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Cyclical behavior of firm-level volatility: An explanation for the contrast between the United States and Japan

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  • Oikawa, Koki

Abstract

This study examines the cyclical behaviors of firm-level volatility, measured by real sales growth. Japanese firm-level data show that their volatility is countercyclical, whereas it is procyclical among the United States firms reported in a previous study. We formulate a theoretical model that accounts for these opposing behaviors over the business cycles. The key driving factor behind the relationship is the bankruptcy cost structure, more specifically, the relative magnitude of the fixed and marginal costs of bankruptcy. The fixed bankruptcy cost operates as an entry barrier and the marginal bankruptcy cost operates as an additional cost of hiring. These distinct impacts affect the type of firms entering/exiting the market over the business cycle. We also examine the welfare and policy implications of the model by comparing the structures of bankruptcy costs in terms of efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 38 (2013)
Issue (Month): PB ()
Pages: 452-464

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Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:452-464

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Firm-level volatility; Medium-term business cycle; Bankruptcy cost; Entrepreneur;

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References

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  11. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
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  13. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
  14. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  15. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  16. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, 06.
  17. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  18. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
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