Working Paper: NBER ID: w10937
Authors: Hyunbae Chun; Jungwook Kim; Jason Lee; Randall Morck
Abstract: Firm-specific variation in stock returns and fundamental performance measures is significantly higher in industries that have a history of more investment in information technology (IT). We hypothesise that IT is associated with creative destruction or product differentiation, either of which can widen the performance difference between winner and loser firms. Thus, economy-level volatility can fall while firm-level volatility rises because firm-specific volatility cancels out in the aggregate. Our results are consistent with rising firm-specific variation in US stocks reflecting a rising pace of creative destruction; and with greater firm-specific variation in richer and faster growing countries reflecting more intensive creative destruction in those economies, though other explanations are probably valid as well.
Keywords: Information Technology; Firm-Specific Volatility; Creative Destruction; Economic Growth
JEL Codes: G0; E3; O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased investment in information technology (IT) (L86) | Greater firm-specific volatility (G19) |
| Increased investment in information technology (IT) (L86) | Higher sales growth (O49) |
| Increased investment in information technology (IT) (L86) | Higher return on assets (ROA) (G32) |
| Increased investment in information technology (IT) (L86) | Greater divergence in performance within industries (L19) |
| Higher IT intensity (L86) | Larger firm-specific volatility (G19) |
| Higher IT intensity (L86) | Higher growth rate of idiosyncratic volatility (G19) |
| Increased IT investment (G31) | Higher performance variability among firms (L25) |
| IT acts as a general-purpose technology (GPT) (O30) | Enhanced firm-level heterogeneity (F12) |
| Dynamics of creative destruction facilitated by IT (O39) | Increased firm-level volatility (D21) |