Product Market Strategy and Corporate Policies
70 Pages Posted: 12 Jul 2019 Last revised: 25 Nov 2019
Date Written: October 31, 2019
Corporate finance has related corporate policies to cash flow risk. I show that corporate valuation and policies are better understood when taking into account the dynamics of products, which microfound firms' cash flows. I demonstrate empirically that product portfolio age is negatively related to firm value, investment and leverage, consistent with the product life cycle channel. I quantify its importance by estimating a model of financing, investment, and product portfolio decisions. The model rationalizes the stylized facts by showing that capital investment and product introductions act as complements and that product dynamics induce stronger precautionary savings motives. The results indicate that product dynamics are important, as they explain 25% of variation in investment and leverage. The estimates imply that product life cycle effects are large and stronger among firms supplying fewer products and competing more intensely. Alleviating these effects can increase firm value by up to 4.5%.
Keywords: Product market strategy, product life cycle, investment, capital structure, structural estimation
JEL Classification: G31, G32
Suggested Citation: Suggested Citation