Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk

29 Pages Posted: 11 May 2011

See all articles by Gian Luca Clementi

Gian Luca Clementi

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Yoonsoo Lee

Federal Reserve Bank of Cleveland

Rui Castro

McGill University - Department of Economics

Date Written: October 12, 2010

Abstract

We estimate firm–level idiosyncratic risk in the U.S. manufacturing sector. Our proxy for risk is the volatility of the portion of growth in sales or TFP which is not explained by either industry – or economy–wide factors, or firm characteristics systematically associated with growth itself. We find that idiosyncratic risk accounts for about 90% of the overall uncertainty faced by firms. The extent of cross–sectoral variation in idiosyncratic risk is remarkable. Firms in the most volatile sector are subject to at least three times as much uncertainty as firms in the least volatile. Our evidence indicates that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

Keywords: Schumpeterian Competition, Creative Destruction, Product Turnover

JEL Classification: D24, L16, L60, O30, O31

Suggested Citation

Clementi, Gian Luca and Lee, Yoonsoo and Castro, Rui, Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk (October 12, 2010). Available at SSRN: https://ssrn.com/abstract=1836699 or http://dx.doi.org/10.2139/ssrn.1836699

Gian Luca Clementi (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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New York, NY 10012
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

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Rimini (RN), RN 47900
Italy

Yoonsoo Lee

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Rui Castro

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
CANADA

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