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Session Overview
CFE-5: Investment
Thursday, 24/Aug/2017:
3:30pm - 5:00pm

Session Chair: Nickolay Gantchev, UNC Chapel Hill
Location: O131

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Downward Wage Rigidity, Corporate Investment, and Firm Value

DuckKi Cho

Arizona State University

Discussant(s): Hyunseob Kim (Cornell University)

Firms reduce investment when facing downward wage rigidity (DWR), the inability or unwillingness to adjust wages downward. I construct DWR measures and exploit staggered state-level changes in minimum wage laws as an exogenous variation in DWR to document this fact. Following a minimum wage increase, firms reduce their investment rate by 1.17 percentage points. Surprisingly, this labor market friction enhances firm value and production efficiency when firms are subject to other frictions causing overinvestment, consistent with the theory of second best. Finally, I identify increased operating leverage and aggravation of debt overhang as mechanisms by which DWR impedes investment.

EFA2017-549-CFE-5-Cho-Downward Wage Rigidity, Corporate Investment, and Firm Value.pdf

Multinational Firms and The International Transmission of Financial Crises: The Real Economy Channel

Jan Bena1, Serdar Dinc2, Isil Erel3

1University of British Columbia; 2Rutgers University; 3The Ohio State University

Discussant(s): Jessica S. Jeffers (University of Chicago)

This paper studies investment and employment at a subsidiary located in a non-crisis country if its parent firm also has a subsidiary in a crisis country. It finds that investment is about 25% lower in the subsidiaries of these parents relative to the same- industry, same-country subsidiaries of multinational firms that do not have a subsidiary in a crisis country. Employment also shrinks by about 0.5% in the former while it increases by about 1.5% in the latter. These results hold controlling for subsidiary and parent size, parent cash flow, subsidiary country, industry, year, and parent country, as well as using alternative crisis definitions.

EFA2017-1858-CFE-5-Bena-Multinational Firms and The International Transmission.pdf

Information, Competition, and Investment Sensitivity to Peer Stock Prices

Malcolm Ian Wardlaw1, Arzu Ozoguz2, Michael Rebello1

1University of Texas at Dallas; 2Rice University

Discussant(s): Bige Kahraman (University of Oxford)

We examine how investment response of firms to the price movements of their peers is affected by the competitive environment of the industry. We show that firms behave very differently in the presence of competitive effects which we argue changes the makeup of the information impounded into prices. We show that this composite information can make inference difficult when testing the impact of price informativeness on investment responses to peer price. We propose an alternative test involving the market leaders in an industry, and show that the investment response to price changes is actually negative and that price informativeness amplifies this negative response.

EFA2017-1455-CFE-5-Wardlaw-Information, Competition, and Investment Sensitivity.pdf

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