Sources of Large Firms’ Market Power and Why It Matters
Filippo di Mauro, Matthias Mertens, Bernardo Mottironi
VOXEU COLUMN,
January
2023
Abstract
Excessive market power has detrimental effects on the functioning of the economy, raising consumer prices, distorting the allocation of resources, and creating welfare losses. The existing literature has largely focussed on competition in product markets. This column argues that it is important to differentiate between various sources of firm market power on output and input (most notably labour) markets. European firm-level data reveals that large firms charge lower markups in product markets but exert their market power significantly in labour markets. Competition authorities can and must distinguish between the sources of market power when attempting to regulate it.
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The Geography of Information: Evidence from the Public Debt Market
Bill Francis, Iftekhar Hasan, Maya Waisman
Journal of Economic Geography,
Nr. 1,
2023
Abstract
nWe investigate the link between the spatial concentration of firms in large, central metropolitans (i.e. urban agglomeration) and the cost of public corporate debt. Looking at bond issues over the period 1985–2014, we find that bonds issued by companies headquartered in urban agglomerates have lower at-issue yield spreads than bonds issued by firms based in remote, sparsely populated areas. Measures of the count of institutional bondholders in a firm’s vicinity confirm that the spatial cross-sectional variation in bond spreads is driven by the proximity of metropolitan firms to large concentrations of institutional investors. Our results are robust to controls for firm productivity and governance, analyst following, and exogenous shocks to institutional investor attention. The effect of headquarters location on bond spreads is especially pronounced for more difficult to value, speculative-grade bonds, bonds issued by smaller, less visible firms and bonds issued without protective covenants. Overall, we provide evidence that the geographical distribution of firms and investors generates a corresponding distribution of value-relevant, firm-level information that affects its cost of capital.
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Do Larger Firms Exert More Market Power? Markups and Markdowns along the Size Distribution
Matthias Mertens, Bernardo Mottironi
IWH-CompNet Discussion Papers,
Nr. 1,
2023
Abstract
Several models posit a positive cross-sectional correlation between markups and firm size, which characterizes misallocation, factor shares, and gains from trade. Accounting for labor market power in markup estimation, we find instead that larger firms have lower product markups but higher wage markdowns. The negative markup-size correlation turns positive when conditioning on markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias, non-neutral technology) and hold across 19 European countries. We discuss possible mechanisms and resulting implications, highlighting the importance of studying input and output market power in a unified framework.
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Do Larger Firms Exert More Market Power? Markups and Markdowns along the Size Distribution
Matthias Mertens, Bernardo Mottironi
IWH Discussion Papers,
Nr. 1,
2023
Abstract
Several models posit a positive cross-sectional correlation between markups and firm size, which characterizes misallocation, factor shares, and gains from trade. Accounting for labor market power in markup estimation, we find instead that larger firms have lower product markups but higher wage markdowns. The negative markup-size correlation turns positive when conditioning on markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias, non-neutral technology) and hold across 19 European countries. We discuss possible mechanisms and resulting implications, highlighting the importance of studying input and output market power in a unified framework.
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Firm Subsidies, Financial Intermediation, and Bank Stability
Aleksandr Kazakov, Michael Koetter, Mirko Titze, Lena Tonzer
IWH Discussion Papers,
Nr. 24,
2022
Abstract
We use granular project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect the quantity and quality of bank lending. We combine the universe of recipient firms under the Improvement of Regional Economic Structures program (GRW) with their local banks during 1998-2019. The modalities of GRW subsidies to firms are determined at the EU level. Therefore, we use it to identify bank outcomes. Banks with relationships to more subsidized firms exhibit higher lending volumes without any significant differences in bank stability. Subsidized firms, in turn, borrow more indicating that banks facilitate regional economic development policies.
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Identifying Rent-sharing Using Firms' Energy Input Mix
Matthias Mertens, Steffen Müller, Georg Neuschäffer
IWH Discussion Papers,
Nr. 19,
2022
Abstract
We present causal evidence on the rent-sharing elasticity of German manufacturing firms. We develop a new firm-level Bartik instrument for firm rents that combines the firms‘ predetermined energy input mix with national energy carrier price changes. Reduced-form evidence shows that higher energy prices depress wages. Instrumental variable estimation yields a rent-sharing elasticity of approximately 0.20. Rent-sharing induced by energy price variation is asymmetric and driven by energy price increases, implying that workers do not benefit from energy price reductions but are harmed by price increases. The rent-sharing elasticity is substantially larger in small (0.26) than in large (0.17) firms.
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Bank Failures, Local Business Dynamics, and Government Policy
Salvador Contreras, Manthos D. Delis, Amit Ghosh, Iftekhar Hasan
Small Business Economics,
Nr. 4,
2022
Abstract
Using MSA-level data over 1994–2014, we study the effect of bank failures on local business dynamics, in the form of net business formation and net job creation. We find that at least one bank failure in the metropolitan statistical area (MSA) with the mean population prevents approximately 475 net businesses from forming in that area, compared with MSAs that experience no bank failures, ceteris paribus. The equivalent effect on net job creation is 16,433 net job losses. Our results are even stronger for small businesses, which are usually more dependent on bank-firm relationships. These effects point to significant welfare losses stemming from bank failures, highlighting an important role for government intervention. We show that the Troubled Asset Relief Program (TARP) is effective in reducing the negative effects of bank failures on local business dynamics. This positive effect of TARP is quite uniform across small and large firms.
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The (Heterogenous) Economic Effects of Private Equity Buyouts
Steven J. Davis, John Haltiwanger, Kyle Handley, Josh Lerner, Ben Lipsius, Javier Miranda
IWH Discussion Papers,
Nr. 10,
2022
Abstract
The effects of private equity buyouts on employment, productivity, and job reallocation vary tremendously with macroeconomic and credit conditions, across private equity groups, and by type of buyout. We reach this conclusion by examining the most extensive database of U.S. buyouts ever compiled, encompassing thousands of buyout targets from 1980 to 2013 and millions of control firms. Employment shrinks 13% over two years after buyouts of publicly listed firms – on average, and relative to control firms – but expands 13% after buyouts of privately held firms. Post-buyout productivity gains at target firms are large on average and much larger yet for deals executed amidst tight credit conditions. A post-buyout tightening of credit conditions or slowing of GDP growth curtails employment growth and intra-firm job reallocation at target firms. We also show that buyout effects differ across the private equity groups that sponsor buyouts, and these differences persist over time at the group level. Rapid upscaling in deal flow at the group level brings lower employment growth at target firms.
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Revealing Corruption: Firm and Worker Level Evidence from Brazil
Emanuele Colonnelli, Spyridon Lagaras, Jacopo Ponticelli, Mounu Prem, Margarita Tsoutsoura
Journal of Financial Economics,
Nr. 3,
2022
Abstract
We study how the disclosure of corrupt practices affects the growth of firms involved in illegal interactions with the government using randomized audits of public procurement in Brazil. On average, firms exposed by the anti-corruption program grow larger after the audits, despite experiencing a decrease in procurement contracts. We manually collect new data on the details of thousands of corruption cases, through which we uncover a large heterogeneity in our firm-level effects depending on the degree of involvement in corruption. Using investment-, loan-, and worker- level data, we show that the average exposed firms adapt to the loss of government contracts by changing their investment strategy. They increase capital investment and borrow more to finance such investment, while there is no change in their internal organization. We provide qualitative support to our results by conducting new face-to-face surveys with business owners of government-dependent firms.
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The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?
Stefano Colonnello
Journal of Financial Services Research,
February
2022
Abstract
I analyze the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act’s separation between commercial and investment banking. Using a sample of US firms and their relationship banks, I show that firms curtail debt issuance and investment after positive shocks to the underwriting capacity of their main bank. This result is driven by unrated firms and is strongest immediately after a shock. These findings suggest that universal banks may pay more attention to large firms providing more underwriting opportunities while exacerbating financial constraints of opaque firms, in line with a shift to a banking model based on transactional lending.
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