Exposure to Superstar Firms and Financial Distress

A small minority of highly successful firms (referred to as superstar firms) have captured large market shares and earned massive profits in recent decades. Although various macroeconomic developments, such as an increase in industry concentration, have been attributed to the rise of superstar firms, there is little empirical evidence on how superstars affect individual firms exposed to them in product markets. We conjecture that superstars adversely affect the survival of these firms and provide supporting evidence. Building on recent research that shows that superstar firms are associated with increasing aggregate markups, we identify superstars as firms with the highest markups in the industry and whose industry markup share is increasing over time. We then measure a focal firm’s overall exposure to superstars by employing product similarity scores. We document that firms with greater exposure to superstars in product markets are more likely to subsequently file for bankruptcy. We also shed light on the underlying channels through which superstar exposure is associated with bankruptcy and show that firms with the greater exposure exhibit weaker financial performance and greater riskiness. Furthermore, the association between superstar exposure and the likelihood of bankruptcy is concentrated among firms that are less innovative and those that have a weaker access to debt capital, as these firms are less likely to withstand the competitive pressure from superstar firms. Finally, we triangulate our primary evidence by documenting that sophisticated market participants, including dedicated institutional investors, short sellers, and auditors, account for the adverse effects of superstar exposure in their decision-making. Overall, our paper highlights the firm-level consequences of the superstar firm phenomenon, develops a tractable measure of superstar exposure, and documents the positive association between this exposure and firms’ financial distress.