Production Networks and Stock Returns: The Role of Vertical Creative Destruction

Michael Gofman, Gill Segal, Youchang Wu and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2020, vol. 33, issue 12, 5856-5905

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.

JEL-codes: G12 L14 L23 O33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (36)

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