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Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification

Author

Listed:
  • Carlos Carvalho
  • Mr. Gee Hee Hong
  • Jing Zhou

Abstract

Product scope adjustment is a key mechanism through which multi-product firms achieve efficient resource allocations. In this paper, we take a novel perspective to study firms’ product scope adjustment behavior through the lens of asset pricing. Using a unique panel scanner data set containing detailed information on products, matched with the financial information of their manufacturers, we find that multi-product firms with higher product turnover have lower financial risks and lower risk premia. To understand this channel, we propose a stylized model with a time-dependent (Calvo-type) product turnover rate to highlight the ’risk absorption channel’ of product scope adjustment. In response to an economy-wide shock, a firm that can adjust its product scope more flexibly shows lower excess equity returns and lower asset volatility.

Suggested Citation

  • Carlos Carvalho & Mr. Gee Hee Hong & Jing Zhou, 2017. "Extensive Margin Adjustment of Multi-Product Firm and Risk Diversification," IMF Working Papers 2017/146, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/146
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    Cited by:

    1. R. Monin & M. Suarez Castillo, 2020. "Product switching, market power and distance to core competency," Documents de Travail de l'Insee - INSEE Working Papers g2020-06, Institut National de la Statistique et des Etudes Economiques.

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