Does Idiosyncratic Business Risk Matter?

Claudio Michelacci () and Fabiano Schivardi

No 1002, Working Papers CELEG from Dipartimento di Economia e Finanza, LUISS Guido Carli

Abstract: Several imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entrepreneurial activity and hinders growth, with the effects being stronger in economies with lower risk diversification opportunities. In accordance with this prediction, we find that OECD countries with low levels of risk diversification opportunities (as measured by the relevance of family firms or of widely held companies) perform relatively worse (in terms of productivity, investment, and business creation) in sectors characterized by high idiosyncratic volatility. Given that volatility is endogenous with respect to risk diversification opportunities, we instrument its value at the country-sector level with the corresponding sectoral volatility in the US, a country where idiosyncratic business risk can be more easily diversified away. Diversification measures are instrumented using demographic changes induced by World War II. We also provide firm-level evidence suggesting that firms controlled by less diversified owners display lower mean and dispersion of productivity growth.

Keywords: Entrepreneurship; risk diversification; growth. (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Does Idiosyncratic Business Risk Matter? (2008)
Working Paper: Does Idiosyncratic Business Risk Matter? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:lui:celegw:1002

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