Abstract
We examine empirically and theoretically the relation between firms' risk and distance to consumers in a production network. We document two novel facts: Firms farther away from consumers have higher risk premiums and higher exposure to aggregate productivity. We quantitatively explain these findings using a general equilibrium model featuring a multilayer production process. The economic force is "vertical creative destruction,"that is, positive productivity shocks to suppliers devalue customers' assets-in-place, thereby lowering the cyclicality of downstream firms' values. We show that vertical creative destruction varies with competition and firm characteristics and generates sizable cross-sectional differences in risk premiums.
Original language | English |
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Pages (from-to) | 5856-5905 |
Number of pages | 50 |
Journal | Review of Financial Studies |
Volume | 33 |
Issue number | 12 |
DOIs | |
State | Published - 1 Dec 2020 |
Externally published | Yes |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Accounting
- Finance