Working Paper: NBER ID: w19466
Authors: Bernard Herskovic; Bryan Kelly; Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: Firm volatilities co-move strongly over time, and their common factor is the dispersion of the economy-wide firm size distribution. In the cross section, smaller firms and firms with a more concentrated customer base display higher volatility. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions. We propose and estimate a simple network model of firm volatility in which shocks to customers influence their suppliers. Larger suppliers have more customers and customer-supplier links depend on customers size. The model produces distributions of firm volatility, size, and customer concentration consistent with the data.
Keywords: firm volatility; network effects; customer-supplier linkages; firm size distribution
JEL Codes: E1; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| customer growth (O49) | supplier volatility (L14) |
| idiosyncratic shocks (D89) | firm growth rates (L25) |
| customer growth rates (O49) | firm growth rates (L25) |
| firm size (L25) | volatility (E32) |
| customer size dispersion (D39) | supplier volatility (L14) |
| size dispersion (D39) | average volatility (C46) |
| network effects (D85) | joint evolution of firm size and volatility distributions (L25) |