Exposure to Superstar Firms and Financial Distress

74 Pages Posted: 19 Jul 2023 Last revised: 6 Feb 2024

See all articles by Stephanie F. Cheng

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Regina Wittenberg Moerman

University of Southern California

Wuyang Zhao

McGill University - Desautels Faculty of Management

Date Written: January 30, 2024

Abstract

A small minority of highly successful firms (referred to as superstar firms) have captured large market shares and earned massive profits in recent decades. In this study, we examine whether superstar firms are associated with a greater likelihood of financial distress of firms that are exposed to them in product markets. Building on recent research that shows that superstar firms are associated with increasing aggregate markups, we identify superstars as firms with the highest markups in the industry and whose industry markup share is increasing over time. We then measure a focal firm’s overall exposure to superstars by employing product similarity scores. We document that firms with greater exposure to superstars in product markets are more likely to subsequently file for bankruptcy. We also shed light on the underlying channels through which superstar exposure is associated with bankruptcy and show that firms with the greater superstar exposure exhibit weaker financial performance and greater riskiness. Furthermore, we show that the association between superstar exposure and the likelihood of bankruptcy is stronger when superstar firms have greater market power. This association is also concentrated among focal firms that are less innovative, have lower credit financing flexibility, and those with less favorable product market dynamics, as these firms are less likely to withstand the competitive pressure from superstar firms. Finally, we triangulate our primary evidence by providing suggestive evidence that sophisticated market participants account for the adverse effects of superstar exposure in their decision-making.

Keywords: Superstar Firms; Financial Distress; Bankruptcy; Financial Performance; Innovation; Product Market Exposure

JEL Classification: G33, M40, M41

Suggested Citation

Cheng, Stephanie F. and Vyas, Dushyantkumar and Wittenberg Moerman, Regina and Zhao, Wuyang, Exposure to Superstar Firms and Financial Distress (January 30, 2024). Available at SSRN: https://ssrn.com/abstract=4506218 or http://dx.doi.org/10.2139/ssrn.4506218

Stephanie F. Cheng

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Dushyantkumar Vyas (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6
Canada

Regina Wittenberg Moerman

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Wuyang Zhao

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5

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