Product Market Concentration, Financing Constraints, and Firms' Business Cycle Sensitivity
Pontuch, Peter (2011), Product Market Concentration, Financing Constraints, and Firms' Business Cycle Sensitivity, 2011 FMA Annual Meeting, 2011-10, Denver, Etats-Unis
TypeCommunication / Conférence
Conference title2011 FMA Annual Meeting
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Abstract (EN)We study the effects of product market concentration and financing constraints, separately and jointly, on the business cycle sensitivity of firms' operations. We confirm that the sensitivity is higher for firms in industries with both a low concentration and a relatively even distribution of market power (truly competitive industries) and lower for firms in concentrated industries. Next, we find that financially constrained firms are in general more sensitive to the cycle, but they also have a less favorable exposure to leading downturn indicators (CP spread or bond spread). This suggests that constrained firms are the first to be affected by turnarounds in the business cycle, consistent with a financial accelerator effect. However we show that this effect of financing constraints is mostly present in truly competitive industries, and less so in concentrated industries. Lastly we find that financing constraints have a significant impact on competition mechanisms, proxied by the cross-sectional mean-reversion of company profitability.
Subjects / Keywordsprofitability mean-reversion; firm profitability; business cycle; financing constraints; product market competition
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