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CFGE-16: Spillover effects
Business Group Spillovers: Evidence from the Golden Quadrilateral in India
1HKUST, Hong Kong S.A.R. (China); 2Columbia University and NBER
We compare the investment behavior of standalone firms in different geographical areas after a positive shock to the local investment opportunities generated by a large-scale highway development project. We show that the investment behavior of standalone firms is affected by the density of business groups in the local area, with higher density associated with lower standalone investment. We find evidence in support of a financing mechanism driving this effect: Following the shock, banks disproportionally allocate new loans to business group affiliates, denying standalone firms of external finance. Moreover, we show that standalone firms deprived of finance have higher profitability and TFP than business group affiliates. Overall, our study documents the costs of conglomeration wherein business groups inhibit the growth of standalone firms.
Corporate rivalry and return comovement
1NHH Norwegian School of Economics; 2Tuck School of Business at Dartmouth, USA; 3California Institute of Technology, USA
We study changes in extra-factor, extra-industry return comovement among rival firms as they react to increased competition. Theory of industrial organization suggests that rivals will generally react in one of two ways: increase product differentiation from (become less similar to) close rivals, or reduce differentiation (become more similar) to take advantage of cost-saving scale economies. As changes in idiosyncratic return comovement reflect the resulting changes in underlying cash-flows correlations, our evidence is informative about these two mutually exclusive reaction functions. Notwithstanding substantial cross-industry heterogeneity, rivals typically become more-not less-similar.
Institutional horizontal shareholdings and generic entry in the pharmaceutical industry
1Chinese University of Hong Kong, Hong Kong S.A.R. (China); 2Tuck School of Business at Dartmouth College
Brand-name pharmaceutical companies often file lawsuits against generic drug manufacturers that challenge the monopoly status of patent-protected drugs. Institutional horizontal shareholdings, measured by the weight of generic shareholders' ownership in the brand-name company relative to their ownership in the generic manufacturer, are significantly positively associated with the likelihood that the two parties will enter into a settlement agreement in which the brand pays the generic to stay out of the market. Horizontal shareholdings are also positively associated with the brand's daily abnormal returns around the settlement agreement. Generic manufacturers who settle with the brand-name company and receive a 180 day period of marketing exclusivity are more likely to delay the sale of generic substitutes if they have higher horizontal shareholdings with the brand-name firms. These delays preclude other generic firms from entering the market.
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