Corporate Investment in the Modern Economy
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Andrea Eisfeldt, University of California-Los Angeles
Product Life Cycles in Corporate Finance
AbstractWe develop a novel 10-K text-based model of product life-cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the explanatory power of investment-Q models, and reveals a natural ordering of investments driven by the product life cycle. Firms initially focus on R&D, which additionally is sensitive to Q. CAPX emerges second. Acquisitions then arise as firms mature, and divestitures as firms decline. In aggregate, major shifts toward dynamic life cycle stages substantially explain the increase in the explanatory power of Q-models.
The Rise of Star Firms: Intangible Capital and Competition
AbstractThere is much concern about a growing divergence in rates of return between a small group of star firms and the rest of the economy. If due to market power, such divergence signals adverse implications for investment, innovation, and customers. Using conventional return calculations, we indeed show a divergence, especially in industries that rely on a skilled labor force. However, we show that the divergence results from the mismeasurement of invested capital. Once intangible capital is accounted for, this gap has not been widening over time. Moreover, star firms produce more per dollar of invested capital, innovate more, have higher growth, and invest more. Higher productivity appears to be a better predictor of star status than high markups. A small subset of exceptional firms may pose more pressing policy concerns with much higher returns and the potential to exercise market power in the future.
The Impact of the Opioid Crisis on Firm Value and Investment
AbstractHigh rates of opioid abuse have had a significant impact on the United States including implications for firms which must now contend with a lower pool of available and productive workers. This paper documents a negative effect of instrumented opioid prescriptions and subsequent individual employment outcomes. In turn, this impacts firms as we show a negative relationship between
opioid prescriptions and subsequent firm growth. We also show that firms respond to the labor shortage by investing more in technology, substituting capital for labor to mitigate some of the costs otherwise expected due to the decline in labor supply. Moreover, we establish a causal link between opioids and firm values using the staggered passage of state laws intended to limit opioid prescriptions. Following the passage of these laws, we find a 40 basis point increase in the cumulative abnormal return of the average firm and a 70 basis point increase for firms that are less capital intensive pre-treatment and thus
more dependent on labor inputs.
- G3 - Corporate Finance and Governance