Extensive Margin Adjustment Of Multi Product Firm And Risk Diversification
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Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification
Author | : Carlos Carvalho |
Publisher | : International Monetary Fund |
Total Pages | : 44 |
Release | : 2017-06-30 |
Genre | : Business & Economics |
ISBN | : 148430702X |
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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.
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