Conference Agenda

A firm’s gross margin increases by 0.8 p.p. after forming a new direct board connection to a product market peer. Gross margin also rises by 0.4 p.p. after a connection is formed to a peer indirectly through a third intermediate firm. Further, using barcode-level data of 2.7 million products, we show that new board connections are related to higher consumer good prices, a greater tendency for market allocation, and slower new product introductions. The effects are stronger when the newly connected peers share corporate customers or have similar business descriptions and hold when controlling for other inter-firm relationships.

Using data on firms' self-declared competition networks, we identify over ten competition communities in the U.S. economy, defined as groups of firms within and across industries that are direct or indirect competitors. Based on this observation, we build a model in which firms strategically respond to their direct and indirect competitors in both product market and financing. Due to predatory strategic interactions, shocks to a firm can impact any other firm's financing decision in the same competition community. The model predicts complementarity in financing when the competition community's network structure is of heavy-tailed degree distribution, which we validate empirically.

We show how the threat of “uncertainty-induced zombification”—creditors’ willingness to keep their distressed borrowers alive when faced with uncertainty—shapes various industry dynamics. Under a real options framework, we demonstrate that unlevered firms become reluctant to invest and disinvest in anticipation that uncertainty induces creditors to convert defaulting rival firms into zombies. We validate our theory using dynamic, industry-specific estimates of expected uncertainty induced zombification together with loan contract-level data. Empirically, higher uncertainty-led rival zombification expectations prompt healthy firms to reduce their costly-to-reverse capital investment and disinvestment, hiring, and establishment-level openings and closures (intensive and extensive margins are affected). We confirm those dynamics using granular, near-universal data on the asset allocation decisions of global shipping firms. Critically, uncertainty-led zombification expectations depress healthy firms’ sales, profits, and stock returns. Our results reveal nuanced effects on creative destruction—while healthy firms’ asset allocation slows down, their innovation activity accelerates. Our findings highlight a novel channel through which uncertainty shapes firms’ capital accumulation, distorting their real and financial policies and performance.