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Finance and the Product Market

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Chicago Ballroom VIII
Hosted By: American Finance Association
  • Chair: Gregor Matvos, University of Chicago

Risk Management With Supply Contracts

Heitor Almeida
,
University of Illinois-Urbana-Champaign
Kristine Hankins
,
University of Kentucky
Ryan Williams
,
University of Arizona

Abstract

Purchase obligations are forward contracts with suppliers and are used more broadly than traded commodity derivatives. This paper is the first to document that these contracts are a risk management tool and have a material impact on corporate hedging activity. Firms that expand their risk management options following the introduction of steel futures contracts substitute financial hedging for purchase obligations. Contracting frictions – such as bargaining power and settlement risk – as well as potential hold-up issues associated with relationship-specific investment affects the use of purchase obligations in the cross-section as well as how firms respond to the introduction of steel futures.

Product Market Competition in a World of Cross-Ownership: Evidence From Institutional Blockholdings

Jie He
,
University of Georgia
Jiekun Huang
,
University of Illinois-Urbana-Champaign

Abstract

We analyze the effects of institutional cross-ownership of same-industry firms on product market performance and behavior. Our results show that cross-held firms experience significantly higher market share growth than non-cross-held firms. We establish causality by relying on a difference-in-differences approach based on the quasi-natural experiment of financial institution mergers. We also find evidence suggesting that institutional cross-ownership facilitates explicit forms of product market collaboration (such as within-industry joint ventures, strategic alliances, or within-industry acquisitions) and improves innovation productivity and operating profitability. Overall, our evidence indicates that cross-ownership by institutional blockholders offers strategic benefits by fostering product market coordination.

Financial Condition and Product Quality: The Case of Nonprofit Hospitals

Manuel Adelino
,
Duke University
Katharina Lewellen
,
Dartmouth College
William McCartney
,
Duke University

Abstract

Financial constraints can cause firms to reduce product quality, especially when quality is difficult for consumers to observe. This paper tests this hypothesis in the context of nonprofit hospitals. Using large samples of heart attack patients and child deliveries, we test whether hospitals shift towards more intensive and more profitable treatment options as a result of a financial shock—the 2008 financial crisis—and whether the shock led to worse patient outcomes. We show that the crisis was followed by an unprecedented drop in hospital capital investments yet we find no overall effects on treatment choices or patient outcomes. These results are similar for nonprofits and for-profits. We find evidence that hospital governance, in particular separation of management and doctor decision-making, plays a role in shielding patients from undesirable shifts in quality in response to financial shocks.
Discussant(s)
Michael Faulkender
,
University of Maryland
Martin Schmalz
,
University of Michigan
David Matsa
,
Northwestern University
JEL Classifications
  • G3 - Corporate Finance and Governance