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Does Idiosyncratic Business Risk Matter?

Author

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  • Claudio Michelacci

    (CEMFI)

  • Fabiano Schivardi

    (University of Cagliari and EIEF)

Abstract

Several imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entrepreneurial activity and hinders growth, with the effects being stronger in economies with lower risk diversification opportunities. In accordance with this prediction, we find that OECD countries with low levels of risk diversification opportunities (as measured by the relevance of family firms or of widely held companies) perform relatively worse (in terms of productivity, investment, and business creation) in sectors characterized by high idiosyncratic volatility. Given that volatility is endogenous with respect to risk diversification opportunities, we instrument its value at the country-sector level with the corresponding sectoral volatility in the US, a country where idiosyncratic business risk can be more easily diversified away. Diversification measures are instrumented using demographic changes induced by World War II. We also provide firm-level evidence suggesting that firms controlled by less diversified owners display lower mean and dispersion of productivity growth.

Suggested Citation

  • Claudio Michelacci & Fabiano Schivardi, 2010. "Does Idiosyncratic Business Risk Matter?," Working Papers CELEG 1002, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:celegw:1002
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    Cited by:

    1. Francesco Lippi & Fabiano Schivardi, 2014. "Corporate control and executive selection," Quantitative Economics, Econometric Society, vol. 5, pages 417-456, July.
    2. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2015. "Cross Sectoral Variation in the Volatility of Plant Level Idiosyncratic Shocks," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 1-29, March.
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    6. Carlos Drago & Francesco Millo & Roberto Ricciuti & Paolo Santella, 2011. "Corporate Governance Reforms, Interlocking Directorship Networks and Company Value in Italy (1998-2007)," CESifo Working Paper Series 3322, CESifo Group Munich.
    7. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 5-55, January.
    8. Maican, Florin & Orth, Matilda, 2015. "A dynamic analysis of entry regulations and productivity in retail trade," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 67-80.
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    13. Antonio Ciccone & Elias Papaioannou, 2010. "Estimating cross-industry cross-country models using benchmark industry characteristics," Economics Working Papers 1235, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2016.
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    More about this item

    Keywords

    Entrepreneurship; risk diversification; growth.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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