Creative Destruction and the Bright Side of Economic Downturns

39 Pages Posted: 30 Jun 2020

See all articles by Shahram Amini

Shahram Amini

University of Denver

Andrew MacKinlay

Virginia Tech

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: June 10, 2020

Abstract

We find that business cycles drive productive economic churn. During recessions, firms with high previous abnormal investment scale back while firms with low abnormal investment scale up. These findings are consistent with an improvement in investment efficiency over the business cycle. Our estimates suggest that an average firm cuts inefficient investment during recessions by at least 7%, or roughly $145M. Valuation ratios converge similarly with inefficient firms showing relative improvement. Our results are stronger for less entrenched firms and firms with more shareholder filings (13D/G), which point to shareholder monitoring as an economic channel. Overall, investment efficiency appears to improve in recessions and decline in expansions, supporting Schumpeter's notion of creative destruction.

Keywords: Investment Efficiency, Economic Downturns, Overinvestment, Underinvestment, Shareholder Monitoring, Managerial Entrenchment

JEL Classification: G0, G30, G32

Suggested Citation

Amini, Shahram and MacKinlay, Andrew and Weston, James Peter, Creative Destruction and the Bright Side of Economic Downturns (June 10, 2020). Available at SSRN: https://ssrn.com/abstract=3624454 or http://dx.doi.org/10.2139/ssrn.3624454

Shahram Amini (Contact Author)

University of Denver ( email )

2101 S. University Blvd
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United States

HOME PAGE: http://https://daniels.du.edu/directory/shahram-amini/

Andrew MacKinlay

Virginia Tech ( email )

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880 West Campus Drive
Blacksburg, VA 24060-0221
United States

James Peter Weston

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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