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Finance and Product Markets

Paper Session

Sunday, Jan. 3, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Rohan Williamson, Georgetown University

Product Market Strategy and Corporate Policies

Jakub Hajda
,
University of Lausanne
Boris Nikolov
,
University of Lausanne and Swiss Finance Institute

Abstract

How does product life cycle affect investment and financing? To answer this question, we structurally estimate a dynamic model where the firm chooses product portfolio characteristics that influence cash flow dynamics and shape corporate policies. In the model, the firm trades off higher profitability of newer products versus product introduction costs. Using disaggregated product-level data, we find that the product dimension is critical in quantitatively explaining cash flow dynamics, investment and financing, and has materially important valuation effects. In particular, we show that product introductions and capital investment act as complements and that product dynamics induce stronger precautionary savings motives. Our estimates reveal that the product life cycle effect is more pronounced for firms with smaller product portfolios, supplying less unique products, and competing more intensely.

Competition Laws and Corporate Innovation

Ross Levine
,
University of California-Berkeley
Chen Lin
,
University of Hong Kong
Lai Wei
,
Lingnan University
Wensi Xie
,
Chinese University of Hong Kong

Abstract

We examine the impact of competition laws on innovation. We create a unique firm-level dataset on patenting activities that includes over 1.2 million firm-year observations, across 66 countries, from 1991 through 2015. Using a new, comprehensive dataset on competition laws, we find that more stringent competition laws (laws designed to intensify competition) are associated with increases in the number, impact, and explorative nature of firms’ patents. The innovative-enhancing effects of competition laws are stronger among firms that are better positioned to access external finance to invest in innovation, e.g., less financially constrained and publicly listed firms. The innovative-enhancing effects are smaller among familycontrolled firms, where the family tends have a large proportion of its wealth concentrated in the firm and is correspondingly more averse to the firm making risky investments in innovation. Our results also hold when using a country-industry dataset covering 186 countries over the 1888-2015 period.

Life Cycles of Firm Disclosures

AJ Yuan Chen
,
University of Southern California
Gerard Hoberg
,
University of Southern California
Vojislav Maksimovic
,
University of Maryland

Abstract

We propose that product life cycle is important in understanding firm disclosure policies and test this hypothesis using a text-based empirical life cycle model. Mature-stage life cycle firms disclose more, consistent with an outward-focused strategy that lowers search costs for synergistic partners. Early-stage life cycle firms are more secretive, potentially mitigating competitive threats. These results obtain across disclosure measures relating to intellectual property, redaction of contracts, and readability. Patterns of SEC Edgar search by peer firms further validate our framework, and our results are amplified when product market peer life cycle stages reflect those of the focal firm.
Discussant(s)
Evgeny Lyandres
,
Tel Aviv University
Yifei Mao
,
Cornell University
Rene Stulz
,
Ohio State University
JEL Classifications
  • G3 - Corporate Finance and Governance