Cyclical Changes in Firm Volatility

Abstract

We estimate changes in firm-specific volatility in sales and earnings growth of US firms. We do so using an approach which better captures firm-specific volatility than commonly used dispersion measures do. Our results do not lend strong support to the common view that firm-specific volatility is counter-cyclical. The role of firmspecific volatility in explaining aggregate fluctuations is empirically very limited. This is evidence against the implication of irreversibility and financial accelerator theories that increases in firm-specific volatility cause macroeconomic downturns. Our measure also provides evidence on trends in firm volatility. Earlier findings of a trend increase in the volatility of publicly traded firms are completely overturned when we control for changes in sample composition. At the firm level, the 2007-2009 recession did not end the Great Moderation.