Creditor Control Rights and Product Strategy (Job Market Paper)
Abstract: Firms strategically liquidate their growth options and reputational capital in response to loan covenant violations. Using Amazon data in an event study framework, I find a decrease in both product portfolio size and product quality in the two quarters after a violation. I show that firms actively reduce product quality by identifying an increase in the rate of product failure. Violating firms concentrate their changes in product markets with more competitors and in less popular products. These changes align firms' product strategies with creditors' incentives after covenant violations.
Abstract: Using an instrumental variable approach, we find that domestic firms invest in their reputational capital in response to increases in international competition. Specifically, American firms increase the quality of their products after positive Chinese import competition shocks. We identify that this is an active decision by identifying product-level changes, finding significant reductions in the rate of product failures for domestic firms. Firms build reputational capital by increasing product quality, allowing them to differentiate their products from those of their competitors. We find that less diversified firms have a greater incentive to differentiate their products, as product portfolio size attenuates our results.
Abstract: I find that product quality decreases after firms complete their initial public offerings. Using Amazon data to span both public and private firms in an event study specification, I identify a decrease in average product ratings in the two quarters after the completion of firms' initial public offerings. The change in product quality is driven by increases in both the rate of negative brand recognition and the rate of negative customer service experiences.