Contributions in Merlin

This paper develops a method to measure and compare social performance of microfinance investments at the level of microfinance investment vehicles. Drawing from measurement theory, it develops formal quality criteria that individual social performance indicators, the selection, and the aggregation of such indicators into a single metric need to satisfy. Social performance indicators are selected for both microfinance investment vehicles, and their underlying portfolio. The method presented here uses data of the microfinance investment universe to determine a rating framework for the underlying of microfinance institutions, in addition to a unique set of variables captured at MIV level. The paper demonstrates the approach in a sample calculation and serves as a guideline for a future empirical application among microfinance investment vehicles.

The increasing complexity of the modern world creates both higher risks and new interdependencies in the socioeconomic environment. To cope with these challenges powerful new tools must be applied to find sustainable solutions. System dynamics is a field that offers potential assistance in dealing with complex issues. However, managers and politicians often lack the knowledge and necessary skills to apply quantitative methods in their decision-making process. In contrast, qualitative approaches are easily understood and handled but have limited capacities for analysis. To address this gap, we have developed a bundle of tools tailored for managers and politicians facing complex problems. These tools enable executives to recognize effective levers and assess potential consequences of specific interventions in a highly interconnected system. The approach detailed here equips decision makers with a powerful method to develop, test, and communicate strategies to find long-term sustainable solutions for complex issues in business and society.

Past trends in a broad range of fundamental variables predict currency returns. We document that a trading strategy that goes long currencies in countries with strong economic momentum and short currencies in countries with weak economic momen- tum exhibits an annualized Sharpe ratio of about one and yields a significant alpha when controlling for standard carry, momentum, and value strategies. The economic momentum strategy subsumes the alpha of carry trades, suggesting that cross-country di↵erences in carry are captured by di↵erences in past economic trends. Moreover, we study investors’ expectations of fundamental variables and find the expectations to be extrapolative but negatively related to the portfolio weights, which rank economic trends across countries.

Prior literature raises a “puzzle” of high rates of return on corporate political investment, but evidence for this puzzle is largely descriptive in nature. We exploit the setting of the American Jobs Creation Act’s passage in 2004 to provide more robust estimates of political returns based on instrumentation in a two-stage regression model. We find for the median sample firm that an increase of \$1 million in lobbying spending is associated with about \$32.35 million in taxes saved. These estimates, while consistent with a high-returns “puzzle,” are nearly an order of magnitude lower than those previously reported via descriptive methods.

Corporate lobbying activities are designed to influence legislators, regulators, and courts, presumably to encourage favorable policies and/or outcomes. In dollar terms, corporate lobbying expenditures are typically one or even two orders of magnitude larger than spending by Political Action Committees (PAC), and unlike PAC donations, lobbying amounts are direct corporate expenditures. We use data made available by the Lobbying Disclosure Act of 1995, to examine this more pervasive form of corporate political activity. We find that on average, lobbying is positively related to accounting and market measures of financial performance. These results are robust across a number of empirical specifications. We also report market performance evidence using a portfolio approach. We find that portfolios of firms with the highest lobbying intensities significantly outperform their benchmarks in the three years following portfolio formation.

We develop a simple integration of banks into the Solow model. The objective is to provide a tractable benchmark for analyzing the long-term impact of crises on economic activities and growth. A fraction of firms have to rely on banks for financing their investments while banks face themselves an endogenous leverage constraint. Informed lending by banks and uninformed lending through capital markets spur capital accumulation. The ensuing coupled accumulation rules for household wealth and bank equity yield a uniquely determined steady state. We highlight three properties when shocks to wealth, productivity or trust affect the economy. First, typically bond and loan financing react in opposite directions to such shocks. Second, negative temporary shocks to household wealth (financial crisis) or negative sectoral production shocks can surprisingly cause persistent booms of banking and even of the entire economy -- after an initial bust. Third, shocks to bank equity (banking crisis), however, lead to large and persistent downturns associated with high output losses.

This paper investigates the motives for financial complexity by focusing on a large market of investment products exclusively targeted to households. We develop a robust measure of complexity by performing a text analysis of the term sheets of 55,000 retail structured products issued in 17 European countries since 2002. We first find that the complexity of structured products has significantly increased over the period 2002-2010. Second, calculating the fair value of a subsample of products, we show that relatively more complex products have higher markups. Third, the headline rate offered by a product is an increasing function of its complexity. Fourth, distributors targeting low-income investors, such as savings banks, offer relatively more complex products. Fifth, competition amplifies rather than mitigates the migration towards higher complexity. These findings are diffcult to fully reconcile with a completing market motive for financial complexity, while being more consistent with banks catering to yield seeking investors, or developing obfuscation strategies.

In this paper we study the identification of discrete choice models of dynamically optimizing consumers. We first provide additional formal results for existing identification solutions. We then investigate the ‘last in, last out’ (LILO) constraint on consuming from the inventory as a means to identifying the discount factor in these models. We find that the LILO constraint (over-)identifies the discount parameter in the absence of assumptions about consumers’ expectations and show how LILO results in efficient estimates in a parametric, maximum likelihood framework using simulated data. Finally, we report survey based empirical evidence for the relevance of LILO strategies in four different categories.

We make use of hand-collected data on the quality and reputation of the management teams of a large sample of venture-backed entrepreneurial firms undertaking initial public offerings (IPOs) to address two research questions: How does the human capital of a firm’s top management team (“management quality”) affect the quantity and quality of innovation undertaken by it? Second, what are the effects of the pre-IPO innovativeness of a firm and its management quality on the characteristics of its IPO and its post- IPO operating performance? We hypothesize that higher quality management teams hire better scientists and other researchers; invest in more innovative projects; and manage these projects more ably, leading to higher innovation productivity. Consistent with this, we show in the first part of our analysis using ordinary least squares and instrumental variable analyses that firms with higher management quality exhibit higher innovation productivity in the years immediately before and after their IPOs. The above results hold for both the quantity (number of patents) and quality (citations per patent) of innovation. In the second part of our analysis, we find that firms with greater pre-IPO innovativeness are associated with a larger number of anti-takeover provisions in their corporate charter (determined at IPO), higher IPO valuations, younger age at IPO, and better post-IPO operating performance. Further, we find that the above effects are enhanced if innovative firms are managed by teams of higher management quality.

We study the corruption control strategies at three Multinational companies (MNC) before, during, and after the disclosure of corruption scandals and the initiation of legal procedures. In particular, we want to explore why some MNCs after a corruption scandal exceed regulatory expectations, choose proactive strategies, and influence their environment as institutional entrepreneurs that define best practices and new industry standards. Other companies, by contrast, act in a more incremental and self-referred way. We build on the concept of legitimacy in institutional theory, distinguish four strategies to regain legitimacy: decoupling, isomorphic adaptation, moral reasoning, and substantial influence, and explain the choice and sequence of these strategies. While all three case firms managed to (eventually) adapt to the compliance requirements imposed by external regulatory authorities, we found that only very distinct constellations of scandal and reintegration process characteristics, such as the presence of a strong legitimacy shock and the necessity to react both radically and instantly, forces the company into the role of an institutional entrepreneur. In cases where such legitimacy shocks are lacking, companies have more time to react and hence rather choose to gradually adapt their organizational processes to regulatory expectations. Rather than acting as institutional entrepreneurs, these companies rely almost exclusively on participating in moral reasoning activities to safeguard their new anti-corruption strategy. However, if change processes occur rather reluctantly after the disclosure of a big scandal, we found that externally imposed monitors may exercise severe pressure forcing the transgressor to eventually install a leading set of corruption controls.