The Rise of Specialized Financial Products (with Ana Babus and Matias Marzani) [Paper] September 2023
The number of varieties of financial products that firms can use to raise funds from investors has rapidly expanded over the past decades. This paper studies innovation in financial products using a combination of granular data on security issuance and a model of allocation of financial products to firms in specific sectors. We find three key patterns. First, the differential adoption of products across firms explains most of the observed variation in the amounts of funds raised. Second, firms that adopt new products are more successful in raising funds. Finally, most funds raised from new financial products come from a large number of distinct products that are highly specialized in that only a few firms use them.
How do Entrant Build Market Share? The Role of Demand Frictions (with David Argente, Doireann Fitzgerald, and Anthony Priolo) [Paper] American Economic Review: Insights, conditionally accepted, June 2023
We construct a new data set to show that successful entrants in the consumer food sector build market share by adding new customers. Entrants do not use markup manipulation to reach new customers. They do so by entering more geographical markets, placing their product in more stores in these markets, and, for a positively selected subset of firms, by advertising direct to customers. These activities are costly and are associated with persistent increases in quantities sold, but no change in prices. This confirms a central role for marketing and advertising in overcoming demand-side frictions that slow firm growth.
We study the prevalence and implications of firms' strategic practices to patent but not commercialize new ideas. We develop a model illustrating that market leaders have higher incentives to use these practices, and we create a novel data set linking patents to products to evaluate the model's implications. We quantify that 62% of patents do not lead to product introductions. These patents imply a 2.5% reduction in the rate of creative destruction. The possibility of obtaining patent protection without product commercialization also reduces market leaders' innovation efforts, potentially reversing the benefits of the patent system as a whole.
We present a theory of firm size, where both scope and expertise are chosen endogenously. The extent to which expertise is scalable (applicable to multiple products), as opposed to local (specific to a particular product), is also chosen by the firm. We use data on multi-product and multi-establishment firms, and provide empirical evidence in support of the model's predictions.
Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles [Paper] April 2018
I provide new evidence that businesses born in downturns start on a smaller scale and remain smaller over their entire lifecycle, and no evidence that these differences attenuate even long after entry. Using data on the productivity and composition of startup businesses, I show that this persistence is related to selection at entry and demand-side channels. I build a model of firm dynamics that shows that when I mute the effects of selection mechanisms, the average initial size differences are more procyclical, but they are less persistent over time.
We document that the sales of individual products decline at a steady pace throughout most of their life cycles, mostly because the appeal of products declines with age. Our empirical and model-based results are consistent with products quickly becoming obsolete as they face competition from newer products of competing firms (business stealing) and from newer products of the same firm (cannibalization). [This paper was previously circulated as ''How do firms grow? The life cycle of products matters''.]
The last decades have seen large improvements in advertising technology that allowed firms to target better specific consumers’s tastes. This paper studies the relationship between digital advertising and the rise of product varieties using empirical evidence and a model. The model shows that improvements in digital advertising can drive the rise in product varieties over time. Causal empirical evidence, using detailed micro data on firms’ products and exogenous variation in consumers’ differential access to the internet, supports the suggested mechanism.
Product Innovation and Credit Market Disruptions (with João Granja) [Paper] Review of Financial Studies, September 2022
We provide new evidence that disruptions in firms’ access to credit during the Global Financial Crisis had significant effects on product innovation in the consumer-goods sector. We combine highly-granular retail-scan data with lending data and we find that credit-constrained firms introduced fewer new products, those products were less novel, and the new products sold less well. Overall, these findings suggest that disruptions to credit markets impair firms’ ability to compete for profits through new-product offerings..
We use detailed product- and firm-level data to study the sources of innovation over the period from 2007 to 2013. We document that: (i) entry and exit of products is prevalent among different types of firms; (ii) most reallocation of products occurs within the boundaries of the firm; (iii) product reallocation is strongly pro-cyclical and declined by more than 25 percent during the Great Recession.
The Life Cycle of Businesses and Their Internal Organization (with Elizabeth Weber Handwerker and David Piccone), AEA Papers and Proceedings, May 2021, 111:587-592 [Paper]
We document new stylized facts on the occupational mix of businesses in the U.S. and on how their internal organization evolves over their life cycles. Our main empirical finding is that younger businesses have fewer hierarchical layers and span of control than comparable older businesses. Our results suggest that businesses become more hierarchical and increase their managerial span of control over their life cycles. We show that this pattern is not entirely driven by selection or differences in size and is pervasive across cohorts and sectors.
Innovation for Innovators: The Financing of Intangibles (with Ana Babus and Matias Marzani), AEA Papers and Proceedings, May 2023, 113:268-273 [Paper]
This paper examines the characteristics of firms that adopt new financial products and its association with measures of performance. We build a novel firm-level panel dataset and document a positive association between intangible capital and the adoption of new products. We also find that access to external financing through new types of securities is associated with size growth and further investments into intangibles. These findings have important implications for understanding the role that financial innovation can play in meeting the financing needs of firms that rely heavily on intangible capital.
Firm Dynamics and Internal Organization (with Joana Silva)