Correlation of Revenue Growth Across Industries in Business Cycle

In this article we investigate the correlation between growth rates of revenues across different industries linked to the phases of the business cycle over a 40-year period. Using a large sample of quarterly firm revenues aggregated to industry revenues, we find that correlations of revenue growth across industries are not constant among crisis, boom and common phase. We provide empirical evidence that average correlations are higher during crisis than in common phase. The empirical outcome also shows that average correlations are higher in crisis than in boom and higher in boom than in common phase. We test the hypotheses that average correlations are significantly different by applying permutation and bootstrap techniques. The existence of structural changes in correlation of revenue growth through the phases of business cycle should be applied to research in firm valuation and has implications for diversification decisions in portfolio analysis and risk management