Rory Mullen, Department of Economics, Washington
"On Aggregate Fluctuations, Systemic Risk, and the Covariance of Firm-Level Activity" Job Market Seminar.
I study firm-level covariance of productivity, sales, and profit for Compustat firms over the last half-century, in order to understand the sources of aggregate variance and systemic risk for these firms. I find that firm-level covariance explains most of aggregate variance in Compustat, that high-productivity firms covary more with aggregate productivity, sales, and profit growth, but less per dollar of market value. I develop a theory based on diversification of business lines to explain these facts. I derive propositions that characterize endogenous first and second moments of firm and aggregate productivity, and relate firms’ expected stock returns to their endogenous firm-aggregate productivity covariances. As a plausibility check, I run regressions on the number of business segments Compustat firms report and find tentative support for the model’s predictions.
Contact person: Emiliano Santoro