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Financial Market Development and the Rise in Firm Level Uncertainty

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  • Thesmar, David
  • Thoenig, Mathias

Abstract

This Paper posits that firms can choose the degree of risk inherent to their technological/ marketing/organizational strategies. Financial market development, by improving risk sharing between owners of listed firms, increases the willingness of these firms to take risky bets. This in turn increases firm level uncertainty in sales, employment and profits. In equilibrium, this effect diffuses to non-listed firms, a group not directly involved in risk sharing. The effect is larger when competition increases, and when labour market institutions are flexible. This Paper thus provides a finance-based, instead of technology-based, rationale for the increase of firm level uncertainty that has recently been documented in France and the US. We then use the French stock market reforms of the late 1980s to test our predictions, using listed firms as the treated group and privately held firms as a control group. Consistent with our model’s testable predictions, we find that (1) for listed firms, firm sales volatility has increased markedly after the reforms; and (2) this effect is stronger where product market competition is the strongest. Such evidence holds in front of various robustness checks. In particular, we seek to control for the exposure to international competition and the adoption of new technologies, two forces that may have affected our treatment and control groups differently.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4761.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4761

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Related research

Keywords: financial development; firm-level uncertainty; risk sharing;

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Cited by:
  1. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA).
  2. Diego Comin & Sunil Mulani, 2007. "A theory of growth and volatility at the aggregate and firm level," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  3. Amable, Bruno & Demmou, Lilas & Gatti, Donatella, 2007. "Employment Performance and Institutions: New Answers to an Old Question," IZA Discussion Papers 2731, Institute for the Study of Labor (IZA).
  4. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  5. claudio Michelacci & Fabiano Schivardi, 2008. "Does Idiosyncratic Business Risk Matter?," EIEF Working Papers Series 0813, Einaudi Institute for Economic and Finance (EIEF), revised Jul 2008.
  6. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Buch, Claudia M. & Döpke, Jörg & Stahn, Kerstin, 2008. "Great moderation at the firm level? Unconditional versus conditional output volatility," Discussion Paper Series 1: Economic Studies 2008,13, Deutsche Bundesbank, Research Centre.
  8. J. Christina Wang, 2006. "Financial innovations, idiosyncratic risk, and the joint evolution of real and financial volatilities," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  9. Buch, Claudia M. & Lipponer, Alexander, 2007. "Volatile multinationals? Evidence from the labor demand of German firms," Discussion Paper Series 1: Economic Studies 2007,22, Deutsche Bundesbank, Research Centre.
  10. Strotmann, Harald & Döpke, Jörg & Buch, Claudia M., 2006. "Does trade openness increase firm-level volatility?," Discussion Paper Series 1: Economic Studies 2006,40, Deutsche Bundesbank, Research Centre.
  11. Che, Natasha Xingyuan, 2009. "The great dissolution: organization capital and diverging volatility puzzle," MPRA Paper 13701, University Library of Munich, Germany.
  12. Shalini Mitra, 2012. "Does Financial Development Cause Higher Firm Volatility and Lower Aggregate Volatility?," Working papers 2012-07, University of Connecticut, Department of Economics.

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