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Intangibles and Endogenous Firm Volatility over the Business Cycle

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  • Pablo N D’Erasmo
  • Hernan J Moscoso-Boedo

Abstract

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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    Citations

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    Cited by:

    1. Saijo, Hikaru, 2017. "The uncertainty multiplier and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 1-25.
    2. Veldkamp, Laura & Kozeniauskas, Nicholas & Orlik, Anna, 2016. "What Are Uncertainty Shocks?," CEPR Discussion Papers 11501, C.E.P.R. Discussion Papers.
    3. Felipe S. Iachan, 2020. "Capital Budgeting and Risk Taking Under Credit Constraints," Management Science, INFORMS, vol. 66(9), pages 4292-4314, September.
    4. 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.
    5. Tino Berger & Sibylle Grabert & Bernd Kempa, 2016. "Global and Country-Specific Output Growth Uncertainty and Macroeconomic Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 694-716, October.
    6. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    7. Mayumi Ojima & Junnosuke Shino & Kozo Ueda, 2014. "Buyer-Size Discounts and Inflation Dynamics," CAMA Working Papers 2014-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1641-1692.
    9. Laura Veldkamp & Anna Orlik & Nicholas Kozeniauskas, 2015. "Black Swans and the Many Shades of Uncertainty," 2015 Meeting Papers 677, Society for Economic Dynamics.
    10. 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.
    11. Baker, Scott R. & Bloom, Nicholas, 2013. "Does uncertainty reduce growth? Using disasters as natural experiments," LSE Research Online Documents on Economics 121906, London School of Economics and Political Science, LSE Library.
    12. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    13. Dutz, Mark A., 2013. "Resource reallocation and innovation : converting enterprise risks into opportunities," Policy Research Working Paper Series 6534, The World Bank.
    14. Elisa Guglielminetti, 2016. "The labor market channel of macroeconomic uncertainty," Temi di discussione (Economic working papers) 1068, Bank of Italy, Economic Research and International Relations Area.
    15. Nicholas Kozeniauskas & Anna Orlik & Laura Veldkamp, 2016. "The Common Origin of Uncertainty Shocks," NBER Working Papers 22384, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    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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