Financial Market Development and the Rise in Firm Level Uncertainty

48 Pages Posted: 15 Feb 2005

See all articles by Mathias Thoenig

Mathias Thoenig

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); Centre for Economic Policy Research (CEPR); University of Geneva - Department of Political Economics

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Date Written: November 2004

Abstract

This Paper posits that firms can choose the degree of risk inherent to their technological/marketing/organizational strategies. Financial market development, by improving risk sharing between owners of listed firms, increases the willingness of these firms to take risky bets. This in turn increases firm level uncertainty in sales, employment and profits. In equilibrium, this effect diffuses to non-listed firms, a group not directly involved in risk sharing. The effect is larger when competition increases, and when labor market institutions are flexible. This Paper thus provides a finance-based, instead of technology-based, rationale for the increase of firm level uncertainty that has recently been documented in France and the US. We then use the French stock market reforms of the late 1980s to test our predictions, using listed firms as the treated group and privately held firms as a control group. Consistent with our model's testable predictions, we find that (1) for listed firms, firm sales volatility has increased markedly after the reforms; and (2) this effect is stronger where product market competition is the strongest. Such evidence holds in front of various robustness checks. In particular, we seek to control for the exposure to international competition and the adoption of new technologies, two forces that may have affected our treatment and control groups differently.

Keywords: Financial development, firm-level uncertainty, risk sharing

JEL Classification: G10, J63

Suggested Citation

Thoenig, Mathias and Thesmar, David, Financial Market Development and the Rise in Firm Level Uncertainty (November 2004). CEPR Discussion Paper No. 4761. Available at SSRN: https://ssrn.com/abstract=664581

Mathias Thoenig

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4313 6380 (Phone)
+33 1 4313 6382 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Geneva - Department of Political Economics ( email )

40 boulevard du Pont-d'Arve
Geneva 4, CH-1211
Switzerland
+41 22 379 8274 (Phone)
+41 22 379 8293 (Fax)

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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