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New Facts about Firm risk across Countries and over the Business CycleAuthor(s): Hernan Moscoso Boedo
Publication Name: Economic Inquiry
The characteristics of firm-level risk over the cycle and across countries are studied in this paper. Low idiosyncratic firm-level risk is found to be a feature of highly developed, stable economies, whereas the countercyclicality of firm-level risk is associated with flexible as well as stable economies. These facts are uncovered with the help of a theoretical model where small, risk-averse firms display procyclical risk, whereas larger, risk-neutral firms have countercyclical risk patterns that depend on the rigidity of the business environment. The predictions of the model are then confirmed by the data using a large international firm-level database (ORBIS) together with the World Bank Doing Business Database, during the ``Great Recession" across 55 countries. The findings are critical for the growing literature of uncertainty driven business cycles, and show that firm-level uncertainty cannot be treated as an exogenous parameter.