Operational and financial configurations contingent on market power status

This paper develops and tests a stylized model of a manufacturing firm's operational and financial configuration that integrates the effects of market competition and integration abilities of firms. Market power is predicted to drive trade credit balances of suppliers and customers, capital structure, and firm value. These predicted relationships are tested using data for publicly traded U.S. manufacturing firms for the period 1984–2014. A two-step procedure is adopted wherein, in the first step, the model variables of profitability, asset turnover, inventory, and cash are subjected to a factor analysis to determine the existence of a common factor based on theoretical arguments. In the second step, scores of the major factor (MPscore) are used in regressions with accounts receivable, accounts payable, market leverage, and Tobin's Q as alternative dependent variables. Evidence from cross-sectional and time series analyses provides strong support for the hypothesized relationships. Market power is not otherwise explained by firm size and asset tangibility. Additional results indicate that U.S. manufacturers generally increased their market power over this timeframe. We also find that firms with high market power tend to have higher survival rates.