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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.

Suggested Citation

  • Pablo N D’Erasmo & Hernan J Moscoso-Boedo, 2011. "Intangibles and Endogenous Firm Volatility over the Business Cycle," Virginia Economics Online Papers 400, University of Virginia, Department of Economics.
  • Handle: RePEc:vir:virpap:400

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    References listed on IDEAS

    1. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
    2. Nicholas Bloom & Benn Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2013. "Does Management Matter? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 1-51.
    3. Rui Castro & Gian Luca Clementi & Glenn Macdonald, 2009. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 529-561.
    4. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Paper 0812, Federal Reserve Bank of Cleveland.
    5. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    6. Ayse Imrohoroglu & Selale Tuzel, 2011. "Firm Level Productivity, Risk, and Return," 2011 Meeting Papers 21, Society for Economic Dynamics.
    7. 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.
    8. 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.
    9. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
    10. Bronwyn H. Hall, 1990. "The Manufacturing Sector Master File: 1959-1987," NBER Working Papers 3366, National Bureau of Economic Research, Inc.
    11. repec:ste:nystbu:05-20 is not listed on IDEAS
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    Cited by:

    1. Iachan, Felipe Saraiva, 2017. "Capital budgeting and risk taking under credit constraints," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 786, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    2. David M. Arseneau & Ryan Chahrour & Sanjay K. Chugh & Alan Finkelstein Shapiro, 2015. "Optimal Fiscal and Monetary Policy in Customer Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 617-672, June.
    3. N. Bloom., 2016. "Fluctuations in uncertainty," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    4. Mayumi Ojima & Junnosuke Shino & Kozo Ueda, "undated". "Buyer-Size Discounts and Inflation Dynamics," Working Papers e71, Tokyo Center for Economic Research.
    5. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1641-1692.
    6. Hikaru Saijo, "undated". "The Uncertainty Multiplier and Business Cycles," Working Papers e67, Tokyo Center for Economic Research.
    7. Dutz, Mark A. & O'Connell, Stephen D. & Troncoso, Javier L., 2014. "Public and private investments in innovation capabilities : structural transformation in the Chilean wine industry," Policy Research Working Paper Series 6983, The World Bank.
    8. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," CEP Discussion Papers dp1243, Centre for Economic Performance, LSE.
    9. Dutz, Mark A., 2013. "Resource reallocation and innovation : converting enterprise risks into opportunities," Policy Research Working Paper Series 6534, The World Bank.
    10. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.

    More about this item


    Endogenous idiosyncratic risk;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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