Hidden Price-Fixing Signaled by Revolving Door: Cutting Research

Companies that fix prices and hide it may be easier to spot than you think, according to researchers Tanja Artiga Gonzalez, Markus Schmid and David Yermack.

Their analysis of 216 U.S. companies that between 1986 and 2010 attempted to obscure strong cash flows from “regulators, analysts, customers, and at times, even their own boards of directors” found consistent patterns, the three wrote in a March working paper published by the National Bureau of Economic Research (NBER).

In a cartel, a group of firms join together with the intent of jointly increasing profits, often by controlling prices or restricting supply. The companies in the sample were selected from a database of businesses that had been discovered, disclosed and sanctioned by regulators. The report didn’t say whether cases that were settled involved any admission of wrongdoing.

Exxon Mobil Corp. was involved in 13 cartels, the most of any company in the sample, followed by Johnson & Johnson, in nine, the report said. Parker Hannifin Corp. was involved in a marine hose cartel for 22 years, the researchers said in their paper.

Several consistent red flags emerged in each case.

Directors resigned or retired more frequently from cartel-involved firms and were less likely to be replaced, helping companies avoid taking on new members who could expose or obstruct their conspiracies. These companies were also more likely to retain busy directors -- those sitting on three or more boards -- and foreign directors, both of whom are less likely to be available to scrutinize operations.

Companies in cartels changed auditors “far less frequently,” were more likely to reclassify business segments to make year-to-year comparisons more difficult and were 50 percent more likely to restate financial filings, according to the researchers’ findings.

The risky actions paid off: Cartel firms’ sales grew 4.6 percent faster and their market capitalization rose 3.6 percent faster than similar companies that stuck to the rules.

Bristol-Myers Squibb Co., the New York-based drug maker accused of participating in three cartels from 1998 and 2005, adopted many of the deceptive actions, they found.

Artiga Gonzalez and Schmid work for the Swiss Institute of Banking and Finance in St. Gallen, Switzerland, and Yermack works for the Stern School of Business at New York University.

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China’s policies to reduce risk in the financial system work better when transmitted via small banks than through large ones, a sign that more market opening is needed, according to researchers Bin Wang and Tao Sun.

Their analysis of 171 banks found that increases in the portion of deposits lenders must hold as reserves was least effective in containing housing prices through the nation’s five largest banks, according to a March working paper published by the International Monetary Fund.

“All the evidence indicates that improving policy transmission through the large banks is vital to fend off systemic risk,” they wrote. “Further commercialization of the large banks should be on the policy makers’ agenda.”

Smaller banks respond better to policies because they are more market-oriented, the researchers said in their paper. They found an increase in deposit requirements was most effective in containing house prices via foreign banks that operate in China, then smaller banks, and lastly the large banks.

China’s unprecedented surge in credit between 2008 and 2010 in response to the global financial crisis indicates the nation “is in a risky position,” according to the researchers.

The credit expansion was one of the greatest among housing booms the researchers tracked in the U.S., U.K., South Korea and Hong Kong in the five years before prices peaked, they said. Credit and asset price growth are “powerful signals” of rising systemic risk as early as two to four years before a crisis erupts, the researchers said in their report, citing an earlier IMF working paper.

While the growth rates of lending and house prices at small and medium-size banks was linked to provincial economic expansion, that wasn’t the case at large banks, the research found.

Agricultural Bank of China Ltd., Bank of China Ltd., Bank of Communications Co. Ltd., China Construction Bank Corp., and Industrial & Commercial Bank of China Ltd. are China’s five largest banks.

“This further reflects the fact that small banks are more market-oriented than the large ones,” the report said. “Further commercialization of the large banks would help improve the effectiveness of macroprudential policies.”

Bin Wang works at the People’s Bank of China, the central bank, and was a special appointee at the IMF. Tao Sun is a senior economist at the IMF in Washington.

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The U.S. labor market, which shrugged off the government dysfunction that threatened the world’s largest economy in the past several months, isn’t yet healthy enough to convince Federal Reserve officials it no longer needs their help, according to Sven Jari Stehn at Goldman Sachs Group Inc.

Monthly payroll growth averaged about 200,000 from November to February. Broader measures of job market health, the kind tracked by the Federal Open Market Committee, suggest payroll growth should have only averaged about 150,000 in that period. That buttresses the economist’s view that “improvement needs to be more broad based before the FOMC concludes that the labor market outlook has improved substantially.”

To reach his assessment in the March 27 report, Stehn created a composite indicator using 24 monthly and weekly figures that the Fed staff typically reviews. The components could be grouped into five categories: unemployment, which includes the jobless rate; employment, which includes payroll growth; layoffs, which includes weekly jobless claim filings; hiring; which includes labor market flows; and surveys, which includes Conference Board measures on work availability.

The index, which yielded the projected 150,000 gain, showed that most of the recent gains in the nation’s employment situation have been driven by declining layoffs and lower unemployment rather than “meaningful contributions” from hiring or labor market surveys.

Fed Chairman Ben S. Bernanke has said he and fellow policy makers will “be looking for sustained improvement in a range of key labor market indicators.”

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Foreign direct investment does little to boost productivity or economic growth in its host countries, according to an NBER working paper published last month.

The conclusion suggests that governments that use tax incentives and subsidies to attract foreign companies may be getting poor returns on their money.

“The last two decades have witnessed an extensive policy push for more FDI from governments and international organizations,” wrote authors Christian Fons-Rosen, Sebnem Kalemli-Ozcan, Bent E. Sorensen, Carolina Villegas-Sanchez and Vadym Volosovych. “There is no systematic evidence that supports the notion of substantial growth effects from FDI.”

Culling data from 1.42 million companies from 40 countries in Europe drawn from the Orbis database, the researchers found that even when FDI doubled it resulted in an increase of so-called total factor productivity of just 0.01 percent in developed countries and a drop of 0.01 percent in emerging ones.

The perception that multinational companies outperform domestic ones and that economic growth is correlated with FDI inflows may be driven mainly by foreign companies “cherry-picking” the buying of domestic firms that already had high growth potential, the authors wrote.

“Structural policies have been designed to attract FDI, ranging from sectoral subsidies to lower taxes for multinationals -- all under the assumption that more FDI will bring more growth,” the authors said in their report. “We find that foreign-owned firms are hardly more productive than other firms.”

The authors do say that FDI may generate employment and capital, generate competition in labor markets, and have growth-enhancing benefits via influencing economic policies in host countries.

Fons-Rosen works at the Universitat Pompeu Fabra in Barcelona, Kalemli-Ozcan at the University of Maryland in College Park, Sorenson at the University of Houston, Villegas-Sanchez at ESADE Business School in Barcelona, and Volosovych at Erasmus University Rotterdam in Holland.

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That pocket money you’re giving your kids may be doing more harm than good.

According to Sarah Brown and Karl Taylor, economists at the University of Sheffield, people’s propensity to save money as adults is influenced by the income they received as children. In particular, kids who earned pocket money through jobs such as babysitting or paper routes were more likely to save than those who were simply given a weekly allowance.

The research, an update of a 2011 paper, was presented to the Royal Economic Society conference this week.

Using the British Household Panel Survey, a poll of about 10,000 individual interviews from 1991 to 2008, the researchers found a 1 percent increase in an allowance was associated with a 21.8 percentage point decrease in the probability the child saves. The weekly pay from part-time work, by contrast, was positively linked to savings.

The authors undertook research in this “relatively unexplored” area with an eye toward influencing public policy. British households now have high levels of debt and low levels of savings and there’s “widespread concern” that people aren’t saving enough for their retirement, they said.

Brown and Taylor also found the amount of monthly savings of the parents was statistically insignificant relative to children’s savings.

“Different sources of income received by children appear to influence their saving behavior in contrasting ways,” Brown and Taylor wrote. “Parents may thus be able to instill certain attitudes toward finances in their children, which consequently may be taken by children into adulthood.”

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