The impact of uncertainty on the number of businesses

Abstract

Theoretical results based on the asymmetric-information driven credit-market channel, and the real-options mechanism, imply that greater uncertainty is expected to affect entry, exit, and the number of businesses. In this paper we empirically examine the impact of uncertainty on the number of businesses, and whether firm size plays an important role in the magnitude of this effect. Our results indicate that greater uncertainty has a negative and quantitatively meaningful impact on the number of businesses, and the effects are primarily concentrated on the relatively smaller businesses. Our findings point to uncertainty being a potentially important channel which may cause the differential churning rates of smaller and larger businesses, thereby contributing to our understanding of industry and market dynamics, and the potential framing of policy during fluctuations in economic activity.