Using novel transaction-level data on Chinese business groups, this study provides the first direct evidence of the coinsurance theory of business groups by investigating when different types of ...internal resources are transferred within a business group. We find that in Chinese business groups, a credit crunch experienced by the controlling shareholding firm (the "controller") of a publicly listed firm increases the loan-based related party transactions (RPTs) including loan guarantees and intercorporate loans provided by the listed firm to the controller. In turn, when the listed firm's performance dips, the controller and its son firms provide more support to the listed firm in the form of non-loan-based RPTs. These findings directly show the dynamic interactions of members within business groups.
This paper was accepted by Bruno Cassiman, business strategy.
Visual contracts have attracted increasing attention as a human-focused approach to contract law, with proponents arguing they are a better way to effectively communicate complex terms and ...conditions. However, there have been only limited empirical studies of the efficacy of these contracts. This paper compares and evaluates data of responses to text and visual contracts from two large Australian companies. Drawing on theories of transaction cost economics, we undertook an empirical study of ordinary least square (OLS) regressions to examine the effectiveness of visual contracts in comparison with traditional text-based contracts. Analysis of the results demonstrates that the visual format plays a significant role in reducing the transaction costs of contracting, providing empirical confirmation of the value of contract redesign and the visual format.
Using the intuition that financial markets transfer risks in business time, "market microstructure invariance" is defined as the hypotheses that the distributions of risk transfers ("bets") and ...transaction costs are constant across assets when measured per unit of business time. The invariance hypotheses imply that bet size and transaction costs have specific, empirically testable relationships to observable dollar volume and volatility. Portfolio transitions can be viewed as natural experiments for measuring transaction costs, and individual orders can be treated as proxies for bets. Empirical tests based on a data set of 400,000+ portfolio transition orders support the invariance hypotheses. The constants calibrated from structural estimation imply specific predictions for the arrival rate of bets ("market velocity"), the distribution of bet sizes, and transaction costs.
Applying the Cherny-Shiryaev-Yor invariance principle, we introduce a generalized Jarrow-Rudd (GJR) option pricing model with uncertainty driven by a skew random walk. The GJR pricing tree exhibits ...skewness and kurtosis in both the natural and risk-neutral world. We construct implied surfaces for the parameters determining the GJR tree. Motivated by Merton’s pricing tree incorporating transaction costs, we extend the GJR pricing model to include a hedging cost. We demonstrate ways to fit the GJR pricing model to a market driver that influences the price dynamics of the underlying asset. We supplement our findings with numerical examples.
We theoretically and empirically study portfolio optimization under transaction costs and establish a link between turnover penalization and covariance shrinkage with the penalization governed by ...transaction costs. We show how the ex ante incorporation of transaction costs shifts optimal portfolios towards regularized versions of efficient allocations. The regulatory effect of transaction costs is studied in an econometric setting incorporating parameter uncertainty and optimally combining predictive distributions resulting from high-frequency and low-frequency data. In an extensive empirical study, we illustrate that turnover penalization is more effective than commonly employed shrinkage methods and is crucial in order to construct empirically well-performing portfolios.
Blockchain is projected to be the latest revolutionary technology and is gaining increasing attention from academics and practitioners. Blockchain is essentially a distributed and immutable database ...that enables more efficient and transparent transactions. The consensus-based record validation can eliminate the need for a trusted intermediary. We utilize the transaction cost theory to create a better understanding of how blockchain might influence supply chain relations, specifically in terms of transaction costs and governance decisions. Conceptually developing a set of six propositions, we argue that blockchain limits opportunistic behavior, the impact of environmental and behavioral uncertainty. Blockchain reduces transaction costs, as it allows for transparent and valid transactions. We explore several areas for future research on how blockchain might shape supply chain management in the future.
•Digitalization influences supply chain practice, and should therefore be integrated as a new boundary condition in PSM research.•Blockchain technology influences the prediction of governance structures in the supply chain.•Blockchain technology limits opportunistic behavior, environmental and behavioral uncertainty.•Blockchain application reduces transaction costs and enables more market-oriented governance structures.
This article evaluates the effect of adopting Internet-enabled information and communication technology (ICT adoption) on the decision to reorganize production across national borders (foreign ...boundary decision) by multinational enterprises (MNEs). Using a transaction cost framework, we argue that ICT adoption influences foreign boundary decisions by lowering coordination costs both internally and externally for the firm. We propose that the heterogeneity in the technology's characteristics, namely complexity and the production processes' degree of codifiability, moderate this influence. Using a difference-indifferences methodology and exploiting the richness of confidential US Census Bureau microdata, we find that overall ICT adoption is positively associated with greater likelihood of in-house production, as measured by increases in intra-firm trade shares. Furthermore, we find that more complex forms of ICT are associated with larger increases in intra-firm trade shares. Finally, our results indicate that MNEs in industries in which production specifications are more easily codified in an electronic format are less likely to engage in intra-firm relative to arm's length trade following ICT adoption.
Effective management of the supply network is essential to assure market success for modern supply chains; starting from this, the paper aims to shed light on the dynamics of buyer-supplier ...industrial relationships by exploring the antecedents of supplier commitment – a requisite to improve performance obtained from suppliers. The paper develops a theoretical framework, grounded on Transaction Cost Economics and Social Exchange Theory, which is tested using survey data from 305 international companies and applying a Structural Equation Modelling approach. Results show that goals alignment, buyer commitment and supplier collaboration initiatives are all drivers of supplier commitment, which, in turn, positively affects innovation performance ensured by suppliers. These findings confirm the relevant role of buyer-side initiatives in driving supplier commitment, giving managers focus points to look at when the objective is to gain a preferred customer status.
State and local governments engage each other in a broad set of complicated interdependent relationships. Yet, there is limited research on what these multilevel governance relationships mean for ...community-focused sustainability. This study applies a transaction cost federalism framework to examine the hierarchical influences of state fiscal support and policy actions on municipal commitments to sustainability at the community-level. An analysis of U.S. cities reveals that state investments in energy programs encourage municipal efforts for incentivized energy efficiency initiatives for local taxpayers. Larger percentages of state funding directed to energy programs lead to stronger municipal commitments to incentivized sustainability programs such as individual grants, direct loans, and tax incentives. The results suggest that stable and supportive multilevel governance systems are key for reducing political transaction costs inherent within vertical systems driven by coercive authority. These findings produce theoretical and practical implications for understanding community-level sustainability within the face of “contested federalism.”
ABSTRACT
This paper provides evidence that disclosing corporate bond investors' transaction costs (markups) affects the size of the markups. Until recently, markups were embedded in the reported ...transaction price and not explicitly disclosed. Without explicit disclosure, investors can estimate their markups using executed transaction prices. However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond‐market professionals. We explore changes in markups after bond‐market professionals were required to explicitly disclose the markup on certain retail trade confirmations. We find that markups decline for trades that are subject to the disclosure requirement relative to those that are not. The findings are pronounced when constraints on investors' information processing capacity limit their ability to be informed about their markups without explicit disclosure.
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