Product Market Strategy and Corporate Policies
64 Pages Posted: 12 Jul 2019
Date Written: June 10, 2019
I study how product market strategy influences corporate investment and financing policy. Using data on firms' product portfolio structure, I show that product portfolio age is negatively related to firm value, investment and leverage, consistent with the product life cycle channel. An estimated dynamic model of firms' financing, investment, and product portfolio decisions shows that the negative relationships exist because capital investment and product introductions act as complements, leading to a stronger precautionary savings motive when the firm's product portfolio ages. The structural estimates imply large effects of the product life cycle channel, with firms acting as if new products were twice as profitable as old ones, and document that firms are more exposed to product-level economic forces when they supply fewer products and compete more intensely. Counterfactual analysis implies that alleviating product life cycle effects can increase firm value by up to 3.5%.
Keywords: Product market strategy, product life cycle, investment, capital structure, structural estimation
JEL Classification: G31, G32
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