Product Market Strategy and Corporate Policies
115 Pages Posted: 12 Jul 2019 Last revised: 13 Jan 2023
Date Written: June 10, 2022
Abstract
We examine how product life cycle affects investment and financing by estimating an industry equilibrium model that embeds product portfolio characteristics. In the model, firms trade off higher profitability of newer products versus product introduction costs. Using product-level data, we find that the product dimension is critical in quantitatively explaining cash flow dynamics, corporate policies, and industry structure. We show that product introductions and capital investment are complements and that product dynamics incentivize preserving more debt capacity. Our estimates reveal that product life cycle is more pronounced for firms with smaller and more concentrated product portfolios as well as those with high product variety.
Keywords: Product market strategy, product life cycle, investment, capital structure, structural estimation
JEL Classification: G31, G32
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