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Production Networks and Stock Returns: The Role of Creative Destruction

47 Pages Posted: 6 Jun 2017 Last revised: 1 Aug 2017

Michael Gofman

Simon School of Business

Gill Segal

Kenan-Flagler Business School, The University of North Carolina at Chapel Hill

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: July 31, 2017

Abstract

We establish a novel return spread based on the distance between firms and final consumers in a production network. Firms with the longest distance to consumers earn an excess monthly return of 105 basis points relative to final goods producers. We explain this spread quantitatively using a general equilibrium model with multiple layers of production. The driving force behind the spread is creative destruction, which reduces firms’ exposure to productivity shocks. The spread is smaller for firms that belong to supply chains with lower competition. Overall, our results demonstrate a novel effect of creative destruction on firms’ cost of capital.

Keywords: production networks, stock returns, creative destruction, monopolistic competition, technological innovations

Suggested Citation

Gofman, Michael and Segal, Gill and Wu, Youchang, Production Networks and Stock Returns: The Role of Creative Destruction (July 31, 2017). Available at SSRN: https://ssrn.com/abstract=2981447 or http://dx.doi.org/10.2139/ssrn.2981447

Michael Gofman (Contact Author)

Simon School of Business ( email )

Rochester, NY 14627
United States

HOME PAGE: http://gofman.info

Gill Segal

Kenan-Flagler Business School, The University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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