Does Volatility Enable Organizations to Increase their Rank? Evidence from the Private Equity Market

Does performance volatility enable organizations to increase their rank relative to their rivals? While prior research has argued that rankings are derived from organizations’ realized (past) performance, under quality uncertainty, volatility could also confer advantages for increasing rank. These advantages arise because having similar performance as rivals for the same rank counts as a “loss” – that is, it doesn’t help an organization increase its rank relative to rivals – while superior performance counts as a “win,” that is, it enables an organization to increase its rank. Analysis of the relationship between the volatility and ordinal rankings of private equity firms over 2000-2020 supports these arguments. It shows that the lagged standard deviation of firms’ benchmark-adjusted returns was positively associated with increases in their rank, and that increases in maximum past performance drove these effects. These results are robust to different time lags and public-market-equivalent returns. The results suggest that increases in rank may be derived from volatility, rather than higher expected performance