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Cyclical Changes in Firm Volatility

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  • EMMANUEL DE VEIRMAN
  • ANDREW LEVIN

Abstract

We characterize trends and cycles in the volatility of U.S. firms using a measure that we argue more cleanly captures firm‐specific volatility in sales and earnings growth than standard measures do. While earlier literature has emphasized a trend increase in the volatility of publicly traded firms, we find that a typical publicly traded firm has become more stable. We find that the negative association between firm‐specific volatility and the business cycle is weaker than earlier research based on dispersion measures suggests. We find that during the Great Recession of 2007–2009, firm‐specific volatility increased moderately but never substantially exceeded its sample mean. Our results are inconsistent with the hypothesis that firm‐specific volatility is an important driver of the business cycle, as it theoretically could be through an effect of default risk on credit spreads.

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  • Emmanuel De Veirman & Andrew Levin, 2018. "Cyclical Changes in Firm Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 317-349, March.
  • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:2-3:p:317-349
    DOI: 10.1111/jmcb.12462
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    1. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.
    2. Claudia M Buch & Manuel Buchholz & Lena Tonzer, 2015. "Uncertainty, Bank Lending, and Bank-Level Heterogeneity," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(4), pages 919-954, November.
    3. Mona Yaghoubi & Michael O’Connor Keefe, 2018. "The Influence of Investment Volatility on Capital Structure and Cash Holdings," Working Papers in Economics 18/20, University of Canterbury, Department of Economics and Finance.
    4. Berner, Julian & Buchholz, Manuel & Tonzer, Lena, 2020. "Asymmetric investment responses to firm-specific forecast errors," IWH Discussion Papers 5/2020, Halle Institute for Economic Research (IWH).
    5. Giacomo Candian & Mikhail Dmitriev, 2020. "Risk Aversion, Uninsurable Idiosyncratic Risk, and the Financial Accelerator," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 299-322, July.
    6. Cook, Douglas O. & Kieschnick, Robert & Moussawi, Rabih, 2019. "Operating leases, operating leverage, operational inflexibility and sticky costs," Finance Research Letters, Elsevier, vol. 31(C).
    7. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    8. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.
    9. Daisoon Kim & Yoonsoo Lee, 2019. "Entry, Exit, and Productivity Dispersion," 2019 Meeting Papers 927, Society for Economic Dynamics.
    10. Young Gak Kim & Hyeog Ug Kwon, 2017. "Aggregate and Firm-level Volatility in the Japanese Economy," The Japanese Economic Review, Springer, vol. 68(2), pages 158-172, June.
    11. Roberta Distante & Ivan Petrella & Emiliano Santoro, 2013. "Asymmetry Reversals and the Business Cycle," Working Papers 2013.54, Fondazione Eni Enrico Mattei.
    12. Manuel Buchholz & Lena Tonzer & J. Berner, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7, Halle Institute for Economic Research.
    13. Vidal-Tomás, David & Ruiz-Buforn, Aba & Blanco-Arroyo, Omar & Alfarano, Simone, 2020. "A cross-sectional analysis of growth and profit rate distribution: the Spanish case," MPRA Paper 102065, University Library of Munich, Germany.
    14. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    15. Chen, Chongyang & Kieschnick, Robert, 2018. "Bank credit and corporate working capital management," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 579-596.
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    17. Robert Faff & Steven Cahan, 2013. "Mickey Mouse and the IDioT principle for assessing research contribution: discussion of ‘Is the relationship between investment and conditional cash flow volatility ambiguous, asymmetric or both?’," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(4), pages 949-960, December.
    18. Buchholz, Manuel & Tonzer, Lena & Berner, Julian, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7/2016, Halle Institute for Economic Research (IWH).
    19. Mona Yaghoubi & Michael O’Connor Keefe, 2019. "The Influence of Investment Volatility on Capital Structure and Cash Holdings," Working Papers in Economics 19/11, University of Canterbury, Department of Economics and Finance.

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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