How Networks Impact Stock Returns
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Ron Kaniel, University of Rochester
Production Networks and Stock Returns: The Role of Vertical Creative Destruction
AbstractWe study the relation between firms' risk and their upstreamness in a production network. Empirically, firms' average stock returns and productivity exposures increase monotonically with their upstreamness. We quantitatively explain these novel facts using a multi-layer general equilibrium model. These patterns
arise from vertical creative destruction -- innovations by suppliers devalue customers' assets-in-place. We conrm several model predictions, and document additional new facts consistent with vertical creative destruction: a diminished value premium among downstream firms and a negative relation between downstream
firms' returns and their suppliers' competitiveness. Overall, vertical creative destruction has a sizable effect on cross-sectional risk premia.
Return Predictability in Firms with Complex Ownership Network
AbstractIn this study, using data from 23 developed markets, we examine all four possible cases of stock return predictability in ownership-linked firms (OLFs): parent-subsidiary, subsidiary-parent, subsidiary-subsidiary, and parent-parent. We find that the returns of OLFs predict returns of the focal firm for all four cases. In particular, a simple long/short portfolio strategy for firms sorted by the lagged monthly returns of OLFs yields the Fama and French (2018) value-weighted six- factor alpha of up to 113 bps per month. The underreaction of focal firms to OLF returns is best explained by active internal capital markets – a specific mechanism unique to OLFs.
- G1 - General Financial Markets