We propose a theory of endogenous firm-level risk over the business cycle based on endogenous market exposure. Firms that reach a larger number of markets diversify market-specific demand shocks at a cost. The model is driven only by total factor productivity shocks and captures the observed countercyclity of firm-level risk. Using a panel of US firms we show that, consistent with our theoretical model, measures of market reach are procyclical, and the countercyclicality of firm-level risk is driven by those firms that adjust their market exposure, which are larger than those that do not. (JEL D21, D22, E23, E32, L25)
"Market Exposure and Endogenous Firm Volatility over the Business Cycle."
American Economic Journal: Macroeconomics,
Firm Behavior: Theory
Firm Behavior: Empirical Analysis
Business Fluctuations; Cycles
Firm Performance: Size, Diversification, and Scope