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Working papers: 2003

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WP277: Understanding How Issues in Corporate Governance Develop: Cadbury Report to Higgs Review

Michael Pollitt and Ian Jones

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Issues in corporate governance develop according to an identifiable process. Using the influence model of Jones and Pollitt (2002) we compare the conduct of and influences on the investigations leading to the Higgs Review (2003) and the Cadbury Report (1992). We suggest that while there are similarities in the investigations there are important differences arising from the review process adopted, the role of the government, the background of the leaders of the investigations and the influence of academics. These differences have had important implications for the effectiveness of the implementation of the conclusions of the Higgs Review.

WP276: The Impact on UK Acquirers of Domestic, Cross-border, Public & Private Acquisitions

Robert L Conn, Andy Cosh, Paul M Guest and Alan Hughes

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We examine the announcement and post-acquisition share returns of 4,000 acquisitions by U.K. public firms during 1984-1998. We include acquisitions of domestic and cross-border targets, and of both publicly quoted and privately held targets. In acquisitions of domestic public targets, abnormal returns are negative over both the announcement and post-acquisition period. In acquisitions of cross-border public targets, abnormal returns are zero over the announcement period but negative over the post-acquisition period. In contrast, acquisitions of both domestic and cross-border private targets result in positive announcement returns and zero long run returns. The main difference between private and public acquisitions is that glamour acquirers experience negative announcement and long run returns in public acquisitions, whereas glamour acquirers do not under-perform in private acquisitions. Furthermore, whereas the under-performance of domestic public acquisitions is limited to acquirers using non-cash methods of payment, acquirers of domestic private targets that use non-cash methods do not under-perform.

WP275: Exports, FDI, Linkages & Regional Disparities in China

Xiaolan Fu

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Pronounced disparities in income and economic opportunities between the coastal and the inland regions of China have often been noted. This paper explores the proposition that regional disparities in China are intimately linked with the structure of her exports and FDI, which results in limited linkages from the growth engines. The spillover and migration effects of exports and FDI on regional income inequalities are investigated. The emphasis on FDI-driven labor-intensive processing-type exports in the coastal regions is found to have attracted the relatively mobile and efficient resources from the inland regions, but have only offered limited growth linkages to them. All this has exacerbated the backwardness of the inland regions.

WP274: Learning from Enron

Simon Deakin and Suzanne J Konzelmann

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This essay argues that the Enron affair has been misunderstood as a failure of monitoring, with adverse consequences for the drafting of the Sarbanes-Oxley Act and the Higgs report. Where Enron’s board failed was in underestimating the risks that were inherent in the company’s business plan and failing to implement an effective system of internal control. Enron demonstrates the limits of the monitoring board and points the way to a stewardship model in which the board takes responsibility for ensuring the sustainability of the company’s assets over time.

WP273: Knowledge Transfer, Entrepreneurship & Economic Growth: Some Reflections & Implications for Policy in the Netherlands

Alan Hughes

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This paper provides an overview of the relationship between entrepreneurship university spin-off activity and economic growth. It suggests the need for a diversified university structure, and that spin-offs are a misleading measure of the most important activity for technology transfer which remains the training and education of highly qualified scientists and technologists. It argues that a linear approach to the innovation process positioning basic science at one end of a chain and commercialisation at the other is misleading. The reality is more complex and incorporates important areas of activity where consideration of use and the pursuit of basic science go hand in hand.

WP272: The Beer beneath the Froth: Preliminary Findings from Case Studies of 25 Small High Technology Firms

Thelma Quince and Hugh Whittaker

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Across Europe those who create and run high-tech SMEs have become a primary focus of industrial policy. Part of the rationale for the focus on small high-tech firms lies in the desire to emulate the experience of the US, particularly Silicon Valley and Boston in which spinning off new ventures from research institutions has been seen to play a key role. By comparison the performance of Europe’s research base has been less dynamic. A more pro active stance towards new ventures created by HEIs is welcomed, however to focus policy too narrowly on this group has inherent dangers. There is a danger of implicitly promoting a particular business model: one emphasising personal financial gain and venture capital funding, which may be at variance with those prevailing among the broad spectrum of existing high-tech small firms. The characteristics, pre-occupations and problems of the vast bulk of small firms operating in high-tech sectors, and making a contribution to international competitiveness through innovation and export may be overlooked in the current policy climate. By way of redress this paper reports the preliminary findings from a qualitative study of 25 existing small high technology firms in the UK. The themes outlined include: the motivation and drivers of entrepreneurship, the nature of collaboration with HEIs, relationships with customers and the development of ‘customer empathy’ and experiences of venture capital.

WP271: Entrepreneurial Orientation & Entrepreneurs’ Intentions & Objectives

Thelma Quince and Hugh Whittaker

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Entrepreneurship has become an important issue for policy. At one level, enterprise creation is recognised as important for employment growth and effecting structural change; at another, there is concern to encourage existing firms to become more entrepreneurial as a means of enhancing international competitiveness. Entrepreneurial orientation (EO) reflected in recurring organisational behaviour such as innovativeness, pro-activeness and risk-taking is important in the latter context. This paper explores the extent to which differences in motives, intentions and personal objectives held by entrepreneurs were reflected in organisational behaviour relating to the dimensions of EO suggested by Lumpkin and Dess.

WP270: Significant Feedbacks in Firm Growth & Market Structure

Paul Kattuman and Alexandru Chirmiciu

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There are some markets where the growth of firms are held to be subject to diminishing returns, or negative feedbacks; and there are other markets where firm growth is believed to be subject to increasing returns, or positive feedbacks. A long run tendency towards monopoly might be expected in this latter market type, as opposed to a tendency towards relative equality of size shares in the former. It would be useful to draw inferences about the nature of the feedback process from observed market shares and concentration. We motivate and develop a test for feedbacks in firm growth under the null hypothesis that there are none. We use the equivalence between an urn model of the no-feedback process and the asymptotic distribution of sums of ordered intervals in the random division of the unit interval. In the empirical application for the United States, we find that most markets are subject to significant positive feedbacks.

WP269: Towards Governance for Uncertain Times: Joining up Public, Business and Civil Society Sectors

Ken Coghill

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This paper examines the complexity and “fuzzy logic” actually at play in governance in case studies such as HIH (Australia) and Enron (USA). The rules applying to each sector cannot fully explain events. Non prescribed factors influencing behaviours affecting the interconnections, interdependencies and interactions of the individuals and institutions concerned often determine outcomes. Socio-political systems are dynamic complex evolving systems that function according to bounded self organisation. Their governance often involves decision-making behaviour that does not operate according to formulaic rules but is analogous to the fuzzy logic according to which certain systems behave. Viewing the relationship between public management as regulators, corporations and others as complex dynamic relationships assists understanding the role of unanticipated events and the management of responses and adaptation to uncertainty in a society’s internal and external environments. This can facilitate the protection and advancement of the public interest by public management.

WP268: Are Good Managers Required for a Separation of Ownership & Control?

Brian R Cheffins

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Logically, in a corporate governance system where big companies are widely held and control over corporate policymaking is delegated to a cohort of full time executives, there needs to be “good” managers. In Britain, however, ownership separated from control in large business enterprises at a time when the country’s corporate executives were allegedly amateurish and complacent. The paper examines this British paradox and concludes that dynamics affecting institutional investors explain how ownership structures were reconfigured when doubts existed about managerial quality.

WP267: Interpreting Employment Contracts: Judges, Employers, Workers

Simon Deakin

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This paper reports findings from a survey designed to estimate the numbers excluded from employment protection in the UK by the ’employee’ test and to examine, through qualitative research, perceptions of the process of employment contracting. The survey evidence shows that approaching one third of the labour force does not fit neatly into the categories of ’employee’ and ‘self-employed’. The case studies suggest that there is a considerable disjuncture between the assumptions of choice, control and risk that underlie the legal tests, and the perception of these issues by workers whose employment status is most in doubt.

WP266: Shareholder Primacy & the Trajectory of UK Corporate Governance

John Armour, Simon Deakin and Suzanne J Konzelmann

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Core institutions of UK corporate governance, in particular those relating to takeovers, board structure and directors’ duties, are strongly orientated towards a norm of shareholder primacy. Beyond the core, in particular at the intersection of insolvency and employment law, stakeholder interests are better represented, thanks to European Community influence. Moreover, institutional shareholders are redirecting their investment strategies away from a focus on short-term returns, in such a way as to favour stakeholder-inclusive practices. We therefore suggest that the UK system is currently in a state of flux and that the debate over shareholder primacy has not been concluded.

WP265: Capital Structure, Rates of Return & Financing Corporate Growth: Comparing Developed & Emerging Markets, 1994-00

Jack Glen and Ajit Singh

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Firm level data from financial statements for nearly 8,000 listed companies in 22 emerging and 22 developed countries over the period 1994-00 are examined. Capital structure, asset structure, rates of return and financing patterns are compared across countries and over time. Generally, there are as many similarities as differences between the two groups. The differences include lower levels of debt to finance assets and lower levels of current assets in emerging markets compared with developed countries. Returns on assets, expressed in local currency, are comparable in the two groups but appear more volatile in emerging markets.

WP263: Growth Response to Competitive Shocks Market Structure Dynamics under Liberalisation: The Case of India

Uma S Kambhampati and Paul A Kattuman

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Liberalisation transforms market structures through the behavioural responses of incumbent firms and entrants, large firms and small, to enhanced freedom of choice. Change in market share volatility, and change in the effective agility of small and large firms underpin changes in market structure. We analyse these processes for Indian manufacturing industries over the 18-year period from 1980, spanning the domestic liberalisation of 1985 and the more comprehensive reforms of 1991, using a data set of large and medium firms in 83 industries. We find that while market structures themselves appeared to change little, turbulence in market shares, as well as the way growth is related to size responded markedly, differing in direction and magnitude, depending on whether the liberalisation was partial and domestic, or comprehensive. We find that they tended to offset each other, leading to little visible change in market structure itself. We also find that while drivers of market structure traditionally recognised in industrial organisation studies had significant impacts on both components of concentration change, their dynamics are captured very well by a parsimonious model that has just the announcement effects – the reform dates.

WP262: Globalisation and Its Impact on Competitiveness: The Case of the British and German Pharmaceutical Industry

Christel Lane and Jocelyn Probert

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This paper assesses the degree of financial and economic globalisation of British and German pharmaceutical companies during 1990 and 2001 and explores the changing balance between globalisation and national embeddedness. It tries to explain both the much lower degree of globalisation of German as compared to British companies in 1990, as well as their catching up at the beginning of the 21st century. The paper suggests that the lesser degree of globalisation of German firms during most of the 1990s partly explains their slide in competitiveness during this period. The conclusion examines prospects for the future of firms in both economies. The paper draws on detailed industry data, as well as case studies of the major firms in the two national industries.

WP261: The Effect of Board Structure on Bidder-Shareholders’ Wealth: Further Evidence from the UK Bidding Firms

Charalambos Th Constantinou and Costas Th Constantinou

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In this study we provide evidence of cross-sectional dependence of bidder-shareholder wealth and target’s board characteristics. More specifically we provide evidence that the percentage of non-executives, the board size, the stock holdings of executives, and the other directorships held by non-executives serving the target board are important in assessing the announcement of the bid, whereas in the bidder’s board only the percentage of non-executive directors is important for bidder-shareholders. In addition to that we provide evidence that some of these relationships are not monotonic in nature. Finally, in this study it is documented that bidder-shareholder wealth is favoured in acquisitions where bidders have marginally more executive than non-executive directors in their boards and therefore the question arises as to whether “dependent” boards are more efficient than “independent” ones.

WP260: The Home-based Advantages & a Hierarchy of Location Advantages: Foreign & British-owned Firms in the London Wholesale Insurance Market

Lilach Nachum

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This study seeks to explain why, in some cases, locationally advantageous countries attract foreign firms, who develop dominant competitive positions in the market, rather than facilitate the development of internationally competitive national firms, as theory suggests. Comparative analyses of samples of foreign and British-owned insurance firms in the London wholesale insurance market are used to establish a hierarchy of location advantages in terms of their competitive importance. It is shown that foreign affiliates compensate for their liability in accessing Britain’s location advantages by accessing resources via the MNE internal networks. Their competitive strength is based primarily on such resources. The contributions of the findings to the conceptualisation of the MNE as an internal network within an external network, and the potential substitution of internal and external resources, are discussed. The implications for the theory of the national origin of the competitive advantages of MNEs are outlined.

WP259: Changes in Corporate Governance of German Corporations: Convergence to the Anglo-American Model?

Christel Lane

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This paper examines the many changes which have transformed the German system of corporate governance during the last seven odd years. It concludes that it is in the process of converging towards the Anglo-American systemand that this has fundamentally affected the way strategic decisions are made in firms. Large, internationally oriented companies are particularly affected. But the notion of shareholder value and its many behavioural effects are gradually spreading also to other parts of the economy. Consequently, the distinctive logic, which had underpinned the German variety of capitalism during most of the post-war period, is eroding. This transformation is affecting also labour and industrial relations in negative ways. The argument is empirically substantiated with data about recent trends in capital markets, banks and firms. The paper theoretically examines institutional change, focussing on the notions of system logic and institutional complementarity. It examines both external sources of change and internal powerful actors who promote the process of transformation. The notion of hybridisation of the German business system is examined but is rejected in favour of a trend towards convergence. Convergence is not seen as a functional necessity, nor is it viewed as inevitable.

WP258: Corporate Governance, Corporate Finance & Stock Markets in Emerging Markets

Ajit Singh

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This paper focuses on the inter-relationship between corporate governance, financing of corporate growth and stock market development in emerging countries. It explores both theoretically and empirically the nature of the inter-relationships between these phenomena, as well as their implications for economic policy. It concentrates on how corporate growth is financed, an area where the literature has identified important anomalies in relation to corporate behaviour and governance. The paper provides new information and analysis on this subject for the 1990s which it is shown leads to further anomalies from the perspective of extant economic theory. It also comments briefly on the recent research on the legal system, corporate laws, corporate governance and corporate performance. In considering the latter issues the paper examines more closely the evolution of the financing of corporate growth and of stock market development in the specific case of the Indian economy in the 1980s and 1990s.

WP257: Globalisation, Labour Standards & Economic Development

Ajit Singh and Ann Zammitt

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In recent years a few advanced countries have been advocating multilateral rules permitting punitive trade measures to be taken against countries not upholding core labour standards. The mainly developing target countries have rebutted these initiatives which they argue are protectionist, in intent and in effect. Whilst closely examining the economic arguments in this controversy, this paper is also concerned with the broader political and moral dimensions. The authors suggest that developing countries are committed to improving core and other labour standards; the reason why they are unable to implement many of these forthwith is not because of the wickedness of their governments, but essentially their economic circumstances and the structure of their economies. The paper concludes that core ILO Conventions 87 and 98 should be re-drafted to take into account the economic conditions of developing countries.

WP256: Determinants of the Use of Financial Incentives in Investment Banking

David Nash

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This paper examines the use of incentive pay schemes within the financial services sector in London. Various theories of wage determination are reviewed with particular attention placed on the principal-agent literature as a framework for analysing the use of incentive pay. This is combined with case study interviews and a number of hypotheses regarding the use of bonuses. Quantitative analysis of a detailed industry-wide survey validates the hypothesis that those occupations where output is easily identifiable receive higher bonus pay. The proximity of an occupation to the revenue generating activity within the organisation is also found to be significant in determining bonus levels, as is job grade within the organisation. The paper concludes that principal-agent theories of wage determination are useful in understanding the use of bonus pay in the City, but need to be modified to take account of particular institutional characteristics, in particular the power of individual agents.