From the beginning to the end of the project the fellow worked both on technical and applied aspects of the research. In this summary only the two most policy-relevant results are summarized:
First, after taking stock of the evidence about the growing influence of institutional investors in publicly owned companies -- their participation in the U.S. stock market has been increasing from 10% in 1952 to over 70% in 2006 -- the fellow developed an agent-based model to explain this phenomenon and calibrated it on aggregate EU data. The fellow has shown that a strong presence of impatient (short-term) investors among the shareholders of a firm has a negative effect on firm R&D activities and a positive impact on shares buybacks. In addition, also an increase in the stock-based remuneration of the firm’s executives might exert a positive impact on the amount of share buybacks committed by the firm. Overall, these two forces impact upon competition and growth. From a policy perspective, the analysis carried out suggests that the combination of high-growth and high-competition is feasible, but only under specific conditions: if a sufficient proportion of the shares must be controlled by investors with a long-term horizon and if corporations do provide the right incentives for the management to prefer real investments over buybacks.
Second, the author started from the evidence that the Covid-19 lockdown exerts a strong effect on the firm finances, also impacting on firm churning and market selection. How many more bankruptcies there will be in 2020, with respect to the number of bankruptcies that are observed in normal year? And, more importantly, will the most efficient firm be able to survive? Will the least efficient firms go bankrupt? By employing an agent-based model calibrated using the balance sheet data of one million French firms, the fellow shown that, with respect to normal times, the number of firms in solvency distress is almost double during the pandemic year. Furthermore the overall productivity in France is expected to decline by about 10% due to the lockdown and the impact this exerts on firm bankruptcy. In particular, this is due to the fact that during the lockdown phase, the market selection process has worsened substantially. Firm-level efficiency can only marginally explain the probability of survival of the single firm. Size and available liquid resources matter more. Thus, government intervention is needed in order to limit business failures and to avoid the generation of long-term hysteresis effects. Which firms to bailout? According to the analysis carried out, the government shall focus on helping those firms which are more efficient and that can guarantee higher growth rates in the future, rather than providing generic financial support to all firms.
