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Intangibles and Endogenous Firm Volatility over the Business Cycle

Pablo N D’Erasmo () and Hernan J Moscoso-Boedo ()
Authors registered in the RePEc Author Service: Hernan Moscoso Boedo and Pablo N. D'Erasmo ()

Virginia Economics Online Papers from University of Virginia, Department of Economics

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.

Keywords: Endogenous; idiosyncratic; risk (search for similar items in EconPapers)
JEL-codes: D31 E4 L11 L26 O16 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-12
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Citations: View citations in EconPapers (16) Track citations by RSS feed

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Related works:
Working Paper: Intangibles and Endogenous Firm Volatility over the Business Cycle (2013)
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