Financial Shocks in Production Chains

Transcription

1 Financial Shocks in Production Chains Sebnem Kalemli-Ozcan Se-Jik Kim Hyun Song Shin Bent E. Sørensen Sevcan Yesiltas Philadelphia AEA Meetings 2014

2 Financial Shocks in Production Chains 1 Limits to Length of Production Chains Technological Kremer (1993), Jones (2009) Bargaining and incentives Disorganization in the former command economies (Blanchard and Kremer (1997), Marin and Schnitzer (2004)) Evidence in Gofman (2009) Net working capital is the glue that binds firms in a production chain Net working capital is equity stake in the production chain as a whole Delay in payment builds up net working capital

3 Financial Shocks in Production Chains 2 Developed Country Corporate Balance Sheets France Germany Japan U.K. U.S. Accounts Receivable Accounts Payable Cash (% of total assets) Rajan and Zingales (J. of F. 1995)

4 Financial Shocks in Production Chains 3 Production Chain Final output sold by firm0at priceq. Final output N downstream upstream Firmi+1 supplies intermediate good to firmi. There is a time to build in production process. Success of project depends on effort of all firms in the production chain.

5 Financial Shocks in Production Chains 4 Cash Flows before Transfers Firms 0 1 N 1 N 0 w N 1 w N 1 w N date. w N 1 w N t N 1 w 1 w N 1 w N N w 0 w 1 w N 1 w N N+1 q w 0 w 1 w N 1 w N N+2 q w 0 w 1 w N 1 w N..... Wage costw i cannot be deferred, and must draw on firmi s cash holdings.

6 Financial Shocks in Production Chains 5 Technology In each period, firmichooses from{high effort, low effort} Private benefit from low effort,bw i (b>0) Probability of failure 0 if all exert high effort,εif one or more exert low effort Borrowing rate r used to discount cashflows Zero liquidation value of firms

7 Financial Shocks in Production Chains 6 Recursive Moral Hazard Paymentp i to firmiby firmi 1 for intermediate good. Deviations from high effort deterred by large enough skin in the game (Kim and Shin (2012), multi-firm version of Holmstrom and Tirole (1997)) where p i p i+1 +(1+b i )w i b i = b r(1+r)i ε (IC)

8 Financial Shocks in Production Chains 7 Recursive Moral Hazard p i N k=i (1+b k )w k Prices{p i } incorporate rents{b k w k } for all the upstream firmsk along the production chain Chain unravels unlessq N k=0 (1+b k)w k Parallels with disorganization (Blanchard and Kremer (97))

9 Financial Shocks in Production Chains 8 Working Capital as Glue Firmireceives payment from firmi 1 after delay ofd i periods. Accounts payable amortized at constant ratea i p i (actuarially fair). Distinction between invoiceprice (1+a i )p i fundamentalprice p i. Incentive compatibility constraint with accounts receivable/payable (1+a i )p i (1+a i+1 )p i+1 +(1+b i )w i

10 Financial Shocks in Production Chains 9 Hurdle prices p i 1 1+a i N k=i (1+b k )w k IC constraint can be relaxed by accumulating receivables. But IR constraint limits how far IC constraint can be relaxed. (IC)

11 Financial Shocks in Production Chains 10 Optimal Contract Maximize surplus for firm0subject to (IC) and (IR) for upstream firms. Production chain is sustainable if expected profit of firm 0 is non-negative under the optimal contract. a i p i a i+1 p i+1 = (1+r)w i rp i+1 +(1+b i )w i = b i r p i+1 r w i w i b(1+r) i = p i+1 1 rw i ε w i

12 Financial Shocks in Production Chains 11 Net Working Capital Evaluating flows as perpetuities, receivables (R i ) and payables (P i ) statisfy R i P i = b(1+r) i ε p i+1 w i 1 w i Expression in brackets is increasing in i ( upstreamness ) increasing in r (financial tightness) but there is fundamental constraint given byp 0 q

13 Financial Shocks in Production Chains 12 Empirical Hypotheses Proposition 1. Net receivables relative tow i is higher for upstream firms Proposition 2. Net working capital is increasing inrfor low values ofr. However, ifr>r for thresholdr, net working capital is declining inr.

14 Financial Shocks in Production Chains 13 Upstreamness Fally (2011), Antras, Chor, Fally and Hillberry (2012) and Antras and Chor (2013) Input-Output matrix; sector-level measure: U i =1+ N j=1 d ij Y j Y i U j d ij Y j /Y i is share of sectori s total output purchased by sectorj.

15 Financial Shocks in Production Chains 14 Data OECD input-output tables for 16 countries Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Italy, Netherlands, Portugal, Slovakia, Slovenia, Spain, and United States 18 sub-industries of manufacturing Annual firm-level data from ORBIS; sample > 150,000 firms, > 600,000 firm-year observations

16 Financial Shocks in Production Chains 15 Figure 1. Median normalized end-year working capital for US firms classified into upstream, downstream and all firms

17 Financial Shocks in Production Chains 16 Dependent variables ( REC OR ) (PAY OR ) (N REC OR ) (WC OR ) UPS 0.014*** 0.005*** 0.009*** 0.013*** (47.29) (21.23) (31.65) (32.62) country fixed effects yes yes yes yes year fixed effects yes yes yes yes AdjustedR Obs

18 Financial Shocks in Production Chains 17 Dependent variables ( REC OR ) (PAY OR ) (N REC OR ) (WC OR ) UPS 0.015*** 0.005*** 0.010*** 0.011*** (47.77) (20.13) (33.24) (27.42) UPS spread 0.018*** 0.017*** 0.010*** 0.010*** 0.008*** 0.007*** 0.014*** 0.015*** (8.52) (8.32) (6.23) (6.25) (3.70) (3.46) (5.06) (5.44) UPS spread *** *** *** *** * ** *** *** (-6.87) (-7.13) (-6.32) (-6.20) (-1.96) (-2.29) (-7.22) (-8.11) country fixed effects yes yes yes yes yes yes yes yes year fixed effects yes yes yes yes yes yes yes yes sector fixed effects no yes no yes no yes no yes AdjustedR Obs

19 Financial Shocks in Production Chains 18 Panel A: Dependent variable, average growth of WC OR (04 06) UPS UPS 0.029* (1.80) Country fixed effects yes AdjustedR Obs Panel B: Dependent variable, average growth of WC OR (07 09) UPS UPS *** (-2.83) Country effects yes AdjustedR Obs

20 Financial Shocks in Production Chains 19 Dependent variable, average growth of WC OR (07 09) average growth of WC OR (04 06) ** ** (-2.57) (-2.43) Country fixed effects yes yes Sector fixed effects no yes Clustered std. errors by no no AdjustedR Obs

21 Financial Shocks in Production Chains 20 Industrial Development How can developing countries with poorly capitalized firms achieve lengthening of production chain? Two hurdles: Working capital to finance the initial triangle of costs Sustaining long production chain Both can be solved if firms have sufficient initial capital (by using IR slack to relax IC) Both are problematic when firms are poorly capitalized

22 Financial Shocks in Production Chains 21 Comparative Industrial Structure Financial interlinkages in supply chain through accounts receivables and payables may mitigate inefficiency due to bargaining and incentives Efficiency through delayed settlement Possible explanation for why accounts receivable and payable are so large? Downside of delayed settlement is large demands on working capital Equity capital accumulation brings economic efficiency gains