Competition and Operating Volatilities around the World

Tanakorn Makaew and Vojislav Maksimovic

Numerous papers have shown that developing economies are more volatile. We show despite greater aggregate and industry stability, performance and size of individual firms in developed countries are more volatile. In developing countries, market imperfections insulate incumbent firms from competition. Consistent with this, firms in developing countries have higher profit, higher market concentration, and less capital raising. Cross-country differences in operating risk and competition intensity are greater in external finance dependent industries where we expect higher impacts of capital market imperfections. We show the inverse relation between aggregate and firm-level volatilities has important implications on international studies of cash holding.

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