Financial Constraints and Product Market Decisions: The Role of Production Cycles

56 Pages Posted: 24 Sep 2020 Last revised: 28 Sep 2020

See all articles by Diogo Mendes

Diogo Mendes

Stockholm School of Economics; Swedish House of Finance

Date Written: March 1, 2020

Abstract

This paper studies how financial frictions affect product market decisions. As different products have different production cycles and generate cash-flow at different maturities, companies may adjust product mix in order to alleviate financial constraints. I use the wine sector in Portugal as a laboratory because product mix decisions can be identified and linked to cash-flow maturity. I exploit a banking regulatory shock which impacted negatively on credit availability, and I find that credit constrained firms change their product mix in response to the shock. Firms shift from long cash-flow maturity products to shorter ones. My results suggest that the adverse impact of financial constraints on product markets may be exacerbated with longer, less-flexible, production cycles.

Keywords: Corporate Finance, Financial Constraints, Product Mix, Cash Conversion Cycle

JEL Classification: D25, G30, G31, L15

Suggested Citation

Mendes, Diogo, Financial Constraints and Product Market Decisions: The Role of Production Cycles (March 1, 2020). Swedish House of Finance Research Paper No. 20-19, Available at SSRN: https://ssrn.com/abstract=3596061 or http://dx.doi.org/10.2139/ssrn.3596061

Diogo Mendes (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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