Jaideep Shenoy

An Examination of the Efficiency, Foreclosure, and Collusion Rationales for Vertical Takeovers

We investigate the efficiency, foreclosure, and collusion rationales for vertical integration in a large sample of vertically related takeovers. The efficiency rationale, as discussed under the transaction cost economics and property rights theories, posits that vertical integration mitigates contractual inefficiencies between suppliers and customers (termed as holdup) and provides incentives to undertake relationship-specific investments. In contrast, the foreclosure and collusion rationales suggest that vertical integration is anticompetitive in nature. Specifically, the foreclosure argument suggests that vertical integration is used to raise costs of rival firms, and the collusion argument suggests that vertical integration facilitates coordination between the integrated firm and its rivals. To distinguish between the three hypotheses, we examine (1) the announcement period wealth effects to the merging firms, rival firms, and customer firms; and (2) the operating performance changes to the merging firms in vertical takeovers. We find that firms expand their vertical boundaries consistent with an efficiency enhancing rationale. This paper was accepted by Brad Barber, finance.

Customer-Supplier Relationships and Liquidity Management: The Joint Effects of Trade Credit and Bank Lines of Credit

We examine the determinants of trade credit for a sample of U.S. public firms while controlling for supply-side and demand-side factors. Our dataset contains characteristics of suppliers and their key customers matched with data on their access to short-term financing through lines of credit. We find that suppliers that have access to a bank line of credit and a lower probability of financial distress have higher amounts of outstanding trade credit to their customers. Further, we find that supplier firms have higher amounts of outstanding trade credit when their customers lack access to a bank line of credit, have a higher probability of bankruptcy, and are more financially constrained. We also show that liquidity shocks to supplier firms influence the amount of trade credit outstanding.

On the Determinants, Financial and Operating Consequences, and the Product Market Effects of Product Recalls

We study a large sample of product recalls that include a wide variety of products such as consumer products, food, drug, medical devices, and automobiles and show that such product quality failures have significant adverse value consequences for the recalling firms. Our analysis sheds light on factors that affect the incidence of product recalls, the financial and operating consequences for the recalling firms, and the actions taken by them in response to the recall. We also study the value implications for the rivals and suppliers – which enable us to draw important inferences about product market linkages. We find that the financial condition, competitive position, coordination costs, incentives of workers and management, and monitoring environment impact recall likelihood. Recall events result in significant costs for key suppliers which are further exacerbated if they have made larger relationship-specific investments. Further, instead of benefiting from the recalling firms’ problems, industry rivals suffer adverse contagion effects, perhaps due to anticipated regulation and diminished perceptions about the product category. We find that a larger investment in brand capital alleviates the negative wealth effects for the recalling firms. Finally, using a difference-in-differences approach, we find that recalling firms suffer sales declines and increase advertising expenditures – consequences and policy changes that we further show are not just due to a continuation of a differential trend from before the recall event and, therefore, directly attributable to the recall.

Impact of Financial Leverage on the Incidence and Severity of Product Failures: Evidence from Product Recalls

We study the impact of the financial condition of firms on firms’ ability to produce safer products that result in fewer recalls. Using a variety of tests, including two quasi-natural experiments that result in exogenous negative industry cash-flow shocks, we find that firms with higher leverage or distress likelihood have a greater probability of a product recall. These firms also face more frequent and severe recalls. Further, firms with more debt due at the onset of the financial crisis experience a greater likelihood and frequency of recalls. We conclude that a firm’s financial condition has real effects that impact product safety.

An Investigation of Pooled Purchasing as a Source of Value Creation in Diversifying Acquisitions

In this paper, we take a broad product markets approach to examine the sources of value creation in diversifying acquisitions. We find that our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, negatively related to the change in cogs-to-sales of merging firms, and negatively related to the wealth effects of common supplier industry firms and rival firms. Furthermore, we document post-acquisition decreases in output prices for the main common supplier industry. The above results cannot be explained by negative demand shocks in acquiring firm industries. These results highlight the benefits of pooled purchasing in diversifying acquisitions. Additionally, greater asset complementarities and increased debt capacity also generate larger gains for the merging firms.We examine buyer power as a source of value creation in conglomerate acquisitions. We find that an increase in buyer power is positively related to the combined wealth effect of merging firms and negatively related to both the wealth effect of supplier firms and acquirer rival firms. We document post-acquisition decreases in both output prices for supplier industries and cogsto-sales for merging firms. Our results cannot be explained by asset complementarities between merging firms, pre-acquisition declining trends in output prices in supplier industries, or negative demand shocks in acquiring firm industries. Overall, our evidence supports buyer power in conglomerate acquisitions. JEL classification: G34, L22, L25, D57

Value Creation in Diversifying Acquisitions

In this paper, we take a broad product markets approach to examine the sources of value creation in diversifying acquisitions. We find that our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, negatively related to the change in cogs-to-sales of merging firms, and negatively related to the wealth effects of common supplier industry firms and rival firms. Furthermore, we document post-acquisition decreases in output prices for the main common supplier industry. The above results cannot be explained by negative demand shocks in acquiring firm industries. These results highlight the benefits of pooled purchasing in diversifying acquisitions. Additionally, greater asset complementarities and increased debt capacity also generate larger gains for the merging firms.We examine buyer power as a source of value creation in conglomerate acquisitions. We find that an increase in buyer power is positively related to the combined wealth effect of merging firms and negatively related to both the wealth effect of supplier firms and acquirer rival firms. We document post-acquisition decreases in both output prices for supplier industries and cogsto-sales for merging firms. Our results cannot be explained by asset complementarities between merging firms, pre-acquisition declining trends in output prices in supplier industries, or negative demand shocks in acquiring firm industries. Overall, our evidence supports buyer power in conglomerate acquisitions. JEL classification: G34, L22, L25, D57

An Investigation of Pooled Purchasing, Asset Complementarities, and Increased Debt Capacity as Sources of Value Creation in Diversifying Acquisitions

In this paper, we take a broad product markets approach to examine the sources of value creation in diversifying acquisitions. We find that our proxies for the merging firms’ change in purchasing concentration are positively related to the combined wealth effect of merging firms, negatively related to the change in cogs-to-sales of merging firms, and negatively related to the wealth effects of common supplier industry firms and rival firms. Furthermore, we document post-acquisition decreases in output prices for the main common supplier industry. The above results cannot be explained by negative demand shocks in acquiring firm industries. These results highlight the benefits of pooled purchasing in diversifying acquisitions. Additionally, greater asset complementarities and increased debt capacity also generate larger gains for the merging firms.We examine buyer power as a source of value creation in conglomerate acquisitions. We find that an increase in buyer power is positively related to the combined wealth effect of merging firms and negatively related to both the wealth effect of supplier firms and acquirer rival firms. We document post-acquisition decreases in both output prices for supplier industries and cogsto-sales for merging firms. Our results cannot be explained by asset complementarities between merging firms, pre-acquisition declining trends in output prices in supplier industries, or negative demand shocks in acquiring firm industries. Overall, our evidence supports buyer power in conglomerate acquisitions. JEL classification: G34, L22, L25, D57

Stock Returns and the Competitive Effects of Debt

Prior studies examine real firm behavior and show that high debt makes a firm vulnerable in the product market. In this study, we assess the economic magnitude of competitive effects of debt by examining stock returns. For identification, we use a double-layer of contrasts by conditioning our tests across the business cycle and varying product differentiation environments. Firms with high relative-to-industry debt experience significantly lower stock returns during recessions but similar returns during normal times compared to firms with low relative-to-industry debt. The results are driven by the sub-sample of firms with low product differentiation where the competitive effects of debt should be the strongest. Returns are 9% lower during recessions for firms with above industry median debt in this sub-sample. This finding is robust to alternative explanations such as endogeneity, mechanical leverage effects, business risk, debt overhang, and customer warranty concerns. We also link real effects to stock returns by showing that debt-induced sales growth is a significant determinant of stock returns. Our finding that the competitive effects of debt have an economically significant effect on stock returns is important to investment bankers who advise firms on capital structure decisions, chief financial officers, corporate treasurers, and equity money managers.