The common component of firm growth

We use a factor model to detect the presence of economy-wide underlying forces leading firm growth. By using quarterly firm level data on 660 US firms for 20 years, we find evidence of a unique common factor explaining approximately one fifth of the variance of firm growth rates. We investigate the influence of the common shock on the cross-correlations of the growth rates, and we study the firm impulse responses to the shock, both on average for the whole dataset and on some particular subsets of firms, defined according to the firms’ size and industrial sector.

► We use a factor model to detect economy-wide underlying forces leading firm growth. ► We use quarterly firm level (sales) data on 660 US firms for 20 years. ► A unique common factor explains 20% of the total firm growth variance. ► The common shock has an influence on the growth rate cross-correlations. ► Heterogeneous firms’ impulse responses call for the use of firm-level data.