The purpose of this project was to revisit an intriguing finding. Although over the last few decades leading up to the financial crisis there was a marked reduction in the volatility of aggregate output and inflation, there appears to have been a corresponding increase in the volatility of individual firms.
Here we argue that this apparent increase in firm level volatility was due to an increase in churning of firm activity in the form of acquisition and disposal of businesses. This created an increase in negative covariances between firms, so while the volatility of underlying organic growth has also fallen, observed volatility has risen.
We used a large set of observations on quoted US firms from 1950 to 2015, and data on acquisitions and divestitures from 1982 to 2014 to examine the relationship between firm volatility and the market for corporate assets.
Aggregate and Firm level volatility: the role of acquisitions and disposals
Aggregate and Firm level volatility: the role of acquisitions and disposals, Luke Devonald, Chris Higson and Sean Holly, Cambridge Working Papers in Economics, CWPE1741 (2017)
The purpose of this paper is to revisit an intriguing finding. Although over the last few decades leading up to the financial crisis there was a marked reduction in the volatility of aggregate output and inflation, there appears to have been a corresponding increase in the sales volatility of individual firms. Here we argue that a significant reason for this apparent increase in firm level volatility was an increase in churning of firm activity through the acquisition and disposal of businesses. This created an increase in observed negative covariances between firms, so even if the volatility of underlying organic growth has also fallen, observed volatility has risen
