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Intangibles and Endogenous Firm Volatility over the Business Cycle

  • Pablo N D’Erasmo

    ()

  • Hernan J Moscoso-Boedo

    ()

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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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
Contact details of provider: Web page: http://www.virginia.edu/economics/home.html

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  1. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
  2. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
  3. Bloom, Nicholas & Eifert, Benn & Mahajan, Aprajit & McKenzie, David & Roberts, John, 2011. "Does management matter ? evidence from India," Policy Research Working Paper Series 5573, The World Bank.
  4. Bronwyn H. Hall, 1990. "The Manufacturing Sector Master File: 1959-1987," NBER Working Papers 3366, National Bureau of Economic Research, Inc.
  5. CASTRO, Rui & CLEMENTI, Gian Luca & MACDONALD, Glenn, 2009. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Cahiers de recherche 2009-08, Universite de Montreal, Departement de sciences economiques.
  6. repec:ste:nystbu:05-20 is not listed on IDEAS
  7. CASTRO, Rui & CLEMENTI, Gian Luca & LEE, Yoonsoo, 2010. "Cross–Sectoral Variation in Firm–Level Idiosyncratic Risk," Cahiers de recherche 2010-07, Universite de Montreal, Departement de sciences economiques.
  8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  9. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
  10. 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.
  11. Ayse Imrohoroglu & Selale Tuzel, 2011. "Firm Level Productivity, Risk, and Return," 2011 Meeting Papers 21, Society for Economic Dynamics.
  12. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
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