Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification

Author/Editor:

Carlos Carvalho ; Gee Hee Hong ; Jing Zhou

Publication Date:

June 30, 2017

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Product scope adjustment is a key mechanism through which multi-product firms achieve efficient resource allocations. In this paper, we take a novel perspective to study firms’ product scope adjustment behavior through the lens of asset pricing. Using a unique panel scanner data set containing detailed information on products, matched with the financial information of their manufacturers, we find that multi-product firms with higher product turnover have lower financial risks and lower risk premia. To understand this channel, we propose a stylized model with a time-dependent (Calvo-type) product turnover rate to highlight the ’risk absorption channel’ of product scope adjustment. In response to an economy-wide shock, a firm that can adjust its product scope more flexibly shows lower excess equity returns and lower asset volatility.

Series:

Working Paper No. 17/146

English

Publication Date:

June 30, 2017

ISBN/ISSN:

9781484303764/1018-5941

Stock No:

WPIEA2017146

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

44

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