Production Networks and Stock Returns: The Role of Vertical Creative Destruction

Review of Financial Studies (Forthcoming)

90 Pages Posted: 6 Jun 2017 Last revised: 2 Feb 2020

See all articles by Michael Gofman

Michael Gofman

Simon School of Business

Gill Segal

University of North Carolina (UNC) at Chapel Hill - Finance Area

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: January 19, 2020

Abstract

We examine empirically and theoretically the relation between firms' risk and their distance to consumers in a production network. We document two novel facts: firms that are further away from consumers have higher risk premia and higher exposures to aggregate productivity. We quantitatively explain these findings using a general equilibrium model featuring a multi-layer production process. The economic force is vertical creative destruction" --- positive productivity shocks to suppliers devalue customers' assets-in-place, which lowers the cyclicality of downstream firms' values. We show that vertical creative destruction varies with competition and firm characteristics, and generates sizable cross-sectional differences in risk premia.

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

JEL Classification: G10, G12

Suggested Citation

Gofman, Michael and Segal, Gill and Wu, Youchang, Production Networks and Stock Returns: The Role of Vertical Creative Destruction (January 19, 2020). Review of Financial Studies (Forthcoming), 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

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
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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