Firm Heterogeneity and Aggregate Fluctuations

Abstract

We study how firm heterogeneity shapes the transmission of aggregate shocks. The aggregate response of macroeconomic outcomes to any source of aggregate shocks depends on both the average response across firms and the covariance between firms’ response and their economic weight, which determines whether heterogeneity amplifies or dampens fluctuations. Using U.S. Compustat data from 1990 to 2019 and the Generalized Random Forest estimator, we estimate firm-level responses of sales, investment, and debt issuance to business cycle fluctuations. We uncover substantial heterogeneity driven primarily by non-financial characteristics—particularly industry scope and firm size. Aggregating these responses reveals that firm heterogeneity dampens aggregate fluctuations, especially for investment and debt issuance, as larger firms tend to be less cyclical than the average firm. Our results carry over to exogenously identified shocks and to financial outcomes.