Cash Holdings, Investment, and Firm Dynamics
Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PST)
- Chair: Pablo Ottonello, University of Michigan
Who Bears Firm-level Risk? Implications for Cash Flow Volatility
AbstractPublic firms in the United States that provide better insurance against productivity shocks to their workers experience higher cash flow volatility. The difference in intra-firm risk sharing between workers and capital owners accounts for more than 50% of the variation in firm-level cash flow volatility. I develop a theory in which wages can serve either as a hedge or as leverage, depending on the history of the productivity shocks the firm has faced. Heterogeneous roles of workers in the firm are derived by analyzing the dynamic equilibrium wage contracts between risk-neutral owners and risk-averse workers who can leave the firm with a fraction of accumulated human capital. Owners of the firm will optimally bear more risk when the current value of the firm’s human capital is lower than the peak value it has reached. The model explains the joint dynamics of cash flow volatility and the wage-output sensitivity. Also, the model produces predictions for the dynamics of cash flow volatility that are consistent with the time series properties of the firm-level data.
Customers and Retailer Growth
AbstractUsing the universe of Visa debit and credit card transactions in the U.S. from 2007–2017, we document the paramount importance of customers in accounting for sales variation across merchants, across stores within retail chains, and over time for individual stores. Customers, as opposed to transactions per customer or sales per transaction, consistently account for 80 to 90% of sales variation on these margins. According to a simple growth model in which retailers invest to improve their quality and to access customers, these facts suggest a larger role for entrants and a smaller role for incumbents in driving overall growth than one would infer from retailer life cycle sales alone.
London Business School
Princeton University and New York University
- E0 - General
- G0 - General