Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk

Abstract

We estimate firm-level idiosyncratic risk in the U.S. manufacturing sector. Our proxy for risk is the volatility of the portion of growth in sales or TFP which is not explained by either industry-or economy-wide factors, or firm characteristics systematically associated with growth itself. We find that idiosyncratic risk accounts for about 90% of the overall uncertainty faced by firms. The extent of cross-sectoral variation in idiosyncratic risk is remarkable. Firms in the most volatile sector are subject to at least three times as much uncertainty as firms in the least volatile. Our evidence indicates that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

Firms, Destinations, and Aggregate Fluctuations

“…By contrast, the estimated sector-destination shocks are much less volatile and have much lower correlation with actual sales growth. These results are of course not surprising and confirm the conventional wisdom that most shocks hitting firms are firm-specific (Haltiwanger (1997), Castro, Clementi, and Lee (2013)). 13 Examining the bottom two panels, it is clear that the importance of the firm-specific component is similar for both domestic and export sales.…”

“…Similarly, plant-level investment is dominated by infrequent and large spikes, and an active literature has explored whether these micro-level patterns affect the behavior of aggregate investment (see, among many others, Doms andDunne (1998), Cooper, Haltiwanger, andPower (1999), Cooper and Haltiwanger (2006), Gourio and Kashyap (2007)). Also closely related are studies of firm-level volatility (see, e.g., Comín and Philippon (2005), Davis, Haltiwanger, Jarmin, and Miranda (2007), Castro, Clementi, and Lee (2013), Thesmar and Thoenig (2011), Moscarini and Postel-Vinay (2012), Yoonsoo and Mukoyama (2012)). These research agendas have tended to emphasize that studying micro behavior is important as a way to learn what are the salient frictions in the economy.…”

“…This approach to iden-11 Appendix B presents further discussion of how our σ 2 Aτ 's relate to the variances of actual aggregate growth rate γ At and its components. tifying firm-specific shocks is adopted by Gabaix (2011) and Castro, Clementi, and Lee (2013), and follows in the tradition of Stockman (1988), who applied it at the sector level.…”

“…The analysis in the paper uses the growth rates of firm-destination sales. Other related work focuses on measures of firm productivity such as value added per worker (e.g., Gabaix (2011), Castro, Clementi, andLee (2013)) or total factor productivity (TFP) (Carvalho and Gabaix (2013)), or employment (e.g., Moscarini and Postel-Vinay (2012)). Unfortunately, neither employment nor value added per worker data can be broken down into destinations-it is of course impossible to know which workers in the firm are producing for exports and which for domestic sales-whereas we show above that to carry out our analysis, the destination-by-destination breakdown is essential.…”

Promoting Transparency in Social Science Research

“…Governments and advocacy groups display a growing appetite for evidence-based policy-making. In 2005, Mexico established an independent government agency to rigorously evaluate social programs, and in 2012, the U.S. Office of Management and Budget advised federal agencies to present evidence from randomized program evaluations in budget requests (1, 2). …”