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Explaining the Persistent Effect of Demand Uncertainty on Firm Growth

Gigout, Timothee and Bricongne, Jean-Charles (2019): Explaining the Persistent Effect of Demand Uncertainty on Firm Growth.

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Abstract

We study the effect of demand uncertainty on firm growth. We use product-level bilateral trade data to build an exogenous firm-level measure of the uncertainty of demand shocks. We match it with exhaustive custom and fiscal data between 1996 and 2013. An increase in uncertainty has a negative and persistent impact on the growth of exposed firms. This suggests a different underlying mechanism from a simple real-option effect. Financially constrained firms experience a much sharper and longer slowdown. Sectoral comovement is also a key factor explaining the persistent effect of uncertainty.

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