A seminar by Dr Winston Dou from the University of Pennsylvania
Title: Feedback and Contagion Through Distressed Competition
Abstract: Firms tend to compete more aggressively in financial distress; the intensified competition in turn reduces profit margins for everyone, pushing some further into distress. To study such feedback and contagion effects, we incorporate dynamic strategic competition into an industry equilibrium with long-term defaultable debt, which generates various peer interactions: predation, self-defense, and collaboration. Such interactions make cash flows, stock returns, and credit spreads interdependent across firms. Moreover, industries with competition under tacit coordination exhibit opposite dynamics, such as spillover behaviors and leverage strategies, to the benchmark where firms compete non-collusively. Finally, we exploit exogenous variations in market structure – large tariff cuts – to test the core competition mechanism.
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