Working Papers

Product Market Competition and Strategic New Product Releases, Job Market Paper

Draft available upon request

Economic theory suggests that strategic releases of new products can deter entrants and preempt competition. However, tracking new products is challenging due to the multitude of brands and product models. I build disclosure-based measures of new products using new product announcements collected from newswires, and examine how product market competition affects firms’ new product releases. Using plausibly exogenous variations in tariff changes as a proxy for foreign competition, I find that firms are more likely to release new products when competition increases. Consistent with my predictions, I also find that the effect concentrates in industries that have higher sales concentration and lower patenting barriers, and in well-performing firms. Additionally, I find descriptive evidence that industry-wide new product releases are negatively correlated with concurrent foreign import changes. Taken together, my results suggest that firms respond to potential foreign competition with new products to deter entrants.

Are Accruals Smoothing Earnings, Relative to Cash Flows, with Panos Patatoukas, Jacob Thomas and Frank Zhang

Under major revisions; Available upon request.

We investigate two aspects of earnings smoothing via accruals that are consistent with accounting rule changes causing a decline in measures of accounting quality. First, since 2000 accruals cause earnings to be far more volatile than cash flow from operations (CFO). We find this surprising result is unrepresentative, driven by the disproportionate influence of firms with negative CFO and low total assets (the deflator commonly used). We consider three other deflators—sales, market capitalization, and number of shares—as well as different specifications and diagnostics to determine distortion caused by deflation. We find number of shares produces the least distortion, and volatility of earnings is only about half that of CFO. Second, “smoothing coefficients”—slopes from annual cross-sectional regressions of accruals on CFO—based on per share data have become less negative over time. We find this trend is likely due to changes in operating characteristics, mainly a decline in inventory levels, not changes in accounting rules.

Understanding Analysts’ Use of Macroeconomic News, with Hui Ding and Frank Zhang

Using the Macroeconomic News Index (MNI), a newswire-based comprehensive measure of macroeconomic news, we examine how analysts incorporate macroeconomic news in their earnings forecasts. We find analysts incorporate but underreact to the MNI. We also show that the MNI differs conceptually from GDP news and has different implications for investors’ reaction. Decomposing the MNI into specific components, we find that labor market, housing, and industrial production news are informative about firm fundamentals, but analysts underreact to the latter two news components. We also document that macroeconomic news has heterogeneous effects on different industries and that analysts’ reactions vary across industries. In additional tests, we show that analysts react to macroeconomic news more efficiently when macro uncertainty is low and when analysts have more industry-specific experience.