Browsing by Subject "Financial constraints"

Now showing 1 - 2 of 2

Essays on corporate finance and product market competition
(2014-08) Lee, Bomi; Cohn, Jonathan B.; Titman, Sheridan
This dissertation contains two essays on the aggressive behavior of corporations in product market competition. In the first essay, I investigate how market structure can impact a firm's risk of facing predation by rivals, and hence, its financial policy decisions. Using a simple model, I demonstrate that a firm faces a greater predation threat when it meets the same competitor in many markets, as this competitor is able to internalize more of the benefit, degrading the firm's ability to compete in the future through aggressive actions today. I then test the predictions of the model using 2003-2011 panel data on store location across retail store chains in the US. I find that firms tend to expand more aggressively in markets shared with a competitor experiencing a substantial increase in leverage, or a decline in a credit rating, when they face that competitor in more of the other markets. The expansion relationship was found to be stronger in data from the 2008-2009 financial crisis, a period when difficulty in rolling over or obtaining new debt made it especially hard for weak firms to absorb losses. I also show that a firm facing the same competitors in many markets choose lower levels of leverage and that it decreases that leverage when a merger in the industry increases the amount of competitive overlap it has with other firms. These results suggest that firms are aware of the predation risk due to a competitive overlap and select financial policies to minimize this risk. In the second essay, I study the impact of internally generated funds on product market competition. More specifically, I investigate the idea that firms compete aggressively when their competitors face cash flow shortfalls. Testing this idea is challenging because competitor's cash flow changes are potentially endogenous with respect to firm's behavior. I address this problem in three ways. First, I investigate firm's reaction in a given market when its competitors face cash flow shortfalls outside of that market; this analysis is conducted using store location data on retail store chains. Second, I focus on the 2008-2009 financial crisis period in which retail store chains were hit by a negative demand shock which was hardly expected ex ante. Finally, I use a shock to local economic conditions which varies across markets and the different distributions of store locations across firms as instruments for the changes in competitors' cash flows. I find that a firm expands more in a given market in which it competes with rivals which face a more negative cash flow shortfall in the other markets. This relation is stronger when the competitors were highly leveraged before the crisis. Finally, I illustrate evidence that a firm responds more aggressively to competitor's cash flow shortfalls if it competes with that competitor in many of the same markets; this result is consistent with the prediction of the model in Chapter 1. These essays contribute to the literature by adding new evidence on the predatory behavior of corporations in product market competition.
Firm finances and responses to trade liberalization : evidence from U.S. tariffs on China
(2019-06-18) Schiff, Avishai; Cohn, Jonathan B.; Boehm, Christoph; Alti, Aydogan; Fracassi, Cesare; Titman, Sheridan
This dissertation examines the relationship between a firm's finances and its response to trade liberalization. Understanding how firms with different financial structures react to a major trade liberalization event sheds light both on an important real effect of financial frictions as well as on the underlying mechanisms of reorganization in the U.S. manufacturing sector. In the first chapter, I summarize the nascent yet growing literature at the intersection of corporate finance and trade economics and lay out the contribution of this research. In the second chapter, I provide institutional details on the natural experiment that lies at the heart of my empirical analysis. The conferral of Permanent Normal Trade Relations (PNTR) status to China, effective 2001, reduced uncertainty about future trade costs and facilitated investment in setting up import and distribution networks in China. I discuss the validity of the PNTR shock, arguing that it was an unexpected and material relaxation of trade barriers between the U.S. and China. I also lay out the main hypotheses relating firm finances and responses to freer trade. Increased import competition may represent a threat for many U.S. firms, especially those lacking the financial resources to properly respond. However, the opening of Chinese labor markets and the possibility of offshoring likely represents an important opportunity for firms with the financial wherewithal to invest in overseas production and import networks. While both channels translate to large domestic job losses, the underlying mechanisms and the firms responsible for the losses are very different. In the third and final chapter I use the PNTR shock, along with micro-level data from the U.S. Census Bureau, to empirically assess how firm finances relate to trade responses. I find larger manufacturing job losses in better capitalized firms - those with less leverage and more cash on hand. The effects concentrate in industries where weaker balance sheets are likely to lead to collateral and other borrowing constraints, helping rule out alternative explanations. Finally, domestic manufacturing job losses are not accompanied by greater reductions in sales or aggregate employment, but better capitalized firms do exhibit reduced input costs, increased productivity, and are more likely to invesst in establishing import networks in China. These findings point to offshoring as the predominant firm response to trade liberalization and suggest a role for financial capacity in facilitating offshoring investments.