Not surprising, these estimates show that employer offers of RHI have declined, greater numbers of retirees are enrolling in these plans, and expenditures for employer-sponsored RHI have been rising.
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The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?
October 2005
Working Paper Number:
CES-05-29
We examine the effect of financial dependence on the acquisition and investment of single segment and conglomerate firms for different long-run changes in industry conditions. Conglomerates and single-segment firms differ in the investments they make. The main differences are in the investment in acquisitions rather than in the level of capital expenditure. Financial dependence, a deficit in a segment's internal financing, decreases the likelihood of acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries and also for firms that are publicly traded. In declining industries, plants of segments that are financially dependent are less likely to be closed by conglomerate firms. These findings persist after controlling for firm size and segment productivity. We also find that plants acquired by conglomerate firms in growth industries increase in productivity post-acquisition. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.
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