{
  "title": "Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification",
  "publication": "IMF Working Papers, June 30, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/06/29/extensive-margin-adjustment-of-multi-product-firm-and-risk-diversification-44972",
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  "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.",
  "sections": [
    {
      "heading": "Summary findings",
      "content": "- Product scope adjustment is a key mechanism through which multi-product firms achieve efficient resource allocations.\n- 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.\n- 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.\n- 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."
    },
    {
      "heading": "Data and empirical approach",
      "content": "- Data: unique panel scanner data set with detailed product-level information matched to manufacturers’ financial information.\n- Empirical regularity: higher product turnover in multi-product firms is associated with lower financial risk measures and lower required risk premia."
    },
    {
      "heading": "Theoretical model",
      "content": "- Model feature: stylized model with a time-dependent (Calvo-type) product turnover rate.\n- Mechanism emphasized: ’risk absorption channel’ of product scope adjustment, whereby scope flexibility attenuates firms’ exposure to economy-wide shocks.\n- Implication: greater flexibility in product scope adjustment translates into lower excess equity returns and reduced asset volatility following aggregate shocks."
    },
    {
      "heading": "Policy implications and interpretation",
      "content": "- Product scope adjustment functions as an internal risk diversification mechanism for multi-product firms.\n- Firms and policymakers assessing corporate risk and valuation should account for the role of product turnover and scope flexibility in absorbing aggregate shocks."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subject: Asset prices, Consumption, Financial institutions, Income, Labor, National accounts, Prices, Stocks\n- 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\n\n---\n\n Content in this bundle\n\n- Extensive Margin Adjustment of Multi-product Firm and Risk Diversification, WP/17/146, June 2017\n  - Extensive Margin Adjustment of Multi-product Firm and Risk Diversification, WP/17/146, June 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Extensive Margin Adjustment of Multi-product Firm and Risk Diversification, WP/17/146, June 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/06/29/extensive-margin-adjustment-of-multi-product-firm-and-risk-diversification-44972"
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    "Authors: Carlos Carvalho, Gee Hee Hong, Jing Zhou",
    "Published: June 30, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484303764.001",
    "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: 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.",
    "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.",
    "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.",
    "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",
    "**Extensive Margin Adjustment of Multi-product Firm and Risk Diversification, WP/17/146, June 2017**"
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