Giacinta Cestone

Corporate Social Responsibility and Managerial Entrenchment

When stakeholder protection is left to the voluntary initiative of managers, relations with social activists may become an effective entrenchment strategy for inefficient CEOs. We thus argue that managerial turnover and firm value are increased when explicit stakeholder protection is introduced so as to deprive incumbent CEOs of activists support. This finding provides a rationale for the emergence of specialized institutions (social auditors and ethic indexes) that help firms commit to stakeholder protection even in the case of managerial replacement. Our theory also explains a recent trend whereby social activist organizations and institutional shareholders are showing a growing support for each others agenda.

Anticompetitive Financial Contracting: The Design of Financial Claims

This Paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In standard models of the interaction between product and financial markets, a firms use of financial instruments deters entry by affecting product market behaviour, whereas in our model entry deterrence occurs by affecting the credit market behaviour of investors towards entrant firms. We find that in order to deter entry, the claims held on incumbent firms should be sufficiently risky, ie equity, in contrast to the standard Brander-Lewis (1986) result that debt deters entry. We show that this effect is more marked, the less competitive is the credit market, implying that more credit market competition spurs more product market competition. The model can be used to shed light on the mode of financing of start-up industries and the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms.

Insurance Between Firms: The Role of Internal Labor Markets

We investigate how Internal Labor Markets (ILMs) allow organizations to accommodate shocks calling for costly labor adjustments. Using data on workers mobility within French business groups, we find that adverse shocks affecting affiliated firms boost the proportion of workers redeployed to other group units rather than external firms. This effect is stronger when labor regulations are stricter and destination-firms are more efficient or enjoy better growth opportunities. Affiliated firms hit by positive shocks rely on the ILM for new hires, especially high-skilled workers. Overall, ILMs emerge as a co-insurance mechanism within organizations, providing job stability to employees as a by-product.Exploiting matched employer-employee data allowing us to follow individual job-to-job transitions, merged with information on the ownership structure of business groups, we document that French groups actively operate Internal Labor Markets (ILMs). For the average group-affiliated firm, the probability to absorb a worker from the group’s internal labor market exceeds by 9 percentage points the probability to hire a worker employed outside the group. This average figure hides substantial heterogeneity: ILM activity is higher in more diversified groups, in groups experiencing plant/firm closures and is highest for high-skill occupations. We also find that closure events boost the proportion of separating workers redeployed to group affiliated partners (as opposed to external labor market partners) relative to normal times, spurring ILM activity mainly for blue collar occupations. Overall, these findings suggest that groups respond to idiosyncratic shocks disproportionately relying on ILMs because they allow to save on search costs for human capital intensive occupations, while reducing firing costs for the more unionized occupational categories. Finally, we find that upon closure events the ILM reallocates displaced employees more intensely to larger and healthier groups units, and less intensely to highly levered and financially distressed units.