IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Endemic Volatility of Firms and Establishments: Are Real Options Effects Important?

Listed author(s):
  • Vivek Ghosal

Consider the intertemporal volatility of the number of firms and establishments within an industry over a relatively long span of time. Data from the U.S. manufacturing sector shows that this degree of endemic volatility varies widely across industries. Examining the determinants of this volatility is important in its own right as it reflects on the underlying forces governing entry and exit. In addition, data shows that the volatility of firms and establishments is significantly correlated with the volatility of the number of production and nonproduction workers employed in an industry. The primary focus of this paper is to evaluate the role played by the real options channel which suggests that sunk costs and uncertainty may be important determinants of the degree of volatility of the number of firms. We also control for other factors related to advertisingintensity, industry growth and technological change. An advantage of the manufacturing industry dataset we use in this study is that it combines the annual timeseries data from the Annual Survey of Manufactures with data from the five-yearly Census of Manufactures. This allows us to construct measures of uncertainty about profits, sunk capital costs, technological change, among others. Our key findings are: (1) industries with higher sunk capital costs and profit uncertainty have significantly lower endemic volatility of the number of firms and establishments; and (2) these relationships are non-linear as suggested by theory with even small amounts of sunk costs or profit uncertainty contributing to significantly lower firm volatility. Our findings appear broadly consistent with the predictions of the real options channel. We highlight some implications of our findings for antitrust/competition policy and labor market dynamics. ZUSAMMENFASSUNG - (Endemische Volatilität von Unternehmen und die Bedeutung von 'real option effects') Betrachtet man die intertemporale Schwankung der Anzahl von Unternehmen eines Industriezweigs über einen relativ langen Zeitraum, so zeigen Daten der U.S.amerikanischen verarbeitenden Industrie eine große Variation des Grades dieser endemischen Schwankungen zwischen unterschiedlichen Industriezweigen. Die Untersuchung der Determinanten dieser Volatilität ist für sich genommen bedeutsam, indem sie die Hintergründe für den Markteintritt und - austritt von Firmen beleuchtet. Darüber hinaus lässt sich eine hohe Korrelation zwischen der Schwankung in der Anzahl der Unternehmen und der Volatilität der Zahl der Arbeiter, die in der Produktion und in nicht-produzierenden Tätigkeiten beschäftigt sind, herstellen. Das Hauptaugenmerk dieses Papier ist es zu bewerten, welche Rolle der 'real options'- Kanal spielt, was impliziert, dass 'sunk costs' und Unsicherheit entscheidende Bestimmungsfaktoren für den Grad an Volatilität der Unternehmenszahl sind. Bei der Untersuchung werden auch andere Faktoren, die mit Werbungsintensität, Industriewachstum und technologischem Wandel verbunden sind, kontrolliert. Ein Vorteil des in der Analyse verwandten Datensatzes liegt darin, dass er jährliche Zeitreihendaten aus dem Jahresbericht des verarbeitenden Gewerbes der U.S.A. (Annual Survey of Manufacturers) mit Daten des Zensus des verarbeitenden Gewerbes, der fünfmal im Jahr erhoben wird, kombiniert. Das gestattet die Konstruktion von Maßzahlen zur Unsicherheit über Gewinne, versunkene Kapitalkosten, technologischen Wandel, etc.. Die Hauptergebnisse der Untersuchung sind: (1) Industriezweige mit höheren versunkenen Kapitalkosten und Gewinnunsicherheit zeichnen sich durch signifikant geringere endemische Volatilität in der Anzahl der Unternehmen aus; (2) diese Beziehungen sind nicht-linear, wie bereits die Theorie vermuten lässt, die besagt, dass schon geringe 'sunk costs' oder Gewinnunsicherheit zu bedeutend geringerer Schwankungsbreite in der Unternehmenszahl beitragen. Die Ergebnisse scheinen insgesamt mit den Aussagen zum 'real options'- Kanal übereinzustimmen. Einige Implikationen der Resultate für die 'Antitrust'- und Wettbewerbspolitik sowie Arbeitsmarkt-dynamik werden herausgestellt.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: Full text (original version)
Download Restriction: no

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2003-13.

in new window

Length: 36 pages
Date of creation: Sep 2003
Handle: RePEc:wzb:wzebiv:spii2003-13
Contact details of provider: Postal:
Reichpietschufer 50, 10785 Berlin, Germany

Phone: (++49)(30) 25491-441
Fax: (++49)(30) 25491-442
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Susanto Basu, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 719-751.
  2. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
  3. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
  4. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Macroeconomic Models with Equity and Credit Rationing," NBER Working Papers 3533, National Bureau of Economic Research, Inc.
  5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Working Papers 5125, National Bureau of Economic Research, Inc.
  6. Dale T. Mortensen & Christopher A. Pissarides, 1998. "Technological Progress, Job Creation and Job Destruction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 733-753, October.
  7. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-653, September.
  8. Jovanovic, B. & MacDonald, G.M., 1992. "The Life-Cycle of Competitive Industry," Papers 92-09, Rochester, Business - Financial Research and Policy Studies.
  9. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
  10. John Sutton, 1997. "Technologie a tržní struktura
    [Technology and Market Structure]
    ," Politická ekonomie, University of Economics, Prague, vol. 1997(1), pages 29-45.
  11. Williamson, Oliver E, 1988. " Corporate Finance and Corporate Governance," Journal of Finance, American Finance Association, vol. 43(3), pages 567-591, July.
  12. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  13. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  14. Ghosal, Vivek, 2002. "Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics," Royal Economic Society Annual Conference 2002 86, Royal Economic Society.
  15. Kessides, Ioannis N, 1990. "Market Concentration, Contestability, and Sunk Costs," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 614-622, November.
  16. Ghosal, Vivek, 2000. "Product market competition and the industry price-cost markup fluctuations:: role of energy price and monetary changes," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 415-444, April.
  17. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data," School of Economics Discussion Papers 0405, School of Economics, University of Surrey.
  18. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April.
  19. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  20. Kessides, Ioannis N, 1986. "Advertising, Sunk Costs, and Barriers to Entry," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 84-95, February.
  21. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
  22. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  23. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, September.
  24. Driver, Ciaran & Whelan, Brendan, 2001. "The effect of business risk on manufacturing investment: Sectoral survey evidence from Ireland," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 403-412, April.
  25. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
  26. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  27. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
  28. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
  29. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wzb:wzebiv:spii2003-13. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jennifer Rontganger)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.