Firm Relationships and Valuation

30 Pages Posted: 29 Oct 2019

See all articles by Jordi Mondria

Jordi Mondria

University of Toronto - Department of Economics

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: October 19, 2019

Abstract

We propose a model to study firm relationships that endogenously determine the correlation structure of asset cash flows. Forming a relationship makes firms face the following trade-off in their valuations: On the one hand, collaboration generates an additional payoff component with a positive mean. On the other hand, a relationship makes the firms' cash flows more correlated, which lowers the investor's diversification benefit. We use our model to investigate the incentives of firms to form a relationship and to disclose their relationship to the general public. We show that disclosing relationship information can have real consequences on cash flows through affecting firm relationship at both the intensive and the extensive margins.

Keywords: firm relationships, asset prices, disclosure, matching quality, collaboration intensity

JEL Classification: G12, G14, D83

Suggested Citation

Mondria, Jordi and Yang, Liyan, Firm Relationships and Valuation (October 19, 2019). Available at SSRN: https://ssrn.com/abstract=3472332

Jordi Mondria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
1-416-978-1494 (Phone)

HOME PAGE: http://individual.utoronto.ca/jmondria/

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
21
Abstract Views
129
PlumX Metrics