Gabriel Natividad

Financial Slack, Strategy, and Competition in Movie Distribution

Organizations that enjoy some slack are believed to make good use of it in their strategic decisions. Using panel data on firms in the U.S. film distribution industry between 1985 and 2007, this article examines how financial slack affects the volume of new product introductions, the competitive strategies for those releases, and their economic performance. Unexpectedly successful “sleeper” films are exploited as a source of exogenous financial slack in the econometric analysis. The results suggest that unexpected financial slack leads to more product introductions, less marketing support for the new products, and no improvement in performance. These findings are consistent with an attribution process in which managers attempt to replicate extraordinary success even if it is largely random, providing real-world evidence of a mechanism recently developed in theory and laboratory research.

Box‐Office Demand: The Importance of Being #1

We propose a theoretical framework to understand the effect on a movies eventual theatrical success of leading the box office during the opening weekend. We consider two possible channels: a positive shock to the utility from watching the movie and a greater awareness of the movies existence. We derive a series of testable predictions, which we test on U.S. box office data. The results suggest that being #1 in sales during the opening weekend has an economically and statistically significant effect on the movies total demand; and that the primary channel for this effect is through the greater awareness induced by being #1.

Business Microloans for U.S. Subprime Borrowers

We show that business microloans to U.S. subprime borrowers have a very large impact on subsequent firm success. Using data on startup loan applicants from a lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on firms. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues and create more jobs. Loans are more consequential for survival among subprime business owners with more education and less managerial experience.A lot. Using data on startup loan applicants from a U.S. lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on entrepreneurial success. Obtaining a loan has a strong effect on the future financial position of startups. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues and create more jobs. Loans are more consequential for survival among entrepreneurs with more education and less managerial experience. Access to credit creates a skewed firm size distribution by enabling quite small firms to succeed. We would like to thank Catherine Meyrat, Nelly Rojas-Moreno, and Duangkamol Phuengpanyalert for their guidance about institutional details. We also thank Rosy Manzanarez, Alejandra Garcia, and Siddharth Subramanian for their research support. We are grateful for comments from seminar participants at Instituto de Empresa, NYU Stern, Rutgers, UCLA and Wharton. Garmaise gratefully acknowledges support from the Harold and Pauline Price Center. Contact information: cesare.fracassi@mccombs.utexas.edu, mark.garmaise@anderson.ucla.edu, shimon.kogan@austin.utexas.edu, gnativid@stern.nyu.edu. Small entrepreneurial firms represent a strikingly large portion of the American economy. Basic indicators such as GDP growth, job creation, innovation rate, and wealth accumulation all depend to a great extent on the success of newly founded organizations constantly revitalizing U.S. markets. Given the collective size and dynamism of this sector of the economy, the role of financial institutions in funding nascent firms has become a central area of research and debate. In this paper we consider two main questions. First, to what extent do formal loans matter for entrepreneurial success in the U.S.? Second, what types of entrepreneurs experience the greatest benefits from receiving this credit? On the first issue of the importance of credit, consider a potential loan to a small firm from a given lender. It may be argued that this funding will have a large impact on the firm’s success, as loans constitute a major source of entrepreneurial financing (Robb and Robinson (2012)), and early-stage credit may enable entrepreneurial ventures to invest in value-creating opportunities and achieve necessary scale. On the other hand, there are reasons to suggest that the effect of the loan will be minimal. Specifically, there is evidence that entrepreneurs who cannot obtain bank financing are of relatively low quality (Kerr and Nanda (2009), Cetorelli (2009) and Andersen and Nielsen (2012)). In that case, good firms that are rejected by this one lender will find financing elsewhere, while poor firms that do receive a loan will be unlikely to succeed in any event. Moreover, there are indications that liquidity constraints do not matter much for entrepreneurial firm creation (Hurst and Lusardi (2004)) and some surveys suggest that small firms are unlikely to be financially constrained (Angelini and Generale (2008)). Further, there has been considerable debate on whether financial constraints matter for small-firm growth trajectories in developed economies, as financial capital may be substituted for by other available factors (e.g., Carpenter and Petersen (2002) and Beck, Demirguc-Kunt, and Maksimovic (2005)) and entrepreneurs may For example, the U.S. Census reports that there were 22.6 million nonfarm sole proprietorships and 3.1 million partnerships in 2008, together accounting for 42.4% of all business net income in that year.

Multidivisional strategy and investment returns

This paper studies the influence of multidivisional structure on investment returns using a large database of projects in the U.S. film distribution industry, a setting in which divisionalization exists without horizontal diversification - all divisions of multidivisional distributors release feature films. The findings are consistent with a positive effect of multidivisional strategy on investment returns, even if total investment need not increase. Multidivisional strategies are more consequential for higher profitability when firms share key human talent across their divisions.

Interdependence and Performance: A Natural Experiment in Firm Scope

This paper shows how interdependencies influence performance following a reduction in firm scope. We test the predictions of the theory using detailed microdata on every Peruvian fishing firm before and after a regulatory ban on mackerel fishing, finding that a reduction in the scope of activities causes the productivity of firms’ legacy anchovy operations to fall sharply, before recovering in the long run. The results are most pronounced for firms with the strongest interdependencies between activities. Moreover, we find evidence that the persistence of the productivity decline is explicitly tied to a failure to adapt quickly following the ban. Consistent with our conceptual characterization, the evidence suggests that interdependencies between activities simultaneously create benefits as well as costs, but that costs are more persistent when the firm reduces its scope of activities.

Quotas, Productivity, and Prices: The Case of Anchovy Fishing

I exploit a 2009 reform that introduced individual fishing quotas (catch shares) for Peruvian anchovy – the largest fishery in the world – to assess the causal impact of production quotas on within-firm productivity and market prices. Unique features of the data allow me to create two alternative counterfactuals: (i) anchovy fishing operations in a region of the country that was mandated to implement quotas with a delay, and (ii) variation in quota allocations across ships. I find that quotas do not increase within-asset or within-firm productivity in quantities. Instead, a 200% increase in anchovy prices benefits extraction firms through higher revenues, consistent with two mechanisms enacted by individual fishing quotas: more orderly industry operations reducing excess supply and an increase in bargaining power of extraction firms with respect to fish-processing. Several market characteristics across geographies differentially affect market prices after the quota regime. Supplementary evidence on fewer operational infractions, higher product quality, and a lower banking delinquency observed during the quota regime suggests the existence of efficiency gains rather than purely rent transfers.

Cross-selling in the US home video industry

We identify significant cross-selling effects in the home video industry: a 10% increase in the demand for a studios old titles leads to a 4.7% increase in new title sales. We argue this is due to supply-side effects: studios with strong titles are better able to “push” other titles through retailers; and the latter “push” these additional supplies to consumers by means of lower prices and/or heavier advertising. Our strategy for identifying causality is based on “star power” effects: increases in old movie demand caused by recent success of movies with a similar cast and/or director.

Competing for Deal Flow in Mortgage Markets

The U.S. mortgage market exhibits competitive instability in which some lenders emerge rapidly from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we link this instability to strong positive and convex feedback effects in mortgage financing: future applicants are especially attracted to the current fastest growing lenders. We show that the quickest-growing (not the largest) competitors divert applications and originations from other lenders. Facing a quickly-growing competitor, banks charge higher interest rates, partially due to the increased risk of their loans.