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

  • 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.

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

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Length: 36 pages
Date of creation: Sep 2003
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Handle: RePEc:wzb:wzebiv:spii2003-13
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