Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification
IMF Working Papers, June 30, 2017
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- Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification
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Bibliographic details
- Authors: Carlos Carvalho, Gee Hee Hong, Jing Zhou
- Published: June 30, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484303764.001
Summary findings
- Product scope adjustment is a key mechanism through which multi-product firms achieve efficient resource allocations.
- Using a unique panel scanner data set containing detailed information on products, matched with the financial information of their manufacturers, the authors find that multi-product firms with higher product turnover have lower financial risks and lower risk premia.
- To understand this channel, the paper proposes 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.
Data and empirical approach
- Data: unique panel scanner data set with detailed product-level information matched to manufacturers’ financial information.
- Empirical regularity: higher product turnover in multi-product firms is associated with lower financial risk measures and lower required risk premia.
Theoretical model
- Model feature: stylized model with a time-dependent (Calvo-type) product turnover rate.
- Mechanism emphasized: ’risk absorption channel’ of product scope adjustment, whereby scope flexibility attenuates firms’ exposure to economy-wide shocks.
- Implication: greater flexibility in product scope adjustment translates into lower excess equity returns and reduced asset volatility following aggregate shocks.
Policy implications and interpretation
- Product scope adjustment functions as an internal risk diversification mechanism for multi-product firms.
- Firms and policymakers assessing corporate risk and valuation should account for the role of product turnover and scope flexibility in absorbing aggregate shocks.
Subjects and keywords
- Subject: Asset prices, Consumption, Financial institutions, Income, Labor, National accounts, Prices, Stocks
- Keywords: Asset prices, Consumption, creation rate, destruction rate, firm dynamics, Income, margin adjustment, mi mathcolor, multi-product firm, multi-product firms, product scope, risk diversification, Stocks, substitution effect, WP
Content in this bundle
- Extensive Margin Adjustment of Multi-product Firm and Risk Diversification, WP/17/146, June 2017