Microeconomic regulation

Employee satisfaction and firm value

Alex Edmans, 25 July 2014

Happy workers might well be more productive than unhappy ones, but high worker satisfaction could also be a sign that workers are overpaid or underworked. This column examines the link between worker satisfaction and future stock returns in 14 countries. In most but not all countries, employee satisfaction is associated with higher future stock returns. Abnormal returns to companies with high worker satisfaction are significantly increasing in the flexibility of their countries’ labour markets.

Credit ratings and regulatory risk weights

Harold Cole, Thomas F Cooley, 22 June 2014

In the aftermath of the sub-prime crisis, the major credit rating agencies have been criticised for giving overly generous ratings to mortgage-backed securities. Whereas many commentators have blamed the ‘issuer pays’ market structure for distorting incentives, this column argues that the key distortion came from regulators’ use of private ratings to assign risk weights. This induced investors to focus on the risk weights attached to ratings rather than their information content, thus undermining the reputation mechanism that had previously kept ratings honest.

Net neutrality: Goals and challenges

Joshua Gans, 11 June 2014

Netflix recently agreed to pay Comcast for faster access to Comcast’s customers, intensifying the debate over ‘net neutrality’ – the principle that internet service providers should treat all data equally. This column argues that without net neutrality regulation, ISPs can capture the benefits of higher-quality content, thereby discouraging innovation from content providers. To be effective, net-neutrality regulation must prevent content-based price discrimination on both sides of the market.

Taxing Amazon.com sales

Brian Baugh, Itzhak Ben-David, Hoonsuk Park, 5 May 2014

Several US states have recently implemented laws requiring the collection of sales tax on online purchases. In practice, however, only Amazon.com has been affected. This column shows that households living in these states have reduced their Amazon expenditures by 9.5%. It also shows that the decline in Amazon purchases is offset by a 2% increase in purchases at local brick-and-mortar retailers and a 19.8% increase in purchases through the online operations of competing retailers.

Controlling UK executive pay

Ian Gregory-Smith, Steve Thompson, Peter Wright, 24 March 2014

In 2003, the UK adopted a ‘say on pay’ policy, whereby quoted companies’ executive compensation offers have to be put to a shareholder vote. This column presents evidence that this policy has had a relatively modest impact on executive pay. A 10% increase in compensation is associated with an increase in shareholder dissent against the proposal of just 0.2%. However, remuneration committees representing the more highly rewarded CEOs are quite sensitive to dissent, provided it exceeds a critical threshold of about 10%. Shareholders do not appear more anxious about pay since the crisis.

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