Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification

By Carlos Carvalho, Gee Hee Hong, Jing Zhou

June 30, 2017

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Carlos Carvalho, Gee Hee Hong, and Jing Zhou. Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification, (USA: International Monetary Fund, 2017) accessed November 21, 2024

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.

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

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/146
Stock No:

WPIEA2017146
ISBN:

9781484303764
ISSN:

1018-5941

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