Highlights 2022

WP 22/07

COVID-19 has been a very special economic shock. Qualifying as a “rare disaster,” with the corresponding sudden, violent, and wide-ranging impact, it affected different industries asymmetrically and generated massive uncertainty about its persistence. In the new working paper "COVID-19 and Corporate Finance", Marco Pagano and Josef Zechner distill evidence about the effects of COVID-19 on financial markets and on firms, and therefore its implications for corporate finance, by canvassing not only recent research in this area, but also the latest available balance sheet data for U.S. and European companies. They look at the evidence through three complementary lenses: first, the response of security prices and returns, which could be observed in real time as the shock hit and its effects unfolded; second, the impact of the shock on firms' real outcomes; third, firms' financial response both to the shock and to the support policies enacted by governments to counter the crisis. Stock price reactions to the shock differed greatly across firms, depending on their resilience to social distancing, financial flexibility, and corporate culture. The same characteristics affected the response of firms' sales, employment, and asset growth. Despite the shock, firms expanded their balance sheets and liquidity by raising funds from banks, bonds, and equity markets. While listed firms reduced their leverage, unlisted ones, especially small and medium enterprises, increased it. Government support programs helped firms access external funding. They conclude by identifying unexplored research issues regarding the long-run effects of COVID-19 on companies.

WP 22/06

Employees' careers are often shaped by favoritism and discrimination, however costly this may be to the firm's profitability. In the new working paper "Corporate Governance, Favoritism and Careers", Marco Pagano and Luca Picariello show that firms tend to deviate from merit-based promotion when the objectives of their controlling shareholders are not well aligned with those of external financiers: in this case, they have an incentive to pursue their own non-monetary benefits rather than maximize profitability. However, corporate governance standards may constrain managers' possibility of engaging in such practices, so that the share of meritocratic companies should increase with the quality of corporate governance standards. By increasing the fraction of meritocratic firms, higher standards of corporate governance also affect the incentives of workers, encouraging the skilled to apply for jobs with better career prospects and to invest in their human capital before entering the labor market. Conversely, poorer standards increase the fraction of firms that promote unskilled workers, which depresses the incentive to acquire skills. Hence, good corporate governance ultimately improves the skill composition of the workforce, via career incentives and labor market equilibrium, and thereby raises aggregate productivity: high corporate governance standards are an efficient form of precommitment to shun favoritism. Labor market competition too plays a role in firms' promotion policies and workers' skill acquisition choices, but its effect is ambiguous. Sharper competition between firms for talent means higher wages upon promotion and thus increases workers' incentive to acquire skills, but it also increases talent retention costs for firms, thus reducing the proportion of meritocratic firms. As a result, the equilibrium fraction of skilled workers may shrink, especially if the economy starts from a situation of sharp labor market competition.

WP 22/05

In “JAQ of All Trades: Job Mismatch, Firm Productivity and Managerial Quality”, Marco Pagano, together with Luca Coraggio, Annalisa Scognamiglio and Joacim Tag, investigates whether the matching between workers and jobs helps explain productivity differentials across firms. To address this question, the paper focuses on managerial policies governing the allocation of workers to jobs within the firm and develops a job-worker allocation quality measure by combining administrative employer-employee matched data with ML techniques. This measure is validated by exploring its correlation with workers' wages over their careers, firm performance, and with managerial turnover. The evidence shows that workers earn significantly more as they are better allocated to jobs over their careers, and that firms are more productive if they achieve better worker-job matches. The quality of management appears to play a key role in the efficient assignment of workers to jobs: rank-and-file workers' allocation improves significantly when managerial turnover leads to better assigned and more experienced managers, while the opposite occurs when turnover leads to lower-quality management. The measure proposed in this paper can be constructed for any linked employer-employee data that include workers' occupations, without requiring either expensive surveys or detailed expert evaluations of the skills required for each job, and can be applied to explore the effect of corporate restructurings (such as those resulting from private equity interventions, mergers and acquisitions, changes in corporate control or initial public offerings) on workers' allocation and on their careers.

WP 22/04

In “Assortative Mating and Wealth Inequality” Andreas Fagereng, Luigi Guiso and Luigi Pistaferri shed new light on how sorting in the marriage market contributes to wealth inequality and the extent of wealth concentration at the top of the distribution. They use population data from Norway that allows to observe wealth and returns before and after people marry allowing to study sorting in a very clean setting. They show that spouses tend to sort on their own wealth rather than on parents wealth, as believed so far. Furthermore, spouses sort on their pre-marriage returns to wealth. Finally, once married, household financial decisions tend to be made mostly by the spouse with the highest pre-marriage return. This suggests that family wealth is largely managed by the spouse with the highest potential to grow it. These three features together have alone in interaction with the others a relevant impact on the inequality in wealth both at time of marriage and as the families evolve over their life cycle. Importantly, because sorting and family wealth management allocation rules vary over time, these features also contribute to understand why wealth concentration evolves over time.

WP 22/03

In "Asymptotic properties of the weighted-average least squares (WALS) estimator", Giuseppe De Luca, Jan Magnus, and Franco Peracchi investigate the asymptotic behavior of WALS, a model-averaging estimator with attractive finite-sample and computational properties. WALS is closely related to the normal location model, hence much of the paper concerns the asymptotic behavior of the estimator of the unknown mean in the normal local model. Since the paper adopts a frequentist-Bayesian approach, this specializes to the asymptotic behavior of the posterior mean as a frequentist estimator of the normal location parameter. The paper emphasizes two challenging issues. First, the definition of ignorance adopted in the Bayesian step involves a prior on the t-ratio rather than on the parameter itself. Second, instead of assuming a local misspecification framework, the paper considers a standard asymptotic setup with fixed parameters. The paper shows that, under suitable conditions on the prior, the WALS estimator is consistent and its asymptotic distribution essentially coincides with that of the unrestricted least-squares estimator. Monte Carlo simulations confirm these theoretical results.

WP 22/02

Can new blockchain-based technology disrupt “traditional” entrepreneurial finance? In the new working paper “(R)Evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets”, Luana Zaccaria together with Kirill Shakhnov propose a theoretical framework for entrepreneur's funding choices that builds on the trade-off between the specific comparative advantages offered by Initial Coin Offerings (ICO) and Venture Capital (VC) funding. On the one hand, through the involvement of retail investors, ICOs help startups build large initial communities of users and leverage network effects. On the other hand, professional investors (like VCs) contribute to the improvement of firm outcomes through value-adding services. The authors show that, even when projects have large potential network effects, ICOs may not be optimal if entrepreneurial ability is low. Moreover, despite the potential complementarity between network effects and value-adding services, entrepreneurs combine VC and ICO funding only in highly efficient VC markets. Using data on funding rounds of blockchain startups, they empirically validate the main implications of the model.

WP 22/01

What determines natives' attitudes towards citizenship acquisition for foreigners? In “Strangers and Foreigners: Trust and Attitudes toward Citizenship”, Graziella Bertocchi, Arcangelo Dimico and Gian Luca Tedeschi look at this question in the context of sub-Saharan Africa. Their hypothesis is that, in sub-Saharan Africa, the slave trade represents the deep factor behind contemporary attitudes toward citizenship, with more intense exposure to historical slave exports for an individual's ethnic group being associated with contemporary distrust for strangers, and in turn opposition to citizenship laws that favor the inclusion of foreigners. Their findings confirm that individuals who are more trusting do show more positive attitudes towards the acquisition of citizenship at birth for children of foreigners and that these attitudes are also negatively related to the intensity of the slave trade, as channeled by trust. They also test alternative factors, such as historical conflict, kinship tightness, and witchcraft beliefs, that through trust may affect attitudes toward citizenship, but none of them is able to generate the same distinctive pattern of linkages emerging from the slave trade.