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Small and Large Firms over the Business Cycle

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Abstract

Drawing from confidential firm-level data of US manufacturing firms, we provide new evidence on the cyclicality of small and large firms. We show that the cyclicality of sales and investment declines with firm size. The effect is primarily driven by differences between the top 0.5% of firms and the rest. Moreover, we show that, due to the skewness of sales and investment, the higher cyclicality of small firms has a negligible influence on the behavior of aggregates. We argue that the size asymmetry is unlikely to be driven by financial frictions given 1) the absence of statistically significant differences in the behavior of production inputs or debt in recessions, 2) the survival of the size effect after directly controlling for proxies of financial strength, and 3) the predictions of a simple financial frictions model, in which unconstrained (large) firms contract more in recessions than constrained (small) firms.

Suggested Citation

  • Nicolas Crouzet & Neil Mehrotra, 2017. "Small and Large Firms over the Business Cycle," Working Papers 741, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:741
    DOI: 10.21034/wp.741
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    Cited by:

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    2. Corina Boar & Matthew P. Knowles, 2022. "Optimal Taxation of Risky Entrepreneurial Capital," NBER Working Papers 29961, National Bureau of Economic Research, Inc.
    3. Cezar, Rafael & Gigout, Timothée & Tripier, Fabien, 2020. "Cross-border investments and uncertainty: Firm-level evidence," Journal of International Money and Finance, Elsevier, vol. 108(C).
    4. Gareth Anderson & Saleem Bahaj & Matthieu Chavaz & Angus Foulis & Gabor Pinter, 2023. "Lending Relationships and the Collateral Channel," Review of Finance, European Finance Association, vol. 27(3), pages 851-887.
    5. Darmouni, Olivier & Geisecke, Oliver & Rodnyanky, Alexander, 2019. "The Bond Lending Channel of Monetary Policy," MPRA Paper 95141, University Library of Munich, Germany.
    6. Gigout, Timothee & Bricongne, Jean-Charles, 2019. "Explaining the Persistent Effect of Demand Uncertainty on Firm Growth," MPRA Paper 94228, University Library of Munich, Germany.
    7. Cumming, Fergus, 2022. "Mortgage cash-flows and employment," European Economic Review, Elsevier, vol. 144(C).
    8. Ester Faia & Vincenzo Pezone, 2019. "Monetary Policy and the Cost of Wage Rigidity: Evidence from the Stock Market," 2019 Meeting Papers 278, Society for Economic Dynamics.
    9. Grace Weishi Gu & Eswar Prasad, 2018. "New Evidence on Cyclical Variation in Labor Costs in the U.S," NBER Working Papers 24266, National Bureau of Economic Research, Inc.
    10. Kalemli-Özcan, Sebnem, 2018. "Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," CEPR Discussion Papers 13337, C.E.P.R. Discussion Papers.
    11. James Cloyne & Clodomiro Ferreira & Maren Froemel & Paolo Surico, 2023. "Monetary Policy, Corporate Finance, and Investment," Journal of the European Economic Association, European Economic Association, vol. 21(6), pages 2586-2634.
    12. Corina Boar & Matthew Knowles, 2020. "Entrepreneurship, Agency Frictions and Redistributive Capital Taxation," Discussion Paper Series, School of Economics and Finance 202004, School of Economics and Finance, University of St Andrews.
    13. Seungjun Baek, 2020. "Uncertainty, Incentives, and Misallocation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(7), pages 1821-1851, October.
    14. Nadav Ben Zeev, 2018. "The Tfp Channel Of Credit Supply Shocks," Working Papers 1802, Ben-Gurion University of the Negev, Department of Economics.
    15. Emin Dinlersoz & Sebnem Kalemli-Ozcan & Henry Hyatt & Veronika Penciakova, 2018. "Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," NBER Working Papers 25226, National Bureau of Economic Research, Inc.
    16. Strauss, Ilan & Yang, Jangho, 2020. "Corporate Secular Stagnation: Empirical Evidence on the Advanced Economy Investment Slowdown," INET Oxford Working Papers 2019-16, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    17. Emin M. Dinlersoz & Henry Hyatt & Ṣebnem Kalemli-Özcan & Veronika Penciakova, 2019. "Leverage over the Firm Life Cycle, Firm Growth, and Aggregate Fluctuations," FRB Atlanta Working Paper 2019-18, Federal Reserve Bank of Atlanta.
    18. Faia, Ester & Pezone, Vincenzo, 2018. "The Cost of Wage Rigidity," CEPR Discussion Papers 13407, C.E.P.R. Discussion Papers.
    19. Gigout, Timothee, 2019. "Firm dynamics in an global and uncertain economy," MPRA Paper 96569, University Library of Munich, Germany, revised 16 Oct 2019.
    20. Mahbuba Aktar & Mohammad Zoynul Abedin & Anupam Das Gupta, 2021. "The Impact of Monetary Policy Shocks on Corporate Dynamic Investment Activity With Financial Heterogeneity," SAGE Open, , vol. 11(1), pages 21582440209, February.

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    More about this item

    Keywords

    Firm size; Business cycles; Financial accelerator;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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