Financial Constraints and Product Market Decisions: The Role of Production Cycles
56 Pages Posted: 24 Sep 2020 Last revised: 28 Sep 2020
Date Written: March 1, 2020
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: Suggested Citation