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Intangibles and Endogenous Firm Volatility over the Business Cycle

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Author Info

  • Pablo N D’Erasmo

    ()

  • Hernan J Moscoso-Boedo

    ()

Abstract

We are interested in the endogenous determination of firm level idiosyncratic volatility and its evolution over the business cycle. Using data from the Kauffman Firm Survey and Compustat, we find that idiosyncratic volatility at the firm level is negatively correlated with intangible expenditures (e.g. advertising, marketing, brand development, R&D). We also find that intangible expenses are highly pro-cyclical and that firm level volatility is counter-cyclical. To understand this mechanism, we propose a firm dynamics model with endogenous market participation. Firms that incur higher intangible expenses are able expand the firm and end up diversifying market-specific demand shocks by servicing more markets. The model is driven only by first moment shocks (i.e. shocks to aggregate TFP) and is able to capture the relationship between intangibles and risk as well as their cyclical properties.

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File URL: http://www.virginia.edu/economics/RePEc/vir/virpap/papers/virpap400.pdf
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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 400.

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Length: 38 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:vir:virpap:400

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: Endogenous idiosyncratic risk;

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References

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  1. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Paper 0812, Federal Reserve Bank of Cleveland.
  2. Nick Bloom & Ben Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2010. "Does management matter?: evidence from India," LSE Research Online Documents on Economics 36366, London School of Economics and Political Science, LSE Library.
  3. repec:ste:nystbu:05-20 is not listed on IDEAS
  4. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," Working Papers 10-17, Center for Economic Studies, U.S. Census Bureau.
  5. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  6. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," 2004 Meeting Papers 162, Society for Economic Dynamics.
  7. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
  8. Stephen Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms," Working Papers 06-17, Center for Economic Studies, U.S. Census Bureau.
  9. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  10. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
  11. Ayse Imrohoroglu & Selale Tuzel, 2011. "Firm Level Productivity, Risk, and Return," 2011 Meeting Papers 21, Society for Economic Dynamics.
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Cited by:
  1. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," CEP Discussion Papers dp1243, Centre for Economic Performance, LSE.
  2. Nicholas Bloom, 2013. "Fluctuations in Uncertainty," NBER Working Papers 19714, National Bureau of Economic Research, Inc.
  3. Dutz, Mark A., 2013. "Resource reallocation and innovation : converting enterprise risks into opportunities," Policy Research Working Paper Series 6534, The World Bank.

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