Product Market Interactions Research Articles

Debt enforcement, financial leverage, and product failures: Evidence from China and the United States

AbstractBuilding on capital structure and product market interactions, and the role of debt enforcement in leveraged firms' investments, we examine whether cross‐country debt enforcement can produce different associations between financial leverage and product failures. Results show that different debt enforcement systems can generate opposite leverage effects. In countries with weak/nearly ineffective debt enforcement, financial leverage shows an incentive investment effect due to low default costs, and thus highly leveraged firms tend to invest more and are less likely to have product failures. Conversely, in countries with strict/effective debt enforcement, distressed companies tend to have an underinvestment effect and more product failures.

Entrepreneurial optimism and creative destruction

Using textual analysis of annual reports of US-listed firms, we provide empirical evidence that uncertainty (rather than risk) and optimism are distinctive characteristics of high-impact entrepreneurial firms (recently listed firms) relative to old incumbent firms. We construct an entrepreneurial entry predation model with uncertainty based on this evidence. We show that optimistic entrepreneurs may enter markets that otherwise would be blocked from entry by incumbents’ predatory threats. Thus entrepreneurial optimism may be to the benefit of consumers. Entrepreneurial optimism can also create a strategic advantage for entrepreneurs since incumbents may react by being less aggressive in product market interactions, which will benefit the profitability of the entrepreneur’s venture and consumers via lower prices.

Cost of high leverage in socially responsible firms in a linear dynamic panel model. Evidence from product market interactions

Corporate Social responsibility is the major challenge for senior management of firms and they devoted the significant resources for CSR initiatives. Despite of significant comprehension of CSR, an ongoing debate is still under consideration about its economic repercussions in terms of “do well by doing good”. Corporations are facing huge leverage cost with bad customer reputation in the product market. This study attempt to examine this phenomenon as the cost of high leverage in socially responsible firms and the product market interactions of those firms. The data is collected from 2009-2020 in linear dynamic setting for product market interaction, and two step system GMM estimation technique is applied for endogeneity concerns. The study identified that socially responsible firms are experiencing better growth in their sales in product market that maximize the financial benefits. However, the high leverage cost worsen their performance in product market because leverage is associated with some losses in market share due to unfavorable actions of competitors and customers. Socially responsible firms experience the low cost of high leverage which helps the firms to increase the performance in product market. Moreover, the corporate governance effectively devises the strategies to diminish the high leverage cost in the way towards better product market interactions. The results are conclusive across the financial crisis, firm’s classifications and different channels of firms. The study enables the holistic and broader understanding of CSR in the reduction of high leverage cost with an intention to increase the firm’s sustainability in product market. The study contributes with a view to ascertain the cost of high leverage in socially responsible firms for product market interactions of Pakistani firms in a linear dynamic panel.

Do Firms Benefit from Taking Heterogeneous Debt? International Evidence from Capital Structure and Product Market Interactions

Do Firms Benefit from Taking Heterogeneous Debt? International Evidence from Capital Structure and Product Market Interactions

Industry informational interactions and corporate fraud

We examine three information channels through which product market interactions in an industry can affect firms' incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firms' information and greater use of relative performance evaluation encourage the commission of financial fraud. Industry structures that give rise to less collection of information about individual firms decrease the probability of fraud detection and increase the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

The role of creditor rights on capital structure and product market interactions: International evidence

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights into the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Does corporate social responsibility reduce the costs of high leverage? Evidence from capital structure and product market interactions

Abstract Research on capital structure and product market interactions shows that high leverage is associated with substantial losses in market share due to unfavorable actions by customers and competitors. We examine whether corporate social responsibility (CSR) affects firms’ interactions with customers and competitors, and whether it can reduce the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. By reducing adverse behavior by customers and competitors, CSR helps highly leveraged firms keep customers and guard against rivals’ predation. Our results support the stakeholder value maximization view of CSR.

Does Corporate Social Responsibility Reduce the Costs of High Leverage? Evidence from Capital Structure and Product Markets Interactions

Research on capital structure and product market interactions shows that high leverage is associated with substantial losses in market share due to unfavorable actions by customers and competitors. We examine whether corporate social responsibility (CSR) affects firms’ interactions with customers and competitors, and whether it can reduce the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. By reducing adverse behavior by customers and competitors, CSR helps highly leveraged firms keep customers and guard against rivals’ predation. Our results support the stakeholder value maximization view of CSR.

Common Ownership, Competition, and Top Management Incentives

Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.

The Dark-Side Effects of Creditor Rights: Evidence from Capital Structure and Product Market Interactions

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights to the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Competence, Desert and Trust — Why are Women Penalized in Online Product Market Interactions?

AbstractWhy do women sellers in product markets receive lower prices than men sellers when selling the same identical products? This Article investigates the effects of cultural beliefs about competence, desert and trust on market interactions with women and men sellers. We use an experimental approach to show that the prices people are willing to pay for the exact same product (a $100 Amazon gift card) are affected by cultural beliefs about gender; when a woman sells a gift card, she is likely to receive five percent less for it, compared to when a man does. Our analysis further suggests that it is beliefs about women’s relative competence and moral entitlement that drive the gender price gap in product markets. When the participants in the experiment were presented with information that suggested that the woman seller was a competent or entitled seller, no gender price differences were found between such women sellers and their equally qualified male counterparts. Nonetheless, information about the trustworthiness of sellers did not decrease the gap between women and men sellers. This suggests that price gaps between women and men in product markets are not generated by beliefs about the trustworthiness of women and men.

How Does Corporate Investment Respond to Increased Entry Threat?

We study how product-market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals’ entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: it concentrates in markets in which competitive actions are strategic substitutes, where deterring entry is costly and investment makes incumbents look soft. Our results provide novel evidence on how and why firms’ interactions influence corporate investment. Received August 10, 2015; accepted December 1, 2015 by Editor Efraim Benmelech.

Product Market Interactions and Corporate Fraud

We examine three information channels through which product market interactions in an industry can affect firms’ incentives to misreport financial information to investors. We find that lower product market sensitivity to individual firm’ information and greater use of relative performance evaluation encourage the commission of financial fraud. Less collection of information about individual firms decreases the probability of fraud detection and increases the probability of fraud commission. We also examine dynamic effects of fraud. Our results suggest that, in fragmented industries, fraud can amplify cyclical fluctuations in the real economy.

Competitive Pressure and Corporate Policies

We study how product market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals' entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: It concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Our results provide novel evidence on how and why firms' interactions influence corporate investment.

Financial Strength and Product Market Competition: Evidence from Asbestos Litigation

AbstractWe study the role of financial strength on product market competition by examining exogenous shocks to a firm’s liability structure arising from asbestos litigation. We find that exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

Product Market Interactions and the Propensity to Restructure in Bankruptcy

In this paper we model the spillovers from the restructuring of a financially distressed firm on other firms and the feedback effects from the restructuring. Our results indicate that the spillover and feedback effects are complex and are determined by several factors including the level of information asymmetry regarding the restructuring firm, its direct bankruptcy cost, bankruptcy's effect on its competitiveness, and the nature of its economic linkages with the other firms. For example, when the information asymmetry about a firm's prospects is sufficiently high, its bankruptcy can lower both its competitor's stock price and the probability that the competitor will restructure in bankruptcy, while raising the price of its competitor's debt. A sufficiently large decline in the level of information asymmetry can cause these price and bankruptcy probability effects to reverse. Switching from competitive to a customer-supplier relationship also reverses the price and bankruptcy probability spillover effects.

Services Provision and Temporary Mobility: Freedoms and Regulation in the EU

International posting of workers and mobility of self-employed service suppliers lie between outright migration and trade in goods: their regulation, for both distributional and marketcorrecting purposes, is not as difficult to harmonize as that of labour markets, but personal mobility is more visible and socially intrusive than product market interactions. This paper analyzes economic and legal tensions between national regulatory frameworks and international competition in these areas, in both the intra-EU and global contexts, highlighting how interactions between the external and internal roles of the European Commission may foster efficient integration of markets and policies in this and other fields.

Services Provision and Temporary Mobility: Freedoms and Regulation in the EU

International posting of workers and mobility of self-employed service suppliers lie between outright migration and trade in goods: their regulation, for both distributional and market correcting purposes, is not as difficult to harmonize as that of labour markets, but personal mobility is more visible and socially intrusive than product market interactions. This paper analyzes economic and legal tensions between national regulatory frameworks and international competition in these areas, in both the intra-EU and global contexts, highlighting how interactions between the external and internal roles of the European Commission may foster efficient integration of markets and policies in this and other fields.

The information content of trading halts

We investigate the impact of trading halts of NYSE-listed stocks on informationally related securities that continue to trade during the period of the halt. Informational relationships are established for companies in the same four-digit SIC industry based on the correlation of returns, volume, volatility, and the adverse selection components of spreads. We find a significant liquidity impact on informationally related securities with spreads and price impact of trades having substantial increases. However, we also find that quoted depths, the number of trades, and trade volume significantly increase. Our results are consistent with the trading halt model of Spiegel and Subrahmanyam [2000. Asymmetric information and news disclosure rules. Journal of Financial Intermediation 9, 363–403] and with the informed trading model of Tookes [2008. Information, trading, and product market interactions: cross-sectional implications of informed trading. Journal of Finance 63, 379–413]. In addition, our results indicate that there is a common liquidity response of informationally related securities to firm-specific trading halts.

Information, Trading, and Product Market Interactions: Cross‐sectional Implications of Informed Trading

ABSTRACTI present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information‐based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms.