Open Lecture with Kyeong H. Lee

BEROC held the open lecture of Dr. Kyeong H. Lee (Associate Professor of Finance at the Norwegian School of Economics) "Product Durability, Cost Pass-Through, and Corporate Policies" on March 21.

At the lecture Dr. Kyeong H. Lee will presented his research "Product Durability, Cost Pass-Through, and Corporate Policies".


ABSTRACT:

The longer life and major consumer expenditure attributes of durable goods result in larger price elasticities of demand for durable goods than for non-durable goods and services. This presents a challenge to durable goods producers because it negatively affects their ability to adjust product prices when input costs increase. We find that firms with more durable output have lower financial leverage, higher cash balances and marginal value of cash, lower propensity to pay dividends, and lower dividend payouts when they pay dividends. We also find that durable goods firms set higher margins (markups) ex ante, so that they have room to absorb cost shocks. In a quasi-natural experiment involving input price shocks, we find that markups for durable goods firms decline, cash balances decrease, leverage increases, and product quality is sacrificed following significant increases in input prices. This paper contributes to the industrial organization view of the firm by showing that demand for durable goods helps shape firms’ financing decisions and product pricing strategies.