Vol. 13, No. 1
Erkki Koskela and Rune Stenbacka:
Bank mergers and the fragility of loan markets (pp. 3–18)
We address the question of whether competition makes loan markets more fragile in the sense of increasing the equilibrium bankruptcy risk of firms. This is done using a model of the interaction between the concentration of the banking sector and the investment strategies of imperfectly competitive product market firms. It is shown how a merger between two competing bilateral monopoly banks will typically decrease the interest rate and increase the investment volumes of firms if the investment decisions are strategic complements. Under plausible conditions this implies that a merger will lessen, not aggravate, the fragility of loan markets.
(JEL: G21, G33, G34)
Olli Haltia and Mikko Leppämäki:
Do shareholders care about corporate investment returns? (pp. 19–27)
This paper considers the apparent contradiction between the results of Artto (1997), who claims that shareholders in the paper industry have gained reasonable returns, and Pohjola (1996), who argues that a large shareholder value has been lost (the Artto–Pohjola Paradox). We show under fairly general conditions that the shareholders may enjoy reasonable return while the managers are simultaneously destroying value of the firm by allocating funds to bad investments. In this case the firm’s shareholders suffer an opportunity loss equal to the value that could have been created if the firm had paid the funds out to them and they had invested the funds in equivalently risky projects. The paradox occurs if the growth rate of a firm’s market value of equity is high enough to guarantee a nonnegative return for the shareholders but too low in the sense that the shareholders would have earned more had the funds invested at the return (at least) equal to the opportunity cost of capital. Our results support Jensen’s (1986) argument of the incentives of corporate managers to invest inefficiently, since here the shareholders do not necessarily challenge the management due to the fact that they may be perfectly happy and satisfied in financial terms.
(JEL: D24, G31, L73)
Tom Björkroth and Anders Kjellman:
Public capital and private sector productivity – a Finnish perspective (pp. 28–44)
This paper focuses on the impact of the public sector capital on private sector productivity in Finland. The majority of previous contributions support the public capital hypothesis, i.e. that public capital plays an important role in enhancing private sector productivity. However, the contribution of Tatom (1991a) sheds new light on this issue. He shows that by correcting the previously used models of some of their most serious deficiencies, the impact of public capital is no longer significant for private sector productivity. We have applied Tatom’s approach to Finnish data, and our results are similar to his findings. However, our results concerning the precedence between public capital and private sector output provide some evidence of causation running from public capital to private sector output, i.e. our results indicate that, if correctly targeted, public capital investment could affect private sector performance.
(JEL: E6, E62, H5)
Self-employment and the predicted earnings differential – evidence from Finland (pp. 45–55)
Using a large Finnish data set, the choice between self-employment and paidemployment is analysed empirically. The model used is a switching regression model with endogenous switching. The main result suggests that the predicted earnings differential between self-employment and paid employment has a positive influence on the probability of being self-employed.
Effect of publicly and privately financed R&D on total factor productivity growth (pp. 56–68)
The effects of privately and publicly financed R&D on total factor productivity growth are examined. Total factor productivity (TFP) is decomposed into markup, exogenous demand, factor price, and publicly and privately financed R&D effects at the industry level. The constructed dataset consists of 11 Finnish manufacturing industries in 1975–1993. The results suggest that both privately and publicly financed R&D has a considerable effect on the TFP rate of growth but R&D explains only part of the technical progress. On the average, total R&D accounted for about 9 percent of the TFP rate of growth in manufacturing industries while one fourth of the growth could be attributed to the residual technical change. Exogenous demand effect was the biggest component, accounting almost for one third of the TFP rate of growth.
(JEL: L6, O38, O47)