Working Paper: NBER ID: w19017
Authors: Randall Morck; Bernard Yeung; Wayne Yu
Abstract: Many seemingly discordant results are reconciled if firm-specific return volatility is characterized as the intensity with which firm-specific events occur. A functionally efficient stock market allocates capital to its highest value uses, which often amounts to financing Schumpeterian creative destruction, wherein creative winner firms outpace destroyed losers, who can be last year's winners. This elevation in firm-specific fundamentals volatility elevates firm-specific return volatility in a sufficiently informationally efficient stock market. These linkages are interconnected feedback loops, rather than unidirectional chains of causality.
Keywords: R-squared; firm-specific return volatility; market efficiency; economic dynamism; creative destruction
JEL Codes: F3; G14; G3; N2; O16; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-specific return volatility (G17) | firm-specific events intensity (G14) |
| firm-specific events intensity (G14) | firm-specific return volatility (G17) |
| financial development (O16) | firm-specific events intensity (G14) |
| market efficiency (G14) | firm-specific events intensity (G14) |
| institutional changes (O17) | firm-specific events intensity (G14) |
| creative destruction (O39) | firm-specific fundamentals event intensity (G14) |
| firm-specific return volatility (G17) | market efficiency (G14) |
| firm-specific return volatility (G17) | capital allocation (G31) |