Production networks and stock returns: The role of vertical creative destruction

Michael Gofman, Gill Segal, Youchang Wu

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)5856-5905
Number of pages50
JournalReview of Financial Studies
Volume33
Issue number12
DOIs
StatePublished - 1 Dec 2020
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Accounting
  • Finance

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