The Business Cycle, Macroeconomic Shocks and the Cross Section: The Growth of UK Quoted Companies

Co-movements and correlations in the major macroeconomic aggregates has been the focus of much recent literature in business cycle research. In this paper we provide another dimension to business cycle analysis. We examine the evolution of the cross sectional distribution of the growth rates of UK quoted companies from 1968 to 1997 and find correlations between aggregate business cycle fluctuations and the higher moments of the cross sectional distribution of growth rates. To explain this we analyse the sensitivity of firms to aggregate shocks, conditioning growth on firm size, age and industry. We find that the contemporaneous effects of aggregate shocks, both positive and negative, are significantly more pronounced for firms in the interior of growth rate range. This explains cycle-related patterns in the dynamics of the moments of the growth rate cross section. These findings are of importance in understanding firm level as well as business cycle dynamics.