{"content":[{"text":"1","bbox":{"left":0.105882,"top":0.077199,"width":0.014064999999999994,"height":0.026866}},{"text":"Introduction","bbox":{"left":0.148077,"top":0.077199,"width":0.162506,"height":0.026866}},{"text":"Product markets are often highly concentrated. Industries are increasingly characterized \n by a “winner takes most” feature, whereby a small number of “superstar” ﬁrms control a \n large share of the market (e.g., Grullon, Larkin and Michaely, 2018; Loecker and Eeckhout, \n 2019; Autor et al., 2020).1 Furthermore, the positions of market leaders are highly persistent \n (e.g., Sutton, 2007; Bronnenberg, Dhar and Dubé, 2009). With such high levels of market \n concentration and persistence of leadership, strategic interactions among market leaders can \n play a vital role in determining not only the ways that ﬁrms compete in product markets, \n but also the ways that aggregate economic shocks affect industries and idiosyncratic shocks \n spread across ﬁrms and industries.2 \n In this paper, we study the dynamic strategic interactions among ﬁrms that face potential \n threats of ﬁnancial distress. We show that the interplay between tactical competition and \n ﬁnancial distress generates a competition-distress feedback loop and a new form of ﬁnancial \n contagion. These two mechanisms have important implications for the cross section of equity \n returns, determinants of credit risk, and systematic stability. \n Figure 1 illustrates the intuition for the feedback loop. Firms tend to compete more \n aggressively when they become more ﬁnancially distressed. The intensiﬁed competition, in \n turn, reduces the proﬁt margins for all ﬁrms in the industry, pushing some ﬁrms further \n into distress. This feedback effect has two asset pricing implications. First, the feedback loop \n ampliﬁes the negative response of ﬁrms’ proﬁt margins and equity returns to an increase in \n the aggregate discount rate through the endogenous competition channel, which extends \n Fudenberg and Maskin (1986)’s version of folk theorems on the properties of collusive Nash \n equilibria.3 Second, in the cross section, the positive feedback loop is more pronounced in \n less ﬁnancially distressed industries, which can help explain the ﬁnancial distress anomaly \n at industry level. This is because, as we will show, less ﬁnancially distressed industries \n have lower left-tail idiosyncratic jump risk in the cross section. Left-tail idiosyncratic jump \n risk plays a vital role in pricing credit risk (e.g., Seo and Wachter, 2018). The lower level \n of left-tail idiosyncratic jump risk makes ﬁrms in such industries effectively more patient, \n and hence more willing to adhere to tacit collusion agreements, leading to higher yet more \n volatile proﬁt margins as the discount rate ﬂuctuates. This is why the feedback loop is","bbox":{"left":0.105237,"top":0.12598,"width":0.791333,"height":0.659844}},{"text":"1According to the U.S. Census data, the top-four ﬁrms within each four-digit SIC (Standard Industrial \n Classiﬁcation) industry account for about 48% of each industry’s total revenue (see Dou, Ji and Wu, 2020a, \n Online Appendix B). Moreover, Gutiérrez, Jones and Philippon (2019) and Corhay, Kung and Schmid (2020b) \n investigate the forces behind the stylized fact of rising industry concentration. \n 2Recent evidence shows that peer ﬁrms strategically interact in product markets in response to changes in \n their ﬁnancial conditions (e.g., Frésard, 2010; Hortaçsu et al., 2013; Koijen and Yogo, 2015; Gilchrist et al., 2017; \n Cookson, 2017; Grieser and Liu, 2019). \n 3The endogenous competition channel is established by Dou, Ji and Wu (2020a) for all-equity ﬁrms.","bbox":{"left":0.105882,"top":0.79702,"width":0.790271,"height":0.12433300000000003}},{"text":"1","bbox":{"left":0.495116,"top":0.956836,"width":0.00976699999999997,"height":0.018506000000000022}}],"images_bbox":[],"images_bbox_not_text_overlap":[]}