Review of Financial Studies Vol. 33 No. 12 2020
Production Networks and Stock Returns: The Role of Vertical Creative Destruction
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.
- DOI
- 10.1093/rfs/hhaa034
- Volume
- 33
- Issue
- 12
- Pages
- 5856-5905
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref