Working Paper: NBER ID: w10771
Authors: Boyan Jovanovic
Abstract: Until its sales of a product materialize, a firm is a "pre-producer" in the market for that product. That firm may may be a new start-up, or it may already sell other products. Firms that do not succeed in generating sales eventually become discouraged and move on to other activities. When this fate befalls a lot of firms, as it recently did in several IT-related businesses, the industry experiences a "shakeout." In the model that I will present, during the shakeout some firms switch to flatter, safer earnings. This switch raises earnings at the time of the shakeout but lowers them in the long run, and it therefore raises earnings-price ratios. This has happened on the Nasdaq since March, 2000 when the Nasdaq shakeout began.
Keywords: preproduction; shakeout; firm dynamics; market valuations
JEL Codes: L0; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| preproduction periods (D20) | firm outcomes (G32) |
| preproduction periods (D20) | firm discouragement (G33) |
| firm discouragement (G33) | transition to other activities (P39) |
| firm discouragement (G33) | industry shakeout (L19) |
| industry shakeout (L19) | earnings at the time of shakeout (G35) |
| industry shakeout (L19) | long-term earnings (J31) |
| industry shakeout (L19) | earnings-price ratios (G12) |
| preproduction periods (D20) | firm survival (L21) |
| industry shakeouts (L19) | stock prices (G12) |