In the first chapter of this dissertation, I show that firms strategically liquidate their growth options and reputational capital after loan covenant violations. Loan covenant violations increase creditors' relative bargaining power, shifting control rights towards debt holders. I use Amazon product metadata and product reviews in an event study framework to identify changes firms make to their product strategies after these violations. In the two quarters after new loan covenant violations, firms decrease both their product portfolio size and their product quality. I use product review text to show that firms actively reduce product quality by increasing the rate of product failure. These changes increase short-term cashflows, consistent with firms' decisions aligning with creditors' incentives. Violating firms apply these changes strategically within their product portfolios. After covenant violations, firms cull the set of products sold in product markets with more competitors and lower the quality of their less popular products. These strategic decisions reduce the long-term costs of changing product quality and product portfolio size.
In the second chapter of this dissertation (with Nimesh Patel), we find that domestic firms invest in their reputational capital in response to increases in international competition. Specifically, American firms increase the quality of their products after positive Chinese import competition shocks. We determine that this is an active decision by identifying product level changes, finding significant reductions in the rate of product failures for domestic firms. Firms build reputational capital by increasing product quality, allowing them to differentiate their products from those of their competitors. We find that product portfolio size attenuates our results, consistent with less diversified firms having greater incentive to differentiate their products.
In the third chapter of this dissertation, I study the effects of initial public offerings on product quality. Public firms, unlike private firms, are required to regularly disclose financial and business information. The relative lack of information on private firms that results from this regulatory difference makes quantifying how firms change as a result of going public difficult. I use Amazon product data spanning both private and public firms in an event study framework to identify a decrease in product quality after firms complete their initial public offerings. I find that the decrease in product quality after firms go public is driven by an increase in both the rate of negative brand recognition and the rate of negative customer service experiences.
