Studies of the volatility of the U.S. economy suggest a noticeable change in mid 1980s. There is some empirical evidence that the aggregate volatility of the U.S. economy has been decreasing over time. The response of firms to the change of economic volatility and economic fluctuation has been studied in terms of many margins a firm can adjust 'capital, labor, capacity, material, etc. However, we have not studied the most important margin ' the product. This paper studies the effect of profit volatility on the firm/plant level product diversification. Section 2 profiles diversification and shows that there is a downward trend of aggregate diversification in many industries. Cyclicality of diversification is not clear at the aggregate or industry level. Firms change their diversification very frequently and very differently from one another. Section 3 verifies the trend of volatility at the aggregate, sectoral, and firm level and studies the relationship between diversification and volatility at the firm level. Firm level diversification decreases as the aggregate, sectoral and idiosyncratic volatility decreases.
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Efficiency Implications of Corporate Diversification: Evidence from Micro Data
November 2006
Working Paper Number:
CES-06-26
In this study, we contribute to the ongoing research on the rationales for corporate diversification. Using plant-level data from the U.S. Census Bureau, we examine whether combining several lines of business in one entity leads to increased productive efficiency. Studying the direct effect of diversification on efficiency allows us to discern between two major theories of corporate diversification: the synergy hypothesis and the agency cost hypothesis. To measure productive efficiency, we employ a non-parametric approach'a test based on Varian's Weak Axiom of Profit Maximization (WAPM). This method has several advantages over other conventional measures of productive efficiency. Most importantly, it allows one to perform the efficiency test without relying on assumptions about the functional form of the underlying production function. To the best of our knowledge, this study is the first application of the WAPM test to a large sample of non-financial firms. The study provides evidence that business segments of diversified firms are more efficient compared to single-segment firms in the same industry. This finding suggests that the existence of the so-called 'diversification discount' cannot be explained by efficiency differences between multi-segment and focused firms. Furthermore, more efficient segments tend to be vertically integrated with others segments in the same firm and to have been added through acquisitions rather than grown internally. Overall, the results of this study indicate that corporate diversification is value-enhancing, and that it is not necessarily driven by managers' pursuit of their private benefits.
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The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data
March 2007
Working Paper Number:
CES-07-05
This paper provides new evidence that estimates based on aggregate data will understate the true procyclicality of total factor productivity. I examine plant-level data and show that some industries experience countercyclical reallocations of output shares among firms at different points in the business cycle, so that during recessions, less productive firms produce less of the total output, but during expansions they produce more. These reallocations cause overall productivity to rise during recessions, and do not reflect the actual path of productivity of a representative firm over the course of the business cycle. Such an effect (sometimes called the cleansing effect of recessions) may also bias aggregate estimates of returns to scale and help explain why decreasing returns to scale are found at the industry-level data.
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The Efficiency of Internal Capital Markets: Evidence from the Annual Capital Expenditure Survey
April 2008
Working Paper Number:
CES-08-08
We empirically examine whether greater firm diversity results in the inefficient allocation of capital. Using both COMPUSTAT and the Annual Capital Expenditure Survey (ACES) we find firm diversity to be negatively related to the efficiency of investment. However once we distinguish between capital expenditure for structures and equipment, we find that while firms do inefficiently allocate capital for equipment, they efficiently allocate capital for structures. These results suggest that when the decision will have long-lasting repercussions, headquarters will, more often than not, make the correct choice.
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The Rise of Specialized Firms
February 2024
Working Paper Number:
CES-24-06
This paper studies firm diversification over 6-digit NAICS industries in U.S. manufacturing. We find that firms specializing in fewer industries now account for a substantially greater share of production than 40 years ago. This reallocation is a key driver of rising industry concentration. Specialized firms have displaced diversified firms among industry leaders'absent this reallocation concentration would have decreased. We then provide evidence that specialized firms produce higher-quality goods: specialized firms tend to charge higher unit prices and are more insulated against Chinese import competition. Based on our empirical findings, we propose a theory in which growth shifts demand toward specialized, high-quality firms, which eventually increases concentration. We conclude that one should expect rising industry concentration in a growing economy.
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FLUCTUATIONS IN UNCERTAINTY
March 2014
Working Paper Number:
CES-14-17
This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
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The Center for Economic Studies 1982-2007: A Brief History
October 2009
Working Paper Number:
CES-09-35
More than half a century ago, visionaries representing both the Census Bureau and the external research community laid the foundation for the Center for Economic Studies (CES) and the Research Data Center (RDC) system. They saw a clear need for a system meeting the inextricably related requirements of providing more and better information from existing Census Bureau data collections while preserving respondent confidentiality and privacy. CES opened in 1982 to house new longitudinal business databases, develop them further, and make them available to qualified researchers. CES and the RDC system evolved to meet the designers' requirements. Research at CES and the RDCs meets the commitments of the Census Bureau (and, recently, of other agencies) to preserving confidentiality while contributing paradigm-shifting fundamental research in a range of disciplines and up-to-the-minute critical tools for decision-makers.
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Diversification, Organizational Adjustment and Firm Performance: Evidence from Microdata
October 2007
Working Paper Number:
CES-07-29
This paper proposes that diversification taxes firms' existing organizational systems by altering routines, formal contract structures and strategies. I test the proposition that organizational adjustment costs associated with diversification erode incumbent competitive advantage, using novel microdata on taxicab firms from the Economic Census. The tests exploit exogenous local characteristics of taxi markets to identify the impact of diversification on firm organization and performance. Supporting the contention that diversification leads to organizational adjustments, the results show that diversifying firms are less likely to adopt computerized dispatching systems for their taxicabs and make significant changes in their formal contract structures governing asset ownership. Consistent with the theory, diversification is associated with falling taxi productivity. Comparing the productivity of diversified and focused start-ups and incumbent firms reveals that the organizational change component of diversification accounts for an 18% decrease in paid ride-miles per taxi. The results support the core contention of the paper that diversification taxes firms' existing organizational capital.
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The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition
July 2012
Working Paper Number:
CES-12-14
This paper studies the long-term effect of hedge fund activism on the productivity of target firms using plant-level information from the U.S. Census Bureau. A typical target firm improves its production efficiency within two years after activism, and this improvement is concentrated in industries with a high degree of product market competition. By following plants that were sold post-intervention, we also find that efficient capital redeployment is an important channel via which activists create value. Furthermore, our analyses demonstrate that measuring performance using the Compustat data is likely to lead to a downward bias because target firms experiencing greater improvement post-intervention are also more likely to disappear from the Compustat database. Finally, consistent with recent work in asset-pricing linking firm investment decisions and expected returns, we show how changes to target firms' productivity are associated with a decline in systemic risk, particularly in competitive industries.
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Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms
July 2006
Working Paper Number:
CES-06-17
We study the variability of business growth rates in the U.S. private sector from 1976 onwards. To carry out our study, we exploit the recently developed Longitudinal Business Database (LBD), which contains annual observations on employment and payroll for all U.S. businesses. Our central finding is a large secular decline in the cross sectional dispersion of firm growth rates and in the average magnitude of firm level volatility. Measured the same way as in other recent research, the employment-weighted mean volatility of firm growth rates has declined by more than 40% since 1982. This result stands in sharp contrast to previous findings of rising volatility for publicly traded firms in COMPUSTAT data. We confirm the rise in volatility among publicly traded firms using the LBD, but we show that its impact is overwhelmed by declining volatility among privately held firms. This pattern holds in every major industry group. Employment shifts toward older businesses account for 27 percent or more of the volatility decline among privately held firms. Simple cohort effects that capture higher volatility among more recently listed firms account for most of the volatility rise among publicly traded firms.
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Diversification Discount or Premium? New Evidence from BITS Establishment-Level Data
December 2001
Working Paper Number:
CES-01-13
This paper examines whether the finding of a diversification discount in U.S. stock markets is only a data artifact. Segment data may give rise to biased estimates of the value effect of diversification because segments are defined inconsistently across firms, and that inconsistency does not occur at random. I use a new establishment-level database that covers the whole U.S. economy (BITS) to construct business units that are more consistently and objectively defined across firms, and thus more comparable. Using a common methodological approach on a sample of firms which exhibit a diversification discount according to segment data, I find that, when BITS data are used, diversified firms actually trade at a significant average premium. The premium is robust to variations in the method, sample, business unit definition, and measures of excess value and diversification used.
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