Product Market Effects Research Articles

Product Market Effects of Customer Referencing

Customer referencing refers to the phenomenon of a firm intentionally revealing its customers so that the firm can obtain certification of the quality of its products. In this paper, we examine the association between customer referencing and firms’ future product market performance. We find that firms that engage in customer referencing achieve better product market performance than those that do not, which is consistent with the notion that customer referencing, by certifying the referencing firm’s product quality, enhances the firm’s future product market performance. We also find that this positive association is stronger when the referenced customers are reputable and when the referencing firms have a greater need for certification. These results further affirm the certification role of customer referencing. Our study provides new insight into how certification via inter-organizational relationships can be an intangible marketing asset.

Product market competition with CDS

We show that firms grow faster than their industry rivals if there are credit default swaps (CDS) referencing their debt. Using multiple approaches to addressing endogeneity concerns including synthetic difference-in-differences and novel instrumental variables, we find the product market effects of CDS likely to be causal. We provide evidence for two mechanisms driving the CDS effects: the reduction of creditor monitoring and the elevation of shareholder risk-taking. A detailed analysis of product market dynamics reveals that CDS firms achieve faster growth by reducing markups, developing new products, and encroaching on rivals' product space. Over the long run, these strategies increase industry concentration and help profitability growth. Consistent with the classic predation theories, our findings suggest that financial innovations that change incentive problems in financial contracting can have real effects on product market outcomes.

The dynamics of preemptive and follower investments with overlapping ownership

We study how overlapping ownership affects investments in a preemption race with market uncertainty. Internalization of rival payoffs delays follower entry if product market effects are moderate, implying longer incumbency which intensifies the race to lead. Preemptive and follower investment thresholds increase with volatility as in standard real option models but firm value can decrease, and greater volatility makes internalization more profitable. From a welfare perspective there is a tradeoff between a dynamic benefit and a static cost of overlapping ownership. Whereas it is socially optimal not to have any overlapping ownership in some markets, at low volatility levels we find firms have an insufficient incentive to internalize.

The Dynamics of Investments With Overlapping Ownership

We study how overlapping ownership affects investments in a preemption race with market uncertainty. Internalization of rival payoffs delays follower entry if product market effects are moderate, implying longer incumbency which intensifies dynamic competition. Preemptive and follower investment thresholds increase with volatility as in standard real option models whereas firm value can decrease, and greater volatility makes internalization more profitable. From a welfare perspective there is a tradeoff between dynamic benefit and static costs of overlapping ownership. Whereas it is socially optimal not to have any overlapping ownership in some markets, at low volatility levels we find firms have an insufficient incentive to internalize.

Why Do Accruals Predict Earnings?

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high — and, in equilibrium, transitory — true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.

Why do accruals predict earnings?

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.

Product market effects of IFRS adoption

Prior literature finds that International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-à-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU, in a matched sample of public and private firms, and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find that IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption.

Dynamic Decomposition of Factors Influencing the Export Growth of China’s Wood Forest Products

Wood forest products (WFPs) are globally important environmental products, with economic, ecological, and renewable characteristics. China is the world’s largest WFP exporter. However, many factors, such as the downturn of traditional major export markets and the rise of the price of production factors, have generated great challenges and uncertainties for China’s WFP export market. This study improves the product scope of WFPs. The category of WFPs has been expanded to 14 categories and 30 sub-categories, which is more detailed and more developed than in previous literature. Based on the United Nations’ Comtrade Database (COMTRADE), this paper uses the revised constant market share (CMS) model to measure and analyze empirically the factors affecting the export growth of China’s WFPs from the perspective of market, structure, and competitiveness. It is found that (1) the competitive effect exerts the biggest influence on export growth, followed by market size effects, with the effects of market distribution and product structure both being small; (2) wooden furniture, wooden products, plywood, paper, and its products play a main role in enhancing the competitive effect in China’s WFPs; and (3) China’s WFPs have a strong market competitiveness in other markets such as the USA, China Hong Kong, United Kingdom, Japan, Australia, Malaysia, and Singapore. Therefore, it is crucial for China’s WFP market to improve its product structure effects and market distribution effects in order for it to participate in international competition. On the other hand, considering that China’s exports of WFPs mainly consist of resource- and labor-intensive products, the improvement of standards such as the technology level, environmental protection and sustainable development, must not be ignored.

The Product Market Effects of Derivatives Trading: Evidence from Credit Default Swaps

We find that firms’ market share grows significantly faster if they have credit default swaps (CDS) traded on their debt. We use multiple approaches including overlap weighting analysis to draw causal inference about the effect of CDS on market share. CDS-referenced firms achieve growth by reducing markups, developing new products, and encroaching rivals’ product space. The CDS effects are more pronounced for firms with greater technological uncertainties and in industries with more growth opportunities. Our findings are consistent with the view that the availability of CDS mitigates creditors’ agency concerns and encourages product innovations. Overall, we provide novel evidence of increase in consumer welfare associated with financial market innovations.

Product market effects of real estate collateral

This paper exploits shocks to the value of real estate collateral to study how exogenous changes in firms' external financing capacity affect their competitive performance and industry dynamics. Firms with appreciating collateral tend to gain market share relative to their product market rivals. Shocks to collateral lead to less competitive product markets. The effects of collateral are stronger in markets where firms compete in strategic substitutes or face competitors with restricted access to external financing, and when real estate prices are instrumented with the interaction between housing supply constraints and mortgage rates. These results highlight the strategic importance of collateral.

The product market effects of hedge fund activism

We examine the product market spillover effects of hedge fund activism (HFA) on the industry rivals of target firms. HFA has negative real and stockholder wealth effects on the average rival firm. The effects on rivals' product market performance is commensurate with post-activism improvements in target's productivity, cost and capital allocation efficiency, and product differentiation. Financially constrained rivals accommodate these improvements but those facing high intervention threat respond effectively to them. The spillover effects are strengthened in less concentrated and low entry barrier industries. The results are robust to the alternative hypothesis of strategic target selection by hedge funds.

Product Market Effects of Real Estate Collateral

Product Market Effects of Real Estate Collateral

Financial Leverage, Product Quality Failures, and Product Market Effects: Evidence from Product Recalls

We study the impact of financial leverage on severe product quality failures that result in product recalls. Using a variety of tests, including two quasi-natural experiments that result in exogenous negative cash flow shocks to firms, we find that firms with higher financial leverage or likelihood of distress have a greater probability of a product recall. This is consistent with the view that these firms face investment distortions, either due to financial constraints or debt overhang, which adversely affect product quality. Further tests indicate that financial constraints, more so than debt overhang, have a greater economic impact in explaining the quality-leverage relation. Consistent with the view that taking on high debt relative to rivals makes the firm a weaker competitor, we find that recalling firms with high relative leverage experience more negative wealth effects to recalls while their industry rivals experience more positive wealth effects. These effects are, however, confined to the sub-sample of recalls in oligopolistic industries, where strategic interactions between firms are more likely. Key suppliers’ losses are exacerbated when they have more leverage or have committed larger relationship-specific investments. Overall, our paper highlights the effect of leverage not only on product quality at the firm level, but also on the broader product market effects of product quality failures.

Creative Destruction and Productive Preemption

We develop a theory of commercialization mode (entry or sale) of entrepreneurial inventions into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Moreover, preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using detailed data on patents granted to small firms and individuals, we find evidence that high-quality inventions are often sold, and that they are sold under bidding competition.

On the Determinants, Financial and Operating Consequences, and the Product Market Effects of Product Recalls

We study a large sample of product recalls that include a wide variety of products such as consumer products, food, drug, medical devices, and automobiles and show that such product quality failures have significant adverse value consequences for the recalling firms. Our analysis sheds light on factors that affect the incidence of product recalls, the financial and operating consequences for the recalling firms, and the actions taken by them in response to the recall. We also study the value implications for the rivals and suppliers – which enable us to draw important inferences about product market linkages. We find that the financial condition, competitive position, coordination costs, incentives of workers and management, and monitoring environment impact recall likelihood. Recall events result in significant costs for key suppliers which are further exacerbated if they have made larger relationship-specific investments. Further, instead of benefiting from the recalling firms’ problems, industry rivals suffer adverse contagion effects, perhaps due to anticipated regulation and diminished perceptions about the product category. We find that a larger investment in brand capital alleviates the negative wealth effects for the recalling firms. Finally, using a difference-in-differences approach, we find that recalling firms suffer sales declines and increase advertising expenditures – consequences and policy changes that we further show are not just due to a continuation of a differential trend from before the recall event and, therefore, directly attributable to the recall.

Corporate restructuring and product market behaviour

This article investigates the relationship between product market behaviour and corporate restructuring policies. We focus on two types of corporate restructuring events: acquisitions and divestitures. We find that 1 year after acquisition, acquiring firms on average experience long-term deteriorating product market performance. In addition, acquiring firms in industries with less competition have worse performance in subsequent years. In comparison, divesting firms experience no significant change in the performance after divestitures. Last, we document that a sustainable product market improvement is related to higher stock market valuation while a temporary improvement have negative effects. Therefore, we show that corporate restructuring has an important firm-value implication through the channel of product market effects.

Creative Destruction and Productive Preemption

We develop a theory of innovation for entry and sale into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under bidding competition. Asymmetric informatio np roblems are shown to be solved by verification through entry for sale.

The effects of trade liberalization on productivity growth in Brazil: competition or technology?

This paper examines the effects of trade liberalization on productivity growth in Brazil. In contrast with the previous literature, we examine whether this relationship is driven by product or input market effects, by including both output and input tariffs in firm-level productivity regressions and allowing for imperfect competition in the product market. The results show that the reductions of input tariffs were more important to explain the productivity growth that took place during trade liberalization in Brazil. Moreover, we find that the reduction in input tariffs led to a rise in mark-ups, while the reduction in output tariffs did the opposite.

The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists, and Oligopolists

Exit of venture-backed firms often takes place through sales to incumbents. We show that in such an environment, venture-backed firms have a stronger incentive to develop basic innovations into commercialized innovations than incumbents, due to strategic product market effects on the sales price of the venture-backed firm. This will increase the price for basic innovations, thereby triggering more innovations by entrepreneurs. Consequently, a venture capital market implies that more innovations are created, and that these become better developed. Moreover, we show that to exist in equilibrium, venture capitalist must be more efficient, otherwise incumbents will preempt venture capitalists entering the market by acquiring basic innovations.

Structural Effects of Platform Certification on a Complementary Product Market

This article examines the structural effects of platform certification on the supply of complementary products. Drawing on the exploratory case of mobile application markets, the article highlights the broader market effects of competing platforms and their certifications on a platform-based complementary product market. The case suggests that platform certifications influence market intermediation, entry barriers, and deployment fragmentation. We present these market effects in a conceptual model that can be applied to understand similar complementary product markets. As such, the article contributes to the literature on compatibility standards by emphasizing some of the complementary product market effects of employing certification in enhancing compatibility.