The Competition Channel of Skewness
Firm growth rates in times of crisis take are strongly negatively skewed (Salgado et al, 2019). Examining the Compustat universe of firms, we find that this pro-cyclical left-skew is concentrated on very largest companies in the market. Smaller firms exhibit much less skewness in growth rates when hit by adverse shocks. Furthermore, using a factor decomposition, we show that not the shocks themselves, but rather the reactions of firms to shocks exhibit skewness. We rationalize these observation in a simple framework of a profit maximizing firm. A version of Marshall’s second law of demand implies that price setting firms react to shocks with left-skewed output growth rates, while price taking firms respond symmetrically. Furthermore, left-skewness is increasing in the degree of market power and in the standard deviation of the shock. In light of our model, left-skewed downside risk is not a consequence of disaster shocks, but the result of monopolization and market power.
Authors: