Essays on Firm-level and Aggregate Productivity and Risk
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In chapter one I study pairwise covariances of firm-level productivity, sales, and profit growth rates for public firms in the United States. The data suggest that pairwise covariances of firm growth rates drive the variance of aggregate growth rates in all three variables. High-productivity firms contribute most to aggregate variance in absolute terms, but least per dollar of market value—which may explain why investors demand lower returns from high-productivity firms. A tractable DSGE model helps explain the evidence on firm-level covariance endogenously. In the model, a firm’s expected excess stock returns increase as the firm’s productivity covaries more with aggregate productivity, relative to the firm’s market value. In chapter two, coauthored with Daisoon Kim, we ask where fluctuations in aggregate productivity come from, and what role markups and scale economies play in transmitting fluctuations in firm productivity to aggregate productivity. We develop an empirical framework that decomposes TFP into industry, peer, firm, and entry-exit components. We aggregate these components using a new approximate expression for aggregate TFP that lets us investigate explicitly the role of markups and scale economies in transmitting firm TFP innovations to aggregate TFP. In an application using data on public firms, we find that innovations to the firm-specific component of firm TFP drive most fluctuations in firm TFP, while innovations to the industry component drive most fluctuations in aggregate TFP. Innovations to the peer component appear to play a modest role.
- Economics