1. Fall 2015 | The Visible Hand | 1
Volume xxiv. Issue I.
The Visible Hand
December 2015, Volume XXIV, Number I
Spencer Koo Princeton University
Comparing Assimilation and Success Rate of Legal First
Generation Asian and Hispanic Immigrants in the
United States
Victor Ghazal Grinnell College
CEO Duality and Corporate Stewardship:
Evidence from Takeovers
Ziyi Yan Bryn Mawr College
The Effect of Driving Restrictions on Air Quality in
Beijing
Sylvia Klosin
and Cameron Taylor University of Chicago
Parental Employment and Childhood Obesity
Damilare Aboaba Cornell University
Preserving Financial Stability: Capital Controls in
Developing Countries during Times of Finacial Crisis
Alex Foster and Adam Sudit University of Chicago
Veteran Rehabilitation: A Panel Data Study of the
American Civil War
Michael Berton University of California - Santa Bar-
bara
The Origins of the Federal Reserve
Wendy Morrison University of Virginia
Optimal Liquidity Regulation Given Heterogeneous
Risk Preferences and Retrade
3. Fall 2015 | The Visible Hand | 3
Volume xxiv. Issue I.
Over the past few years, the effects of
globalization and the linkages between various
international economic and political events have
only grown stronger. The negative interest rates
set by the European Central Bank have sent waves
through the global economy, while the positive and
negative effects of an oversupply of crude oil were
seen around world. Almost no subject in economics
can be analyzed in geographic isolation anymore.
This issue of The Visible Hand hopes to provide
readers with an appreciation for the complexity of
contemporary economic issues.
As this issue of our journal goes to print, leaders
from 150 countries are meeting in Paris for the 21st
Conference of Parties on global climate change. The
challenge of reducing greenhouse gas emissions
weighs on us now more than ever and Ziyi Yan’s
work in “The Effect of Driving Restrictions on Air
Quality in Beijing,” addresses the way in which
environmental change, enforced on an institutional
level, can be effective in lowering carbon emissions.
In the run-up to the U.S. primary elections,
the topics of immigration and the treatment of
immigrants are receiving attention from both
presidential candidates and social justice activists.
The subject of immigration not only shapes the
contemporary discussion of economic development,
but also the discussion of economic inequality. In
“Comparing Assimilation & Success Rates of Legal
First Generation Asian and Hispanic Immigrants in
the United States,” Spencer Koo looks into various
economic factors such as education and their effect
on the wage gap of first-generation immigrants from
different ethnicities. This research underscores the
importance of identifying policies that ensure
progress for all social groups.
The recent recession in Brazil and economic
slowdown in China have cast a spotlight on the
need to find ways of stabilizing economies. In
December 2012, the IMF released a statement
saying, “In certain circumstances, capital flow
management measures can be useful. They
should not, however, substitute for warranted
macroeconomic adjustment.” A calibrated approach
to capital controls has been seen to lead to financial
stability, whereas tight controls have been linked to
illegal transactions. Therefore, Damilare Aboaba’s
“Preserving Financial Stability: Capital Controls
in Developing Countries during Times of Financial
Crisis,” comes at an appropriate time as it explores
the ways in which the setup of capital controls in
developing economies influences their financial
stability.
The separation of the roles of chairman and
CEO roles in corporate leadership has been the
subject of debate for decades. Victor Ghazal, in his
paper, “CEO Duality and Corporate Stewardship:
Evidence from Takeovers,” offers a new take on
the much-debated question by studying the nature
of negotiation and “aggressiveness” in dual CEOs.
The subject of children’s health, particularly
the growing obesity epidemic, continues to be an
important topic in public debate. Sylvia Klosin and
Cameron Taylor explain various causal mechanisms
that affect the weight of children in their work, titled
“Parental Employment and Childhood Obesity.”
Khizar Qureshi’s “Value-at-Risk:The Effect
of Autoregression in a Quantile Process,” is
more specific study, demonstrating a conditional
autoregressive value at risk model. Readers
curious about the intersection between finance and
mathematics would be particularly interested in
this research as it shows how statistical reasoning
and various mathematical models contribute to risk
management in finance.
Regular readers would be interested to know
that for the first time The Visible Hand will be
publishing an extended online version, which will
include additional research that the editorial board
was unable to print due to the physical limit on the
number of pages in the journal. We are thrilled to
have received work of such high caliber and look
forward to seeing the journal grow in the future.
Nivedita Vatsa
Editor-in-Chief
4. 4 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
Unlike previous notable works, which focus pri-
marily on comparing immigrant wages against the
native white and black populations, this paper will
focus solely on the comparison between the United
States’ main immigrant groups: Asians and Hispan-
ics. Currently, there are no other important prior pa-
pers that concentrate exclusively on the economic
impact and equality between Asian and Hispanic
immigrants.
II. Literature Review
One of the first major papers discussing the earn-
ings difference between immigrants and United
States natives is Barry Chiswick’s The Effect of
Americanization on the Earnings of Foreign-born
Men (1978). His influential work suggests the im-
portance of years resided as well as worked in the
United States as major factors affecting the wage
gap between natives and foreign-born. Ultimately,
he asserts that the foreign-born labor force’s average
I. Introduction
Despite representing less than five percent of
the U.S. population as compared to the near 17%
Hispanic population (United States Census Bureau,
2014), Asian-Americans, who are generally looked
upon as the “model minority,” have been left out of
the diversity conversation. Some believe they are no
longer looked upon as minorities due to their finan-
cial success and are thus not given certain advan-
tages afforded to other minorities (Linshi, 2014).
This paper aims to analyze relatively new, very
comprehensive data from the Princeton New Immi-
grant Survey (NIS) in order to locate the apparent
wage gap between Hispanic and Asian immigrants
and to isolate the reasons behind said income dif-
ferences2
/. However, after locating the wage differ-
ence and some reasons behind it, many questions
still remain: does one race’s propensity to find more
financial success in a new country justify programs
like Affirmative Action? Or, conversely, since most
of the Hispanic immigrants in the survey have re-
sided in the United States for much longer than their
Asian counterparts (Princeton University, 2006),
does the wage gap represent a failure of the United
States’ school system and evidence of overall dis-
crimination?
Putting aside the very complex social and po-
litical issues, from an econometric standpoint, this
paper’s findings suggest that Asian immigrants not
only earn more income, but, more importantly, they
also benefit from schooling moreso than Hispanic
immigrants. In fact, the data analysis shows that
Asian immigrants earn about six percent more in-
come than Hispanic immigrants per each additional
year of education. Additionally, Asian wages in-
crease significantly more than Hispanic wages per
each additional year working in the United States.
Such clues point to a clear difference with a com-
plex explanation behind it, which makes for eco-
nomic and policy questions worth exploring.
Spencer Koo1
Princeton University
Comparing Assimilation & Success Rates of Legal
First Generation Asian and Hispanic Immigrants
in the United States
5. Fall 2015 | The Visible Hand | 5
Volume xxiv. Issue I.
wage eventually catches up to the native’s average
wage, even surpassing it in the long run (Chiswick,
1978). However, at the time of his study, foreign-
born United States residents and citizens made up
only five percent of the total population, a number
which has since been far overshadowed.
Building off of Chiswick’s (1978) basic tenets
is George J. Borjas’ paper, The Economics of Im-
migration (1994). His publication introduces the
proposed “aging effect,” which is the rate at which
earnings increase over a life cycle. Combined with
Chiswick’s (1978) assertion that immigrant wages
increase the longer he or she resides and works in the
US, Borjas claims that the “aging effect” is greater
for immigrant populations as compared to native
populations (Borjas, 1994). Similarly to Chiswick
(1978), Borjas (1994) studied these effects to com-
pare them to the native white and black populations
and to make a contention about the effects of immi-
grants on those native populations (Borjas, 1994).
His regressions on the immigrant wage gap go even
further than Chiswick’s, and these key variables that
Chiswick (1978) and Borjas (1994) identified and
pioneered, such as age and years resided in the US,
can help explain the difference between differing
immigrant groups’ wages.
Since Chiswick (1978) and Borjas (1994) wrote
about very broad categorizations of the wage gap,
many economists and sociologists have since pub-
lished papers on the earnings gap between much
more specific groups such as particular races, gen-
der, immigrants, and more. Tienda and Lii (1987)
investigated how the size of minority labor markets
affects minority wages (separated by group) and
white wages. Using data from 1979, they observed
that in labor markets with a large share of minority
residents, college-educated minorities experienced
a significant earnings loss compared to their white
college-educated counterparts while poorly educat-
ed minorities did not see as large a wage discrep-
ancy with poorly educated whites. Much more rele-
vant to this paper, Tienda and Lii (1987) discovered
that Asians generally had a much higher education
level compared to Hispanics, and, thus, on average
earned a higher wage. Additionally, in areas without
a large minority presence, the wage gap between
Asians and whites was significantly lower than the
gap between other minorities and whites (Tienda &
Lii, 1987).
Expanding on these past research endeavors, this
paper will seek to find out whether those economic
and educational differences still exist amongst mod-
ern-day legal first generation Asian and Hispanic
immigrants. The paper will also make use of the key
economic characteristics pointed out by both Chis-
wick (1978) and Borjas (1994) to identify reasons
behind any discovered differences between the two
groups.
III. Data
As briefly mentioned, this paper primarily uses
the Princeton New Immigrant Survey (NIS), which
offers a comprehensive questionnaire focusing on
legal first generation immigrants. Though relatively
new, the Princeton NIS (2003 and 2007) is the first
nationally representative survey of new immigrants
and their children (Princeton University, 2006).
This paper will focus on NIS responses from adults
between 2003 and early 2004 that covered a well-
distributed group of respondents who planned on
attaining citizenship.
The main reason behind using the NIS rather
than the United States Census is the amount of de-
tail in and accuracy of the survey. Unlike the broad
Census, which tends to suffer from non-response
and potential inaccuracies in the responses, the NIS
took place with carefully selected families from dif-
ferent locations around the US, and the focus of the
6. 6 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
are included to identify the major contributing fac-
tors to the wage gap. With the log of wage as the
dependent variable, a dummy variable representing
the various groups is crucial.
Continuing with this method, the first linear re-
gression will be run normally and as an entity-fixed
regression by state. Additionally, it will only take
into account a dummy variable to distinguish the
two groups as well as various demographic charac-
teristics. It is a simple base-line to show the differ-
ence between the groups.
where logwij
is the log of earnings in dollars for im-
migrant i and state j, Asiani
is a dummy variable
which equals 1 if Asian and 0 if Hispanic, Agei
is the
age, Agei
2
is age squared since lifetime wage is qua-
dratic, and Yij is a vector term, which represents the
demographic data of each immigrant such as gender.
Next, the same regression will be modified and
a vector of economic characteristics of immigrants
will be added. After running the regression again
both normally and state-fixed, β1
from the regres-
sion (1) can be compared with β1
from regression (2)
to show the explained effects of the economic terms
on the earnings gap.
where the variables are the same as regression (1)
with the added vector term Xij
, which represents
many of the productive characteristics from Tables
I and II such as years of education, English speak-
ing ability, English comprehension, years resided in
the United States, and years worked in the United
States.
In the last simple regression, the all-important
education variable will be pulled out of the econom-
ic characteristics vector, and the same normal and
entity-fixed regressions will be run while interacting
the education and the Asian dummy variables. This
will further explain the wage gap by taking into ac-
count race given that immigrant i has a certain level
of education.
where the variables are the same as regression (2)
with the added interaction variables between Asian
and education, which is represented by Edui
.
The final method used for analyzing the dif-
ferences between groups is the Blinder-Oaxaca De-
composition. The core idea behind this universally
used decomposition is “to explain the distribution of
the outcome variable in question by a set of factors
data makes up for the lower number of observations.
Additionally, one would expect that if a significant
difference were found between Asians and Hispan-
ics in the NIS, which covers mainly middle class
families across the board, there would be an even
larger discrepancy in the broader Census.
This paper concentrates on a few major variables
that are used in related literature on immigration,
which include earnings, years of education, age at
immigration to the US, language fluency in both
speaking and comprehension, age at the time of sur-
vey, years resided in the US, and years worked in
the US. All the variables from every table only in-
clude data for immigrants between “working” ages
of 25-603
. These data are broken up between three
major groups: Asian, Hispanic, and all other immi-
grants as a control.
As seen in Table I, there exists a significant wage
gap between Asian and Hispanic immigrants. The
data is further broken up by years of education with-
in each group to see if Asians out-earned Hispanics
within education-level categories.
Again, in Table II, we see that the Asian popula-
tion outpaces the Hispanic one at all levels of educa-
tion and even their white counterparts at the highest
level. However, it can be difficult to interpret some
of the data due to the low numbers of respondents
certain categories. Nevertheless, the number of
Asian immigrants with a higher education versus
the number of Hispanic immigrants with only a high
school diploma or less is astounding. As the paper
moves forward with the regressions, more variables
can be removed to further reduce the number of un-
derlying factors and omitted variables.
IV. Methodology
The commonly accepted approach to analyzing
wage gap questions between two or more groups
involves multiple stages of regressions. In each sub-
sequent regression, potentially underlying variables
7. Fall 2015 | The Visible Hand | 7
Volume xxiv. Issue I.
that vary systematically with socioeconomic status”
(O’Donnell, van Doorslaer, Wagstaff, & Lindelow,
2007). In terms of this paper, the Oaxaca Decompo-
sition examines the variations in the log of the wage
and seeks to find the causal factors or variables that
differ systematically based on race, either Asian or
Hispanic. More specifically, the income gap be-
tween Asians and Hispanics is decomposed into two
parts: 1) part that is due to measurable differences in
variables, and 2) part that is due to the magnitude of
the effect of those variables (O’Donnell, van Doors-
laer, Wagstaff, & Lindelow, 2007). For example, the
measurable, or explained, difference could be the
observed higher level of education of Asian immi-
grants in comparison to Hispanic immigrants. The
immeasurable, or unexplained, difference could be
a cultural trait for studying more and better work
ethic. While the explained results can lead to con-
crete policy changes that could potentially lead to
greater equality in wages, the unexplained results
do not give a clear answer. However, knowing the
magnitude of the effect for those variables can point
policy in the right direction.
To visualize the decomposition, start with an even
further simplified version of regression (1) where xij
is a vector of explanatory variables similar to the
previous regressions.
As seen in the figure4
, the wage gap can be attrib-
uted to both the explained sample means of the x’s
(or the endowments, E), the unexplained β’s (or the
coefficients, C), and the interaction between the two
(CE) (O’Donnell, van Doorslaer, Wagstaff, & Lin-
delow, 2007). In more general terms:
which shows the individual parts for the explained
endowments (E), unexplained coefficients (C), and
the interaction between the two (CE). The Oaxaca
Decomposition, again, compares the two by com-
bining the interaction term with either the explained
or unexplained components (O’Donnell, van Doors-
laer, Wagstaff, & Lindelow, 2007).
By combining different terms, the single equation
can on two different meanings. The first decomposi-
tion assumes that Hispanics are paid fairly based on
their characteristics, represented by vector x, while
Asians earn more with those same characteristics for
some unknown reason. The second decomposition
assumes the opposite: Asians are paid according to
their characteristics, but Hispanics are discriminated
against in the work place.
Using Stata’s Oaxaca ado-file, it is possible to
run a Oaxaca Decomposition to see where the gaps
come from and to shed light on possible reasons
(Jann, DECOMPOSE: Stata module to compute de-
compositions of wage differentials, 2005).
V. Results
Table III only covers the state-fixed regression
data for increased accuracy and less potential survey
bias. The outputs are very similar to the regular re-
gressions, which indicates that the survey data was
sufficiently randomized.
As seen in column (1) of Table III, under the
simplest regression without any detailed productive
characteristics controlled, being Asian accounts for
a massive 51% increase in income and is statistical-
ly significant at the one percent level. Just as Tienda
and Lii (1987) found in their research, Asians far
outpaced their minority counterparts in terms of in-
come. In fact, all of the basic demographic controls
account for a statistically significant impact in the
wage discrepancy. Clearly, there is more to earning
a higher wage than just race and other demographic
statistics as seen by the second regression in column
(2) of Table III.
When the regression includes major productive
characteristics, being Asian continues to account
for a very high 35% increase in income and is still
statistically significant at the one percent level. Un-
surprisingly, English comprehension and speaking
8. 8 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
ability both contribute greatly to income as well.
One must keep in mind that those two data points
were measured on a self-rated scale from one to four
(with four being best). Since it is not a uniform rat-
ing system, it is possible for subjects to over- or un-
derestimate their respective English skills; however,
it is doubtful that one group would skew the results
to a serious degree. Nevertheless, given that most of
the Hispanic survey takers took the survey entirely
in Spanish (Princeton University, 2006), it is possi-
ble that these two characteristics offer much greater
insight into the productive advantage of Asians as
opposed to Hispanics, which will be covered later.
From an intuition standpoint, given the sheer
amount of resources required to move half-way
across the globe versus within the same or con-
necting continent, it remains more than plausible
that legal Asian immigrants had a better education
growing up. Said education would most likely in-
clude learning English before coming to the United
States. Those differences are apparent in Table I.
This would give Asians a significant leg up in terms
of job opportunities and wages earned. Just as Chis-
wick (1978) and Borjas (1994) claim, the longer
the immigrant population resides and works in the
United States, the better off they become (Chiswick,
1978) (Borjas, 1994). Simply put, Asians are mul-
tiple steps ahead of Hispanics due to greater initial
education, English language ability, and resources.
Additionally, this theory of better and greater
previous education is reflected in the United States’
immigration policies. Currently, US policy allocates
many more visas and permanent resident statuses to
skilled workers, investors, and persons that hold ad-
vanced degrees (Immigration Policy Center, 2014).
Since this study focuses on legal immigrants seek-
ing citizenship and the Asians interviewed have
resided in the United States for less time and were
older at the time of immigration (see Table I), it is
reasonable to assume that they are highly educated
or skilled workers. Additionally, they most likely
had careers and lives in their countries of origin,
which further helped with finding jobs of equal stat-
ure and pay in the United States.
This does not mean that all of the study’s Hispan-
ic immigrants were not educated when they arrived.
However, based on the data, Hispanic immigrants
arrived at a much younger age, and even though
they were legal and seeking citizenship at the time
of the study, it says nothing about how they got to
the United States. Given the proximity and history
of Hispanic immigration to the United States, there
are most likely many more immigrants of Hispanic
origin that came as children or teenagers with little
education and less resources who sought legal status
after the fact. Given that the average age at the time
of the 2003 NIS was about 39 years old (see Table
I), arriving illegally in the 1980s would have been
easier than in the present, so legal status could have
been sought between then and the time of survey.
Looking again at Table III, the effect of total
years of education, though statistically significant at
the one percent level, is smaller than the effect of
characteristics like race and gender. In order to find
the magnitude of the effect more education has on
the Asian immigrant population, the Asian dummy
variable must be interacted with the education vari-
able as seen in the regression from column (3). This
key interaction variable reveals that for each ad-
ditional year of education, Asians earn six percent
more than Hispanics.
This could mean a few things: 1) there is a greater
focus on education in Asian countries so the quality
of schooling is better and students attend for more
years on average, 2) Asians, through some immea-
surable characteristics such as work ethic, intelli-
gence, or cultural or family pressure, get more out
of schooling than Hispanics, or 3) legal Asian immi-
grants have more resources than legal Hispanic ones
in their home countries and, thus, receive a better
education including study skills and other immea-
surable traits.
At this point, the greatest contributions to a higher
wage for Asian immigrants (other than gender and
age, which were used just as controls) are education
related as seen by the coefficients on years of educa-
tion and the interaction variables. In fact, as men-
tioned above, even English skills can be attributed
to a better education. However, it is still difficult to
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Volume xxiv. Issue I.
discern exactly why Asians get more out of educa-
tion from these basic regressions. The Blinder-Oax-
aca Decomposition and analysis will reveal more
about where exactly the gaps lie and how much is
still unexplained.
In the first step of the Blinder-Oaxaca Decom-
position, the Asian dummy variable is removed, and
two separate models for each corresponding immi-
grant group are run. Unlike the simpler regressions
from Table III, which included an Asian dummy
variable, Table IV reveals far fewer statistically sig-
nifiant variables.
Table IV exists mainly to point out the differences
between each group independent of the other. The
table clearly shows a much larger return to each ad-
ditional year of education that Asians receive. This
could be due to discrimination in US schools against
Hispanics, bias in origin nations against Hispanics
that tend to emigrate to the United States, or immea-
surable traits that causeAsians to get much more use
out of their education.
The one variable that leads to a greater wage for
Hispanic immigrants is years resided in the United
States. Despite the data, it is important to keep in
mind that, as seen in Table I, the average number
of years resided and worked in the United States is
more than double for Hispanic immigrants. There-
fore, the small and statistically insignificant magni-
tude effect of the number of years resided in the US
for the Asian model will most likely have drastically
risen since the time of the survey according to Chis-
wick (1978) and Borjas (1994).
Additionally, despite the lower amount of time
resided in the United States, the magnitude at which
Asians’ wages increase per year worked in the US
is more than threefold their Hispanic counterparts.
Again, these results could suggest discrimination
against Hispanic immigrants or advantages for
Asians in terms of previous education. Such ad-
vantages like resources and a better school system,
would explain why Asians make more money per
each additional year of school. A major clue that
favors the theory of better previous education and
resources is that despite having lived in the United
States for much less time, Asian survey takers have
a far greater understanding of English than their His-
panic counterparts. Again, it must be stressed that,
even though the survey was offered in more than 19
languages, 73.1% of Hispanic respondents took the
survey in Spanish (Princeton University, 2006).
This sets the stage, as discussed in the meth-
odology, to combine and compare the two groups
on equal terms. Running the second step of the
Blinder-Oaxaca decomposition will separate out the
cumulative effects of the two groups and compare
Asian wages as if they had the endowments and co-
efficients of Hispanics. This will reveal how much
of the wage gap is explained by their respective en-
dowments, coefficients, and the interaction between
the two.
Column (1) of Table V shows the overall ef-
fect of all of the factors on both groups. There is
a clear difference between the cumulative effects
of the two groups, which is statistically significant
at the one percent level. In other words, when the
endowments, coefficients, and interaction terms of
Hispanics are applied to Asians, there is a statisti-
cally significant decrease of 59.5% in Asian wages.
According to the overall effect given in column (1),
the effect of replacing the Asian coefficients with
Hispanic ones accounts for a decline of 49.7% in
10. 10 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
Asian wages. This coefficient effect is more statis-
tically significant than the effect of changing the
endowment values, which decreases Asian wages
by 34%. The interaction term, which is the simul-
taneous effect of applying Hispanic endowments
and coefficients to Asians, is the only factor that fa-
vors Hispanic wages. More specifically, it indicates
that if Hispanic endowments and coefficients were
simultaneously applied to Asians, Asians’ wages
would actually rise by 24.2%. However, the interac-
tion term is not statistically significant so it can be
ignored for the most part. Even though column (4)
shows that parts of the interaction effect are signifi-
cant, those parts have been countered by the insig-
nificance of a majority of the other variables.
Next, and most importantly in the Oaxaca De-
composition, columns (2), (3), and (4) show the
breakdown of each individual variable’s contribu-
tion to the effects of the endowments, the coef-
ficients, and the interaction. These values provide
further insight into whether the main force behind
the wage gap is driven by the explained measured
data, the unexplained immeasurable traits, or a com-
bination of both.
Starting with column (2), the statistically sig-
nificant variables for the endowment effect, or mea-
sured data, are years worked in the United States,
English comprehension, and total years of educa-
tion. The data for the number of years worked in
the United States shows a large effect in favor of
the Hispanic immigrant income. Specifically, the
decomposition states that if Asians had been work-
ing in the United States as long as Hispanics have,
their income would increase by 56.5%. Intuitively,
this result makes perfect sense. According to the
analysis presented in both this paper and the works
of Chiswick (1978) and Borjas (1994), the longer an
immigrant resides and works in the United States,
the more wages he or she will earn. Looking back at
Table I, it is clear that Hispanics have both resided
and worked in the US for more than twice as long as
their Asian counterparts.
Despite that advantage, Asian income still far
outperforms that of the Hispanics. This means that
there are even stronger forces working either against
Hispanics in the form of discrimination or in favor
of the Asian immigrant population in the form of
better work ethic, greater prior resources, or other
data not measured in the survey or a mix of all three.
Though only significant at the 10% level, English
comprehension favors Asian wages by nearly 20%.
The decomposition shows that if Asians immigrants
from the survey understood English as well as the
Hispanic respondents, they would earn 20% less.
This is further proof of potentially better education
and resources from the Asian survey takers’ coun-
tries of origin. Despite living and working in the US
for much shorter periods of time, they understand
English at a higher level. Although not statistically
significant, the decomposition shows that they also
speak English at a higher level as well.
By far the most important factor is total years
of education, which is significant at the one percent
level. The measured endowment effect strongly
favors Asian immigrant wages. In simple terms,
if Asians had the same number of years of educa-
tion as the Hispanic respondents, their wages would
drop by a massive 53.2%. As seen in Table I, Asians
average 4.1 years more of education than Hispanics,
which is the difference between a college graduate
and a high school diploma. Nevertheless, despite
the huge educational disparity, there is still no hard
evidence of discrimination. Both bias against His-
panics and better prior education of Asians or some
other intangible traits could be the root cause.
Beyond the two major control variables of age and
gender, the other insignificant variables are years
resided in the United States and English speaking
skills. While years resided is very closely related to
years worked in the United States, it is intuitive that
one would have to be working and gaining experi-
ence to earn a higher income. Residency itself is not
a major factor. In terms of English speaking skills,
although very closely associated with English com-
prehension, the difference between the Hispanics’
and Asians’ ability to speak does not make a statisti-
cally significant impact on wages.
In column (3), the statistically significant vari-
ables for the unexplained terms, or the magnitude of
each variable’s effect, are years worked in the Unit-
ed States and total years of education. Significant at
the five percent level, the decomposition reveals that
if Asians got the same out of each year worked in
the United States as Hispanics, their income would
decrease by 27.6%. Here, it appears that Asians
have much better returns to their income for each
year they spend working in the US. The effects that
Chiswick (1978) and Borjas (1994) proposed seem
to have a much larger effect on the Asian immigrant
population.
Though not statistically significant, the coefficient
on the number of years resided in the United States
intuitively favors Hispanics. Since, on average, they
have resided in the US for much longer than the
Asian immigrants from the survey, they have been
able to settle, find jobs, and work their way up for
longer. Due to this stability, it makes sense that ap-
plying the Hispanic coefficient for years resided on
11. Fall 2015 | The Visible Hand | 11
Volume xxiv. Issue I.
the Asian model would improve Asian wages. Nev-
ertheless, running a Blinder-Oaxaca decomposition
on the updated data from the 2007 NIS could prove
the current decomposition inaccurate in terms of
years resided.
The major significant variable again concerns
education. When the Hispanic coefficient, or how
much they get out of each year of school, is applied
to Asians, Asian wages decrease by a whopping
92.4%, significant at the one percent level. The co-
efficient effect conveys that the overall quality of
the education that Hispanics receive does not re-
motely compare to that of the Asians. Again, this
does not say exactly why Hispanics get much less
effectiveness out of each year of education, but it
does clearly nudge the conclusion in the general di-
rection of education.
It seems that once again, there are a couple clear
possibilities. One could fairly assume that the rea-
son Asians get more return out of each year worked
in the United States is due to better and more effec-
tive education that they also get a high return from.
The other possibility is discrimination against these
Hispanic immigrants in the United States and in
their respective countries of origin. In reality, it is
most likely a mix of the two factors.
The last component of the difference is from
column (4), the interaction effect. Even though
variables within the effect are significant, the over-
all effect is not statistically significant. Because of
the lack of significance, it is difficult to say how the
combination of the endowments and coefficients
applied to the Asian immigrants actually affects the
wage gap. Therefore, the interaction effect can be
ignored for the most part.
Clearly, the lack of observations hurts this data
set and its analysis. Having a larger data set or com-
paring this decomposition using the 2007 NIS could
provide more insight into whether the endowment
effect of years worked in the United States as well
as other values are accurate. By conducting an even
more recent survey, the endowment effect of years
worked would most likely decrease in favor ofAsian
wages because both groups have been in the United
States for a sufficient amount of time. Another strat-
egy would be to take United States Census data to
re-run the Blinder-Oaxaca Decomposition. While
it would no longer cover only legal immigrants, it
may give a more accurate intuition into how years
worked in the United States affects the two groups,
even if one might expect the wage disparity to be
even more in favor of Asians.
Ideally, a careful study specifically focused on the
education of immigrants, old and new, would need
to be done. The survey must focus on years of edu-
cation in the country of origin, years of education in
the United States, school district within the United
States, time devoted to education in the home, atten-
tion from parents concerning education, evidence
of bullying and discrimination at school in both the
country of origin and the United States, and more
along those lines. With those data points in line,
it would be possible to more accurately figure out
where and why Asians immigrants benefit so much
more from the education they receive.
VI. Conclusion
After identifying clear differences between the
Asian and Hispanic first generation immigrants from
the Princeton NIS, careful statistical analysis and a
Blinder-Oaxaca Decomposition were performed to
identify the causes behind the discovered wage gap.
In summary, the evidence and analysis discov-
ered that the wage gap can be attributed to Asian
immigrant’s greater amount of education as well
as greater return from their years in school. How-
ever, the source of the Asian population’s success
in school cannot be statistically identified as either
discrimination against Hispanics or immeasurable
traits that improve Asian school performance and,
subsequently, wages. Without that concrete conclu-
sion, there cannot be any suggestions toward correct
policy changes.
Nevertheless, this is a start. More surveys and
investigation that focus specifically on education
must occur. With newly researched data, the ques-
tion can be re-analyzed to not only provide answers
to the statistical questions, but also help shape future
policy. Rather than arbitrarily giving certain advan-
tages to only select minority groups or filling quo-
tas through Affirmative Action and guess work, the
United States can help fix the education system and,
in the process, bolster the work force and the lives
of its citizens and future citizens.
VII. References5
Black, D. A., Amelia, H. M., Sanders, S. G., & Tay-
lor, L. J. (2008, Summer). Gender Wage Disparities
among the Highly Educated. (630-659, Ed.) The
Journal of Human Resources, 43(3), 630-659. Re-
trieved December 09, 2014
Borjas, G. J. (1994, December). The Economics of
Immigration. Journal of Economic Literature, 32(4),
1667-1717. Retrieved December 10, 2014
12. 12 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
Chiswick, B. R. (1978, October). The Effect of
Americanization on the Earnings of Foreign-born
Men. Journal of Political Economy, 86(5), 897-921.
Retrieved December 10, 2014
Cotton, J. (1988). On the Decomposition of Wage
Differentials. Review of Economics and Statistics,
70(2), 236-243.
Fairlie, R. W. (2003, November). An Extension of
the Blinder-Oaxaca Decomposition Technique To
Logit and Probit Models. Economic Growth Center.
Retrieved December 10, 2014
Immigration Policy Center. (2012, October 25). De-
ferred Action for Childhood Arrivals: A Resource
Page. Retrieved April 17, 2015, from Immigration
Policy Center: American Immigration Council
Immigration Policy Center. (2014, March 01). How
the United States Immigration System Works:AFact
Sheet. Retrieved April 17, 2015, from Immigration
Policy Center: American Immigration Council
Jann, B. (2005, May 12). DECOMPOSE: Stata
module to compute decompositions of wage dif-
ferentials. Bern, Switzerland. Retrieved March 26,
2015
Jann, B. (2008). The Blinder-Oaxaca decomposi-
tion for linear regression models. (J. Newton, & N.
J. Cox, Eds.) The Stata Journal, 8(4), 453-479. Re-
trieved December 10, 2014
Linshi, J. (2014, October 14). The Real Problem
When It Comes to Diversity and Asian-Americans.
Time. Retrieved 03 20, 2015
Neumark, D. (1988). Employers’ Discriminatory
Behavior and the Estimation of Wage Discrimina-
tion. Journal of Human Resources, 23(3), 279-295.
O’Donnell, O., van Doorslaer, E., Wagstaff, A., &
Lindelow, M. (2007). Analyzing health equity using
household survey data : a guide to techniques and
their implementation. Washington, D.C.: The Inter-
national Bank for Reconstruction and Development
/ The World Bank. Retrieved March 26, 2015
Princeton University. (2006). Study Goals: Why
Study Immigration in America? Retrieved Decem-
ber 10, 2014, from The New Immigrant Survey
Reimers, C. W. (1983). Labor Market Discrimina-
tion against Hispanic and Black Men. Review of
Economics and Statistics, 65(4), 570-579.
The Blinder-Oaxaca Decomposition. (n.d.). Re-
trieved December 10, 2014, from Washington Uni-
versity
Tienda, M., & Lii, D.-T. (1987, July). Minority Con-
centration and Earnings Inequality: Blacks, Hispan-
ics, and Asians Compared. American Journal of
Sociology, 93(1), 141-165. Retrieved December 09,
2014
United States Census Bureau. (2014, December 03).
State & Country Quickfacts. Retrieved December
10, 2014
VIII. Footnotes
1. Special thanks to Professor Jessica Pan and Ji
Huang for useful comments and assistance. Addi-
tional thanks to Monica Cai and Anthony Moham-
med for edits and comments.
2. The Princeton NIS covers legal, first-generation
immigrants as well as their spouses and children.
3. Major outliers have been removed from the sum-
mary statistics and analysis.
4. Graph modified from (O’Donnell, van Doorslaer,
Wagstaff, & Lindelow, 2007).
5. APA style used for references and footnotes and
American Economic Review style used for general
formatting.
13. Fall 2015 | The Visible Hand | 13
Volume xxiv. Issue I.
I. Introduction
When do Chief Executive Officers act in the in-
terest of shareholders? A large literature in financial
economics asks which specific incentives induce
CEOs to act in the best interests of firms and share-
holders (e.g., Shleifer & Vishny, 1988). One such
incentive, or form of leadership structure, is CEO
duality, a situation where a CEO also serves as the
Chair of a company’s board of directors.
The existing scholarly literature remains divided
about whether a CEO should also chair the board of
directors. On the one hand, agency theorists argue
that Board-Chair CEO’s abuse their excessive un-
checked power in a way that destroys shareholder
value (e.g., Eisenhardt, 1989; Fama & Jensen, 1983;
Roe, 2004; Williamson, 1985). Stewardship theo-
rists, on the other hand, argue that excessive moni-
toring destroys the CEOs incentive to take risks
while also degrading the trust between CEOs and
boards, and that good CEOs should be given addi-
tional opportunities to take responsibility and initia-
tive, which will consequently elevate firm perfor-
mance and outcomes (e.g., Brickley & Coles, 1997;
Chen, Lin, & Yi, 2008; Jensen & Meckling, 1976;
Sridharan & Marsinko, 1997). These two views
would make the following predictions about CEO
negotiating behavior during an impending acquisi-
tion:
H0= Dual CEOs, due to lower levels of monitoring,
negotiate less aggressively than single role CEOs,
leading to lower levels of value maximization for
the firm (Agency Hypothesis).
H1= Dual CEOs, due to lower levels of monitoring,
negotiate more aggressively than single role CEOs,
leading to higher levels of value maximization for
the firm (Stewardship Hypothesis).
However, examination of these hypotheses is
complicated by a fundamental epistemological chal-
lenge, which is that scholars often test the value-
maximizing merits of incentives (like CEO duality)
by empirically estimating their effects on outcomes
(like deal premia). This trend is common among
studies that use ready-made data sets, often includ-
ing aggregate performance measures like ROA or
ROE to test the effectiveness of a policy within the
firm. The prevalent usage of performance measures
to test the merits of incentives stems from the lack of
suitable proxies for behavior. Since we, as research-
ers, cannot monitor CEO behavior by putting cam-
eras in offices or tapping phones to directly quantify
and measure effort, this kind of day-to-day behav-
ioral data typically does not exist. While these stud-
ies have made significant contributions to the cor-
porate governance literature, it is worth noting that
Victor Ghazal
Grinnell College
CEO Duality and Corporate Stewardship:
Evidence from Takeovers
* Acknowledgement: I would like to thank Professor Caleb Stroup at Davidson College for his excellent
mentorship, support, and guidance on this paper.
Many scholars have been quick to criticize the merits of CEO duality, a situation where a company’s Chief
Executive Officer is also the Chairman of the Board, by claiming that CEO duality undermines the board’s
ability to effectively monitor and constrain self-interested CEOs. These criticisms are often based on em-
pirical studies that use firm outcomes—aggregate performance measures—as proxies to evaluate the merits
of an incentive structure such as duality on the behavior of CEOs. In this paper, I construct a more direct
measure of CEO behavior by gathering information submitted by companies to the Securities and Exchange
Commission. The novel variable I introduce in this paper measures how aggressively a CEO whose com-
pany is being sold negotiates with a prospective buyer during the pre-announcement sale process. I find
that dual CEOs act in the interest of their shareholders by bargaining 16.1% more aggressively in takeover
negotiations than do single role CEOs. The paper’s main finding is consistent with the view that top manag-
ers, when given higher levels of responsibility, act as good corporate stewards on behalf of their respective
firms and shareholders.
14. 14 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
it is not the incentive that influences the outcome,
but the behavior of the economic agent the incentive
is designed to influence (Finkelstein, Hambrick, &
Canella Jr., 2009).
In this paper, I advance the understanding of
CEO incentive structures by hand-collecting a novel
dataset that permits the construction of a more di-
rect proxy for a CEO’s behavior, thus allowing me
to directly examine the effect of incentives on be-
havior, rather than attempting to infer behavioral
changes from overall corporate outcomes, such as
profitability, which are known to be influenced by
many other factors (e.g., regulation, product market
competition, international business cycles) that a
CEO cannot directly control. I proceed in doing so
by exploiting the fact that public disclosure require-
ments mandate that proceedings leading to substan-
tive changes made public by publically traded com-
panies be made available to the public for current
and potential investors1
.
The specific contribution of this paper is to em-
pirically examine the link between a particular in-
centive, CEO duality, and CEO behavior. Figure 1
illustrates that the relationship between leadership
structures and outcomes is indirect, and is mediated
by CEO behavior. This implies that regressions of
deal premia on CEO duality are unlikely to pro-
vide insight about the possible effect of duality on
a CEOs behavior.
In Figure 1, leadership structure, an incentive,
affects the behavior of the CEO, which then influ-
ences corporate outcomes, such as the profitability
of the firm. If incentives that lead to good CEO be-
havior are chosen, then the positive behavior is ex-
pected to lead to a de facto best-case scenario for the
firm and its shareholders when an outcome occurs.
This is the case because outcomes are determined
by not only the behavior of a singular agent, but also
by market risk and idiosyncratic firm noise. These
two terms refer to the innumerable factors such as
the number of potential bidders for a target, the tar-
get’s industry, profitability, the financial suitability
of acquirers, government regulations, overall mar-
ket forces, among many others, that influence ob-
served deal premia. In other words, whether or not
the CEO of a company also holds the title of Chair-
man of the Board may not necessarily lead to better
deal outcomes.
The presence of these other features (market risk
and firm noise) introduces measurement error that
clouds what would otherwise be a clear empirical
relationship between leadership structure and cor-
porate outcomes. Table 1 illustrates the difficulty
of attempting to evaluate the merits of an incentive
with an outcome by reporting estimates of the effect
of CEO duality2
and CEO Negotiating Aggressive-
ness3
(a behavior) on the price received by share-
holders when their company is sold (i.e. the deal
premium4
).
Column (1) shows that the estimated effect of
CEO duality on the deal premium is statistically in-
distinguishable from zero, indicating the presence
of measurement error, described above. The low R-
Squared in Column (1) indicates the high amount
of econometric measurement error present when at-
tempting to measure the merits of an incentive with
an outcome.
My empirical approach is to hand-collect data on
initial bids contained in documents submitted to the
Securities and Exchange Commission by merging
companies. This information allows me to construct
a novel–and direct–measure of a CEO’s behavior.
This measure is “Negotiating Aggressiveness,”
which proxies for the extent to which the CEO of
a selling company bargains with a purchasing com-
pany to obtain the highest possible price.
Column (2) of Table 1 shows that negotiating ag-
gressiveness has a statistically significant and posi-
15. Fall 2015 | The Visible Hand | 15
Volume xxiv. Issue I.
tive estimated effect on the deal premium.
Figure 2 illustrates why my empirical approach,
which regresses negotiating aggressiveness on CEO
duality, circumvents the measurement error chal-
lenge: The new measure allows me to directly es-
timate the relationship between CEO duality and
CEO behavior which is presumed to affect the final
price paid.
To date, no study that has tested the effect of
duality on value maximizing behavior within firms.
The present study is the first to evaluate the value
maximizing merits of this leadership structure in
in the setting of M&A negotiations, adding another
dimension through which the advantages and disad-
vantages of monitoring structures can be weighed.
II.A Methodology
I begin by measuring CEO Negotiating Aggres-
siveness, NAGGi, as the final bid minus the initial
bid over the initial bid in deal i. This equation mea-
sures how many percentage-points the buyer’s final
bid is removed from the initial bid. Final bid before
sale, FBi, is calculated as the price per target share
that is accepted as the sale priceby the target upon
the execution of the merger agreement in deal i. The
initial bid of the future buyer, IBi, is measured as the
first bid submitted by the eventual acquirer in deal
i. If a range of prices is indicated, the lower of two
amounts is assumed.
NAGGi = FBi
- IBi
IBi
NAGGi: Negotiating Aggressiveness
FBi: Final Bid before Sale
IBi: Initial Bid of Future Buyer
This measure is a tool to shed insight on M&A
negotiating behavior and, thus, value maximizing
behavior. Subramanian (2011) describes dealmak-
ing as two parties meeting somewhere in a zone of
possible agreements (“ZOPA”). Negotiation theory
tells us that buyers and sellers approach a negotia-
tion table with a range of acceptable prices by which
to strike a deal. This is a useful way to think about
negotiations when considering value maximization
because it is a truly relative term, meaning people
have different views on what specifically constitutes
maximization. While the law aims to protect share-
holders by imposing a fiduciary obligation on man-
agers, this does not change the relativity of the term.
Therefore, thinking about the existence of a
ZOPA allows us to judge value maximization as the
extent to which each CEO will negotiate to remove
the bidder from his or her initial willingness to pay.
High levels of negotiating aggressiveness must be
value-adding if one accepts the premise that the
buyer does not make an indication of interest or
an initial bid with a price that is not truly reflective
of his or her willingness to pay. With this in mind,
there must be implications for corporate governance
if there is a leadership structure that is more condu-
cive to these higher levels of negotiating aggressive-
ness.
An intuitively appealing methodological ap-
proach to estimate the effect of duality on negotiat-
ing aggressiveness would be Equation (1).
NAGGi
= β0
+ β1
DUALi
+ εi
(1)
Where DUALi
is a dummy variable that takes a
value of one if the CEO of the selling company is
also the Chairman of the Board in deal i. The coeffi-
cient of interest is β1
-hat. Without control variables,
a causal interpretation of a positive estimate of β1
would lead to the rejection of the null hypothesis,
H0
. Conversely, a negative estimate of β1
would
cause an idealized econometrician to fail to reject
the null hypothesis.
However, a potential challenge with this causal
interpretation is the possibility that certain firms at-
tract more bidders than others. One could imagine
that the presence of each additional bidder would
detach the CEO from being the chief negotiator, as
the bidders would compete with each other. Due to
this added sense of competition, the effect of the
CEO’s negotiating aggressiveness will be weakened
because bidders will shade their initial bids upwards
to factor in the presence of additional bids—mean-
ing that number of bidders would be negatively cor-
related with negotiating aggressiveness. Addition-
ally, dual role led firms may attract more bidders
16. 16 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
because the CEO may have more freedom to contact
more prospective buyers without having to receive
approval from the board, which would cause duality
and the number of bidders to be positively corre-
lated. If this were true, it would cause the β1
-hat co-
efficient to be downwardly biased. So, I control for
this potential issue with the BDRSi
control variable,
which is measured as the total number of potential
buyers that submit a formal indication of interest or
a binding or non-binding letter of intent in deal i.
Another factor to consider when observing the
takeover process is that failing firms may lack bar-
gaining power, causing this status to be negatively
correlated with negotiating aggressiveness. Addi-
tionally, it may be the case that dual CEOs are at the
helm of less failing firms that are for sale because
they may have more power to stay in business. If
this is the case, failing firms are be negatively cor-
related with duality. To avoid downwardly biasing
β1
-hat, I address the issue with FAILi
, a dummy vari-
able takes a value of one if firm failure or industry
decline are cited as a motivation for the sale in the
“Reasons for the Merger” section in the SEC proxy
statement in deal i.
An important feature of takeovers is that some
occur through an auction process. If an auction is
present before the final sale, then this may lead to
upward bias in the coefficient of interest. Atkas &
De Bodt (2009) find empirical evidence that sug-
gests that the threat of auction, latent competition,
is factored into bidding behavior. Bids occurring be-
fore an auction tend to be biased upwards to deter
the seller from initiating an auction and introduc-
ing new competition. This may create in upwardly
biased starting bid, weakening the statistical effect
that the aggressiveness variable picks up, which
would cause the lack of a previous auction to be
negatively correlated with negotiating aggressive-
ness. Also, one might imagine that dual role CEOs
may be more likely to engage in pure negotiations
instead of resorting to an auction because in a one-
on-one negotiation, the dual CEO can more effec-
tively exercise his or her freedom. This may cause
duality and no previous auction to be negatively
correlated. To control for the potential upward bias,
I include the PAi
control variable, which is measured
as an indicator variable takes a value of one if an
auction has not taken place before a negotiation
leading to a sale in deal i.
A specific buyer’s over-eagerness to acquire a
firm may downwardly bias β1-hat in the bivariate
causal interpretation presented in Equation (1). An
indication of this factor can be measured as whether
the acquirer or the target makes the initial contact in
a given deal. One might imagine that if the acquirer
makes initial contact, it may be indicative of a high
willingness or ability to pay, which may bias ini-
tial bids upwards to ward off the target’s potential
impetus to contact additional competitors (Atkas &
De Bodt, 2009). Thus, since initial bids would be
shaded upwards, this decreases the statistical effect
of the NAGGi
variable, causing them to be negative-
ly correlated. In addition, firms with dual leadership
may have CEOs who take more ownership over the
sale process and reach out to more bidders—making
duality and acquirer initiated contact positively cor-
related. If this is true and the coefficient of interest is
downwardly biased, I avert the problem by includ-
ing the AINITi
dummy variable, which takes a value
of one if the eventual acquirer initiates first contact
in deal i.
Another biasing factor that may corrupt the es-
timated duality coefficient is the size of the target
company. More information about the value of the
firm, before due diligence, may be known about
bigger firms. If this is the case, initial bids may be
shaded upwards, closer to a symmetrically known
value, leading to less negotiating on behalf of the
CEO. If this is valid, then size is negatively corre-
lated with aggressiveness. Further, dual CEOs may
tend to lead larger firms at the time of sales, caus-
ing duality and size to be positively correlated. This
makes sense, given that dual CEOs may tend to start
at small firms that grow over time, which are then
sold to bigger firms or competitors. Boone and Mul-
herin (2004) find that the mean and median target
equity value is 56% and 27% of that of the aver-
age bidder respectively, which provides evidence in
support of this prediction. Because failure to include
an adequate control variable would bias my coeffi-
cient upwards, I use MKTCi
. This variable is taken
as the log target market capitalization of the target
firm in deal i, in millions of dollars.
Moreover, an issue with the causal interpreta-
tion of Equation (1) is the possibility that CEOs are
also the owners of their firms, which may bias the
estimation of β1
in an upward direction. Hermalin
& Weisbach (2003) find that CEOs who are also
owners behave differently than non-owner CEOs.
Due to this, CEOs who are also owners may have
an unobservable attachment to the firm that may
cause a positive correlation to exist between owner-
ship and aggressiveness. Further, one might imagine
that duality and ownership are positively correlated
because founders or owners of firms may want to
place themselves in positions to exercise full over-
sight over their firms. To avoid this potential biasing
factor, I include OWNi
, which is a dummy variable
17. Fall 2015 | The Visible Hand | 17
Volume xxiv. Issue I.
that takes a value of one if the standing CEO at the
time of the sale in deal i is also the owner.
A final factor that may drive upward bias in
the coefficient of interest is post-deal employment
perks. One might imagine that if the CEO wants to
be retained, he or she may be more likely to exhibit
loyalty and competency. If this is the case, post-deal
employment is correlated with aggressiveness. Ad-
ditionally, dual CEOs may be more valuable to the
post-merger firms or may be in a better position to
bargain for retention as part of the sale than single
role CEOs—causing duality and post-deal employ-
ment to be positively correlated. To avoid the up-
ward bias in β1
-hat, I control for post-deal employ-
ment with EMPi
, which is an indicator variable that
takes a value of one if the CEO of the target com-
pany is retained in some capacity at the new firm
post deal i.
In the previous discussion, I proposed theoretical
biases based on my understanding of each variable’s
respective relationships with duality and negotiat-
ing aggressiveness. To supplement this analysis, I
also provide a correlation matrixcorrelation matrix
is included in the Appendix to further support the
directions and magnitudes of potential biases.
Rewriting the main estimating equation and plug-
ging in control variables for potentially biasing fac-
tors yields Equation (2).
NAGGi
= β0
+ β1
DUALi
+ β2
BDRSi
+ β3
FAILi
+ β4
PAi
+ β5
AINITi
+ β6
MKTCi
+ β7
OWNi
+ β8
EMPi
+ εi
(2)
NAGGi
: Negotiating Aggressiveness
DUALi
: CEO Duality
BDRSi
: Number of Bidders
FAILi
: Failing Firm
PAi
: No Previous Auction
AINITi
: Acquirer Initiated
MKTCi
: Log Market Cap (M)
OWNi
: CEO Ownership
EMPi
: Post-deal CEO Employment
II.B Data
I examine a sample of 45 M&A deals from the
year 2013. These 45 deals are chosen at random
from a list of all S&P 1500 mergers completed in
2013 with deal values greater than $1.0 million,
where the acquirer gains outright ownership of the
target firm. . The sample is not considered small in
comparison to other studies with hand-collected
data. By only focusing on the year 2013, I attempt
to decrease time variant noise effects. I draw data
on dual CEO/Cchair positions, ownership status,
post-deal employment, and market cap by investi-
gating the company history and financial status on
the from the Bloomberg Terminal. I gather confir-
matory data to support these variables from SEC
Edgar. Additionally, I hand-collect the data on CEO
negotiating behavior from the “Background to the
Deal” sections of publicly available proxy state-
ments (i.e., DEFM-14A, S-4, SC-14D9, and 8-K fil-
ings) through the SEC Edgar database (e.g., Boone
& Mulherin, 2004; Gentry & Stroup, 2015). I also
gather information on the number of bidders, wheth-
er the deal occurs pre- or post-auction, whether the
acquirer or the target initiates contact, and bid and
sale information from the “Background to the Deal”
sections in those proxy statements. I gather confir-
matorydouble-check details on final sale amount
and deal premia from the announcement documents
in the 8-K filings (i.e., EX-99.1) on SEC Edgar and
the Bloomberg Terminal. I draw further data on firm
failure from the “Reasons for the Merger” section
provided in these documents, often directly below
the “Background to the Deal” sections. I remove
deals that are hostile takeovers from my sample, as
those deals do not fully reflect the CEOs ability to
negotiate. The data I collect for deal premia, used in
Table 1 and Figure 3, are taken from the Bloomberg
Terminal and depict the percent premium over the
closing price from the day before the deal execution.
Table 2 reports descriptive statistics for each vari-
able used in this paper. Interestingly, approximately
one-third of the randomly selected sample of M&A
deals from 2013 involves firms with CEO-Chaired
boards. The number of bidders in the sample ranges
from 1 to 20, reflecting a large variance in not only
18. 18 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
the number of firms contacted but those that make
formal indications of interest. The negotiating ag-
gressiveness variable has a minimum value that is
negative, which may suggest two possibilities, ei-
ther certain CEOs are extremely poor negotiators or
the variable is not impervious to firm-specific bias-
ing factors. If the second suggestion is valid, then
the R-Squared value should increase from Equation
(1) to Equation (2) and the usage of control variables
is justified in depicting a more accurate estimate of
the effect of duality on aggressiveness.
III. Findings
Column (1) of Table 3 reports the main estimating
equation in the bivariate case, as shown in Equation
(1). Further, in Column (2) the findings from Equa-
tion (2), which presents the estimated effect of dual-
ity on negotiating aggressiveness in the multivariate
case, are reported.
Column (1) reports a positive and significant cor-
relation between duality and aggressiveness in the
bivariate case. When I introduce control variables
in Column (2), I find that the coefficient on CEO
duality remains positive and statistically significant
at the 1% level. The results suggest that dual CEOs
negotiate 16.1% more aggressively than single role
CEOs. That is, when the CEO also occupies the role
of the company’s Chairman of the Board, the exis-
tence of that relationship in the context of an M&A
deal negotiation is associated with a 16.1 percent-
age point increase from initial to final bid, ceteris
paribus. I therefore reject the null hypothesis that
dual CEOs bargain less aggressively than single role
CEOs, leading to lower levels of value maximiza-
tion.
I also find that the presence of each additional
bidder is associated with a -1.1% decrease in nego-
tiating aggressiveness. This result is significant at
the 5% level. In theory, the presence of more buyers
should decrease the amount of bargaining the CEO
has to do because of the added sense of competi-
tion among prospective buyers. I am surprised that
none of my other control variables were significant,
but acknowledge that this may be due to the small
sample size.
Figure 3 below reports a 2-dimensional visual
representation of the 3-dimensional relationship
between the incentive (duality), the behavior (ne-
gotiating aggressiveness), and the outcome (deal
premium).
The contour plot illustrates two important conclu-
sions from this study. First, CEO duality and deal
premia have no systematic relationship, as shown
in Table 1. Observing the chart, the red-shaded area,
indicating duality, is not disproportionately to the
north or south of the graph, confirming this asser-
tion. Second, the notable divide between the right
and left sides of the plot, the red- and blue-shaded
areas, confirms the findings in Table 3 in a striking
manner; dual CEOs bargain more aggressively than
single role CEOs.
The results indicated in Figure 3 taken together
with Table 2, which suggests that aggressiveness
and deal premia are positively correlated at the 1%
level, confirms our rejection of the null hypothesis.
That is, if we accept the premise that higher deal pre-
mia is good for shareholders, then it is clear that the
duality structure is more conducive to CEO value
maximizing behavior in M&A target negotiations.
19. Fall 2015 | The Visible Hand | 19
Volume xxiv. Issue I.
Boyd, B. (1995). CEO duality and firm perfor-
mance: A contingency model. Strategic Manage-
ment Journal, 301-312.
Brickley, J., Coles, J., & Jarrell, G. (1997). Leader-
ship Structure: Separating The CEO And Chairman
Of The Board. Journal of Corporate Finance, 189-
220.
Buchanan, R., & Kim, K. (2008). CEO Duality
Leadership And Firm Risk-Taking Propensity. The
Journal of Applied Business Research, 24(1), 27-42.
Chen, C., Lin, J., & Yi, B. (2008). CEO Duality And
Firm Performance—An Endogenous Issue. Corpo-
rate Ownership & Control, 6(1), 58-65.
Daily, C., & Dalton, D. (1994). Bankruptcy And
Corporate Governance: The Impact Of Board Com-
position And Structure. Academy of Management
Journal, 1603-1617.
De Bruyn Demivoda, I. (2013). Time lost in nego-
tiations: Productive or wasteful? 1-42.
Donaldson, L., & Davis, J. (1991). Stewardship
Theory or Agency Theory: CEO Governance and
Shareholder Returns. Australian Journal of Manage-
ment, 49-64.
Eisenhardt, K. (1989). Agency Theory: An Assess-
ment and Review. Academy of Management Re-
view, 57-74.
Elsayed, K. (2007). Does CEO Duality Really Af-
fect Corporate Performance? Corporate Gover-
nance: An International Review, 1203-1214.
Faleye, O. (2014). The Costs of a (Nearly) Fully In-
dependent Board. 1-44.
Fama, E., & Jensen, M. (1983). Separation Of Own-
ership And Control. The Journal of Law and Eco-
nomics, 26(2), 301-325.
FASB. (1980). Statement of financial accounting
concepts no. 2: Qualitative characteristics of ac-
counting information. Stamford, Conn.: Financial
Accounting Standards Board.
Finkelstein, S., & D’aveni, R. (1994). CEO Duality
As A Double-Edged Sword: How Boards Of Di-
rectors Balance Entrenchment Avoidance And Uni-
ty Of Command. Academy of Management Jour-
IV. Conclusion
In this paper, I push the frontier of what we know
about the role of CEO duality in the firm and pro-
vide insight about the role of this leadership struc-
ture in the context of takeover negotiations. I expose
the fundamental identification problem that occurs
when we try to judge the merits of an incentive
with an outcome variable, and circumvent the lack
of strong behavioral variables by creating my own,
CEO Negotiating Aggressiveness, using underuti-
lized public information.
Using negotiating aggressiveness as the depen-
dent variable, I create an estimating equation aimed
to measure the effect of duality on CEO negotiat-
ing effort. I find that CEO duality has a positive
and statistically significant relationship with nego-
tiating aggressiveness at the 1% level. I reject the
null hypothesis, which states that duality leads to
lower levels of negotiating aggressiveness, and thus
lower value maximization. I attribute the lack of sig-
nificance among my control variables to the small
sample size, which is common among studies using
hand-collected measures.
These conclusions bear implications for corpo-
rate governance. Stricter governance does not nec-
essarily lead to higher value maximization, at least
in the case of negotiations. I believe the added free-
dom afforded by duality creates a more conducive
atmosphere within the firm for successful negotia-
tions. While my results imply that leadership struc-
ture matters in M&Adealmaking, the specific aspect
of duality that drives these findings remains unclear.
Future research can hopefully explore and identify
the exact mechanism behind this relationship.
V. References
Adams, R., Hermalin, B., & Weisbach, M. (2010).
The Role Of Boards Of Directors In Corporate Gov-
ernance: A Conceptual Framework And Survey.
Journal of Economic Literature, 58-107.
Aktas, N., Bodt, E., & Roll, R. (2009). Negotiations
under the threat of an auction. Journal of Financial
Economics, 241-255.
Bhagat, S., & Bolton, B. (2007). Corporate Gover-
nance And Firm Performance. Journal of Corporate
Finance, 257-273.
Boone, A., & Mulherin, J. (2004). How Are Firms
Sold? The Journal of Finance, 847- 875.
20. 20 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
ernance. Harvard Law School John M. Olin Center
for Law, Economics and Business Discussion Paper
Series, 488, 1-28.
Sampson-Akpuru, M. (1992). Is CEO/Chair Duality
Associated with Greater Likelihood of an Interna-
tional Acquisition? Michigan Journal of Business,
81-97.
Shleifer, A., & Vishny, R. (1988). Value Maximiza-
tion and the Acquisition Process. Journal of Eco-
nomic Perspective, 7-20.
Smith, A. (1976). An inquiry into the nature and
causes of the wealth of nations. E. Cannan (Ed.).
Chicago: University of Chicago Press. (Original
work published 1776)
Sridharan, U. & Marsinko, A. (1997). CEO Duality
In The Paper And Forest Products Industry. Journal
Of Financial And Strategic Decisions, 10(1), 59-65.
Subramanian, G. (2011). Dealmaking: New deal-
making strategies for a competitive marketplace.
New York: W.W. Norton & Co.
Williamson, O. (1985). The economic institutions of
capitalism: Firms, markets, relational contracting.
New York: Free Press.
VI. Footnotes
1. From the perspective of the law, substantive is
defined by the concept of materiality, which is de-
fined as “the magnitude of an omission or misstate-
ment of accounting information that, in the light of
surrounding circumstances, makes it probable that
the judgment of a reasonable person relying on the
information would have been changed or influenced
by the omission or misstatement” (FASB, 1980).
2. CEO duality is measured as an indicator variable
that takes a value of one if the CEO of the company
is also the Chairman of the Board.
3. CEO Negotiating Aggressiveness, the main vari-
able I construct in this paper, is defined in the Meth-
odology section.
4. Summary statistics on each variable used in Table
1 are provided in the Data section.
For appendices and other notes, please refer to the
electronic issue at http://orgsync.rso.cornell.edu/
nal, 37(5), 1079-1108.
Finkelstein, S., Hambrick, D., & Canella Jr., A.
(2009). Strategic leadership: Theory and research
on executives, top management teams, and boards.
New York: Oxford University Press.
Gentry, M., & Stroup, C. (2015). Entry and Compe-
tition in Takeover Auctions. 1-57.
Grinstein, Y., & Hribar, P. (2003). CEO Compensa-
tionAnd Incentives: Evidence From M&ABonuses.
Journal of Financial Economics, 119-143.
Hansen, R. (2001). Auctions of companies. Eco-
nomic Inquiry, 30-43.
Hartzell, J., Ofek, E., & Yermack, D. (2003). What’s
In It for Me? CEOs Whose Firms Are Acquired. Re-
view of Financial Studies, 37-61.
Hermalin, B., & Weisbach, M. (2003). Boards of
Directors as an Endogenously Determined Institu-
tion: A Survey of the Economic Literature. FRBNY
Economic Policy Review, 7-26.
Iyengar, R., & Zampelli, E. (2009). Self-selection,
endogeneity, and the relationship between CEO du-
ality and firm performance. Strategic Management
Journal, 1092-1112.
Jensen, M., & Meckling, W. (1976). Theory of the
firm: Managerial behavior, agency costs and own-
ership structure. Journal of Financial Economics,
3(4), 305-360.
Lam, K., Mcguinness, P., & Vieito, J. (2011). CEO
gender, executive compensation and firm perfor-
mance in Chinese‐listed enterprises. Pacific-Basin
Finance Journal, 1136-1159.
Malmendier, U., & Tate, G. (2003). Who Makes Ac-
quisitions? CEO Overconfidence and the Market’s
Reaction. 1-64.
Oh, K., Pech, R., & Pham, N. (2014). Mergers and
Acquisitions: CEO Duality, Operating Performance
and Stock Returns. 1-34.
Rechner, P., & Dalton, D. (1991). CEO duality and
organizational performance: A longitudinal analy-
sis. Strategic Management Journal, 12, 155-160.
Roe, M. (2004). The Institutions of Corporate Gov-
21. Fall 2015 | The Visible Hand | 21
Volume xxiv. Issue I.
stewards of the firm. Proponents of duality contend
that combining the CEO and Chair positions pro-
vides a company with a unified command structure
and a consistent leadership direction (Chen, Lin, &
Yi, 2008). This means the firm incurs fewer costs
in decision-making. Jensen & Meckling (1976) and
Brickley & Coles (1997) contend that the agency
cost of separating CEOs in dual roles is higher than
the net benefits gained.
Oh, Pech, & Pham (2014) found that duality
has a significant and positive effect on the decisions
made by Vietnamese firms in mergers, primarily in
terms of long-term value added. Hermalin & Weis-
bach (2003) argue that board size, an indication of
corporate governance strength, is negatively related
to corporate performance. This finding supports the
idea that top-management does not need to be con-
stantly monitored in order to maximize shareholder
value (Boyd, 1995).
Sridharan & Marsinko (1997) investigated the
impact of CEO duality on firm value in the paper
and forest products industry and found that dual
firms possessed higher market values than firms
with baseline leadership structures. Under this
line of thinking, duality in firms may also lead to
enhanced collegiality and collaboration between
board directors and company executives, facilitat-
ing smooth and resourceful decision-making.
Correlation Matrix
VI. Appendix
Literature Review
Agency Theory
Agency theory predicts that dual CEOs cannot
maximize shareholder value because they are not
monitored effectively. The prevailing view behind
this theory is that CEOs are profoundly selfish and
will always put the maximization of their utility over
that of the firm and its stakeholders. Proponents of
agency theory believe that without proper monitor-
ing structures, CEOs pursue selfish interests that are
inconsistent with their responsibilities to sharehold-
ers (Williamson, 1985). In fact, Adam Smith (1776)
theorized:
“The directors of [joint stock] companies, however,
being the managers rather of other people’s money
than of their own, it cannot well be expected, that
they should watch over it with the same anxious
vigilance [as owners].... Negligence and profusion,
therefore, must always prevail, more of less, in the
management of the affairs of such a company.”
Eisenhardt (1989) found that M&A takeover
decisions are opportunistic and driven by CEO self-
interest unless properly monitored. Such opportu-
nistic behavior may include shirking of day-to-day
responsibilities and monetary indulgences at the
expense of shareholders (Roe, 2004; Williamson,
1985). The model of the opportunistic and individu-
alistic economic actor, who is primarily concerned
with the maximization of his or her own economic
gain, can be traced to the field of organizational
psychology through McGregor’s (1960) Theory X
(Donaldson & Davis 1991).
Daily and Dalton (1994) also found a signifi-
cant positive association between CEO duality and
firm bankruptcies. Fama and Jensen (1983) warn
that allowing duality signals to shareholders that the
corporation has failed to separate its decision man-
agement from its decision control, which increases
the likelihood that the CEO-Chair will take inef-
ficient and opportunistic actions that deviate from
shareholder interests and reduce shareholder wealth.
Stewardship Theory
Stewardship theory predicts that dual CEOs en-
hance firm performance and maximize shareholder
value to a larger degree than baseline CEOs. The
underlying view backing this theory portrays CEOs
as benevolent and selfless leaders. The more respon-
sibility they are entrusted with, the better they are as
22. 22 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
Ziyi Yan
Bryn Mawr College
The Effect of Driving Restrictions on Air
Quality in Beijing
I. Introduction
Rapid economic growth and urbanization have
dramatically changed China’s transportation, espe-
cially in the major cities. For example, in China’s
capital, Beijing, unlike before, residents are not only
traveling longer distances, but also making more
trips and relying more on motorized modes. Rapid
motorization has contributed to a series of problems
including air pollution, oil price hikes, congestion,
and growing greenhouse gas emissions. In Beijing,
peak-hour speeds on urban arterials and express-
ways often drop below 15 or even 10 kilometers per
hour and it is on the list of the World Health Organi-
zation’s most polluted cities (Sun, Zheng and Wang,
2014).
To address the problems brought on by the ex-
ploding growth of car ownership, Beijing has adopt-
ed a wide range of policies, including investments
in public transportation, ratcheting up vehicle emis-
sion standards, as well as restrictions on both driv-
ing and new vehicle purchases. Among them, the
policy of restricting driving is considered to be an
efficient way to alleviate the traffic pressure in Bei-
jing and it was first introduced in 2008. Beijing im-
plemented the odd-even license plate policy of road
space rationing during the 2008 Olympic Games.
(BBC, 2008) Due to the success in improving the
air quality and the increased road space availability,
the government issued a modified version of road
space rationing, end-number license plate policy af-
ter the 2008 Olympic Games. The odd-even license
plate policy limits the use of cars on the alternative
days by the parity of the end-number of license plate
that if the last digit of license plate is odd, the car is
only allowed to be used on the day which has date
that is odd and if the last digit of license plate is
even, the car is only allowed to be use on the day
which has data that is even. For example, if a car
has end-number of 7, it is only allowed to be used
on 1st, 3rd, 5th, 7th…days of a month and if a car
has end-number of 2, it is only allowed to be used on
2nd, 4th, 6th, 8th…days of a month. Similarly, the
end-number license plate policy limits every car on
only one day of a week based on the end number of
its license plate. If a car has an end-number of 1 or 6,
it is only allowed to be used on the Monday of that
week. If a car has an end-number of 2 or 7, it is only
allowed to be used on the Tuesday of that week, etc.
The main objective of the restraint policies is to re-
duce the amount of exhaust gas generated by motor
vehicles and alleviate the traffic pressure.
Moreover, in consideration of the rapid increase
in the number of cars, the government implemented
a policy that restricts the purchase of small passen-
ger cars, started from January 2011. In 2010, the av-
erage monthly increase in registered new cars was
66,000, and given the increase, the car ownership is
expected to hit 6 million before 2016 (Mu, 2012).
The new policy requires the citizens who wish to
purchase passenger cars with less than five seats to
follow the small passenger car purchase policy to be
applicable for purchasing a passenger car. Accord-
ing to the policy, the individual purchaser must not
already have a passenger car registered under his or
her name, and must fulfill various requirements such
as having a driving license and living in Beijing; if
the purchaser fulfills all of the requirements, he or
she could apply for a quota, and then wait for the
monthly license plate ‘lottery’. During the 26th of
every month the Traffic Management Bureau would
take all of the eligible quotas and select a certain
amount of them randomly, similar to the way of lot-
tery where numbers are drawn randomly. Usually
the lottery rate is under 10% (Yang, Liu, Qin and
Liu, 2014).
In China, pollution is one aspect of the broader
topic of environmental issues and as China indus-
trialized, various forms of pollution have increased,
including air pollution, which is damaging the health
condition of Chinese People. According to the stud-
ies by World Bank, World Health Organization, and
the Chinese Academy for Environmental Planning
on the effect of air pollution on health, between
350,000 and 500,000 Chinese die prematurely each
year because of air pollution1
. The hazardous level
23. Fall 2015 | The Visible Hand | 23
Volume xxiv. Issue I.
of air pollution has urged the government to make
efforts to fight the pollution and as a city, which
underwent serious condition of ‘airpocalyse’ since
2013, Beijing has desired adequate policies to effec-
tively reduce air pollution. Since vehicles have al-
ways been claimed as one of the major sources of air
pollution, the government has aimed to reduce the
level of air pollution by controlling the rapid growth
in the use of vehicles, using the different kinds of
policies that restrict driving.
In this paper, I will evaluate the effect of the driv-
ing restrictions on improving the air quality, during
the time period from 2008 to 2013. Among the vari-
ous measurements of air quality, the level of PM2.5
measures the level of tiny particles that have a width
smaller than 2.5 micrometers. PM 2.5 is a type of
air pollutant that is a concern for people’s health
when levels are high and high levels of PM 2.5
reduce visibility and cause the air to appear hazy.
Since these particles are relatively small, they are
able to travel deeply into the respiratory tract, reach-
ing the lungs. Exposure to PM2.5 can cause health
effects such as eye, nose, throat and lung irritation,
coughing, sneezing, running nose, and shortness
of breath. Studies also suggest that long-term ex-
posure to PM2.5 may be associated with increased
rates of chronic bronchitis, reduced lung function
and increased mortality from lung cancer and heart
disease2
. Besides, vehicle pollution is found to con-
tribute about 22% of PM 2.5 in Beijing3
. Therefore,
based on this particularity of PM 2.5, in this paper, I
will use the level of PM 2.5 as the measurement of
air quality and my working hypothesis is: during the
time period 2008-2013, policies that target to reduce
car pollution, including the restriction on car pur-
chases and road space rationing, help to improve the
air quality in Beijing, with the indicator as PM2.5.
In this paper, Section 2 offers a review of pre-
vious studies which examine driving restriction’
effects. Section 3 introduces the description of the
empirical strategy used, along with the summary of
the data. Section 4 presents the results of the regres-
sion and the interpretation. Section 5 discusses the
reason and explanation behind the results from Sec-
tion 4. Section 6 concludes the paper with policy
recommendation, major limitations and interest for
future research.
II. Literature Review
Chile is the first country that adopted driving
restriction policy that in 1986, it implemented the
policy Restriction Vehicular in its capital, Santiago,
to prohibit vehicles to be used on certain days based
on the vehicle’s plate number. Since then, similar
policies have been used in several large cities across
the world. Sun et al. (2014) points out that the popu-
larity of these policies is attributed to the policy’s
simplicity, perceived quick effects on congestion
and air quality, and low cost to regulators.
To evaluate the effect of car-related policy on
air quality, it is important to know what factors de-
termine the traffic emissions in the air. Besides the
amount of cars in use, both Viard and Fu (2011) and
Sun et al. (2014) state that the determinants of traffic
emissions include but not limited to: temperature,
humidity, wind speed, supply and cost of public
transportation, and fuel price, Furthermore, accord-
ing to the geographical location of Beijing, wind
direction can also affect the level of air pollution.
There are also a small number of empirical studies
on the effects on air quality of driving restrictions in
some major cities in the world. Eskeland and Feyzi-
oglu (1997) shows that Mexico City’s road rationing
policy adopted since 1989, Hoy No Circula, did not
lead to significant decreases in gasoline demand or
car ownership in Mexico City during the period of
1984-1993. Davis (2008) also investigates the case
of Hoy No Circula and it compares pollution levels
before and after the implementation of the Hoy No
Circula to measure the effect of the implementa-
tion on air quality, controlling for covariates such as
weather condition. It points to behavioral responses
as the most likely reason of the Hoy No Circula’s
failure to improve air quality. Davis (2008) also
concludes that Hoy No Circula led to an increase in
the total number of vehicles in circulation through
increased household ownership of second cars, as
well as a change in fleet composition toward high-
emissions vehicles.
Lin et al. (2011) focuses on multiple cities, in-
cluding Sao Paulo (road rationing policy Operaco
Rodizio adopted in 1995), Bogota (road space ra-
tioning policy Pico y Placa adopted in 1998), Beijing
(the odd-even road space rationing policy adopted
in 2008 and end-number road space rationing policy
adopted after 2008 Olympics Games) and Tianjin
(the odd-even road space rationing policy adopted in
2008) and it indicates no evidence support that over-
all air quality has been improved, across different
versions of driving restrictions. Nonetheless, they
conclude that the effect of the driving restrictions
in Sao Paulo and Bogota is primarily on the daily
maximum concentrations of CO and PM 10. It also
suggests that due to the temporal and spatial shifting
of driving, driving restrictions can only be expected
24. 24 | The Visible Hand | Fall 2015
Volume xxiv. Issue I.
to alleviate air pollution when implemented with
an extended schedule or in an extended schedule
that the coverage should be beyond peak hours and
beyond city center. For the analysis of Beijing, Lin
et al. (2011) uses daily concentration of inhalable
particulate matters (PM 10) based on the Air Pollu-
tion Index (API) from the Ministry of Environmen-
tal Protection for the time period from July 2007
to October 2009. It finds that the odd-even license
plate policy during the 2008 Beijing Olympics were
associated with at least 38% reductions in PM 10
concentrations, while there is no evidence that after
the Olympics, the end-number license plate policy
have improved air quality, with the measurement as
PM 10 concentration.
However, the effects are debatable that research-
ers reach to different conclusions by using different
data, length of time windows and different orders
of polynomial time trend. Salas (2010) argues that
reasonable changes in the method used, such as
different time windows and polynomial orders can
dramatically alter the conclusion that using non-
parametric estimates, it identifies a 12-18% reduc-
tion in air pollution during the first months of the
implementation of Hoy No Circula, followed by a
gradual increase in pollutant concentration. Viard
and Fu (2011) find that Beijing’s API fell 19% dur-
ing the odd-even license plate policy and it fell 8%
during the end-number license plate policy. They
back their causal inference with the spatial variation
in air quality changes that larger changes are found
at monitoring stations closer to urban expressways.
Furthermore, Sun et al. (2014) points out that
the complicated chained process from traffic emis-
sions to air pollutant concentrations can be affected
by numerous time-varying variables that some of
the them may be relatively hard for researchers to
include in the study, such as supply of public trans-
portation, fuel price, parking cost and taxi fare, etc.
All of these factors can potentially enlarge or shrink
the “discontinuity” identified around the single time
point when a driving restriction scheme is imple-
mented.
Moreover, there is literature that investigates
the effect of driving restrictions on air quality in
Beijing, with indictor as PM 10. Sun et al. (2014)
concludes although the policies that target to restrict
driving have positive effect on alleviating the traffic
pressure in Beijing from July 2008 to October 2011,
using PM 10 as an indicator of air quality, restricting
driving in Beijing with end-plate number policy has
little, or even negative impact on air quality. There-
fore, the effect of the driving restrictions in Beijing
still seems debatable.
III. Data and the Overview of the Empirical
Strategy
i. Data and Variables:
Previous literature has discussed the determi-
nants of air quality and researchers have identified
a number of variables as important factors in the
change of air quality indicators. Some variables
they have identified include temperature, humidity,
wind speed, and precipitation (Onursal & Gautam,
1997). Among them, temperature affects the speeds
of evaporation, humidity affects aerosol formation
and dust re-suspension, wind speed affects pollutant
dilution, and dust re-suspension and precipitation
affects wet deposition, or washing-out, of air pol-
lutants. (Onursal & Gautam, 1997) With indicator
as PM 10 to study the effect of restricting driving
on traffic and air quality, Sun et al. (2014) use a set
of determinants, including daily mean temperature,
daily mean humidity, daily mean wind speed and the
presence of policy that restricts driving. Consider-
ing the similarity between the sources of PM 10 and
PM 2.5 in Beijing, which both have approximate
source apportionment including soil dust, automo-
bile, secondary source, coal combustion, biomass
burning and industrial sources (Zhang, Guo, Sun,
Yuan, Zhuang, Zhuang and Hao, 2007), with indi-
cator as PM 2.5 in Beijing, in this paper, the set of
independent variables is as follows: daily mean tem-
perature in Beijing (in Celsius), daily mean humid-
ity in Beijing (in %), daily mean wind speed in Bei-
jing (in km/h), the presence of policies on restricting
car purchases, the presence of polices on road space
rationing of end-number license plate, the presence
of policies on road space rationing of odd-even
number license plate. Here, in consideration of the
complexity and the limited availability of the data of
wind direction, the wind direction data is obviated.
Therefore, in this paper, I use a time series data
set that includes the following variables during the
time period 2008-2013. I obtain the daily meteoro-
logical variables from an online weather base4
and
the daily PM 2.5 data from the website of the United
States embassy in Beijing5
The data of the presence
of the policies is compiled from the website of Bei-
jing Traffic Management Bureau6
.
The dependent variable is the daily average hour
PM2.5 concentration (µg/m3) in Beijing. The in-
dependent variables are daily mean temperature in
Beijing (Celsius), daily mean humidity in Beijing
(%), daily mean wind speed in Beijing (km/h), dum-
25. Fall 2015 | The Visible Hand | 25
Volume xxiv. Issue I.
my variable for the presence of policy on restricting
car purchases that it is 1 if the policy is being imple-
mented at the time and it is 0 if the policy is not be-
ing implemented at the time, the presence of polices
on road space rationing of end-number license plate
such that it is 1 if the policy is being implemented at
the time and it is 0 if the policy is not being imple-
mented at the time, and the presence of policies on
road space rationing of odd-even number license
plate such that it is 1 if the policy is being imple-
mented at the time and it is 0 if the policy is not
being implemented at the time.
ii. Model
In this paper, I use a multiple regression model to
evaluate the effect of driving restrictions on air qual-
ity, with the indicator as PM 2.5 in Beijing.
The basic regression model can be written as a lin-
ear specification of the following form:
PM 2.5i
= α + β1
*Temperaturei+ β2
*Humidityi +
β3
*Wind Speedi
+ β4
*Odd Eveni
+ β5
*End Numberi
+ β6
*Purchasei
+ ei
Where the subscript “i” stands for the time index.
The summary statistics for the variables in the re-
gression model is presented in Table 1.
The independent variables used in the model
are grouped into two categories, meteorological
variables including temperature, humidity and wind
speed, and the other category including the policies
that restrict driving.
First, the group of meteorological variables is
going to be considered. Tai et.al (2010) conclude
that daily variation in meteorology including nine
predictor variables (temperature, relative humid-
ity, precipitation, cloud cover, 850-hPa geopotential
height, sea-level pressure tendency, wind speed,
E-W and N-S wind direction) can explain up to
50% of the daily PM 2.5 variability in US. Addi-
tionally, humidity is positively correlated with the
level of PM 2.5, while wind speed is negatively cor-
related with the level of PM 2.5. It also discusses
the effect of temperature on PM 2.5 concentration
and that the influence is correlated to other aspects
of the environment as well. Therefore, the effect
of temperature on the level of PM 2.5 may not be
simply determined, which is to say, the direction of
the effect of temperature on PM 2.5 concentration
may be ambiguous. In this paper, we anticipate the
temperature has a positive effect on the air quality
that as temperature increases, PM 2.5 concentration
decreases.
Then, the group of policies that target restrictions
on driving is under consideration. Sun et.al (2014)
point out that using the indicator as the level of PM
10 shows that although the most stringent driving
restrictions had a positive impact on city-wide traf-
fic speed, the marginal reduction in the number of
usable vehicles may result in little, or even negative
impact on air quality. This paper specifies the differ-
ence between different types of driving restrictions,
pointing out that the end-number license plate poli-
cy, which is less stringent than the odd-even license
plate policy, does not happen to have any significant
positive effect on air quality, unlike the odd-even li-
cense plate policy, which helps to both alleviate the
traffic pressure and reduce air pollution. However,
the implementation of end-number license plate pol-
icy is reported to have a positive effect on reducing
the use of cars as experts point out that this policy
has reduced the number of cars on the public road-
space in Beijing by 700,0007
. Thus, according to the
great amount of pollution contributed by vehicles,
in this paper, the end-number license plate policy
is expected to have a positive effect on air quality,
which is to say that the policy is negatively corre-
lated with PM 2.5 concentration. Similarly, based
on the positive impact of odd-even license plate
policy on the alleviation of traffic pressure and the
air quality with indicator as PM 10 concentration
(Sun, Zheng and Wang, 2014), odd-even policy is
expected to be negatively correlated with PM 2.5
concentration.
Yang et al. (2014) conclude that the policy on
restricting purchases have significant effect on both
vehicles sold and congestion. They point out that
with this policy put in place alongside other poli-
ices aimed at improving transporation, Beijing ex-
