International industry data permits testing whether the industry-speci…c impact of cross-country di¤erences in institutions or policies is consistent with economic theory. Empirical implementation requires specifying the industry characteristics that determine impact strength. Most of the literature has been using US proxies of the relevant industry characteristics. We show that using industry characteristics in a benchmark country as a proxy of the relevant industry characteristics can result in an attenuation bias or an ampli…cation bias. We also describe circumstances allowing for an alternative approach that yields consistent estimates. As an application, we reexamine the in‡uential conjecture that …nancial development facilitates the reallocation of capital from declining to expanding industries.

[Link to the latest version] We estimate the volatility of plant–level idiosyncratic shocks in the U.S. man-ufacturing sector. Our measure of volatility is the variation in Revenue Total Factor Productivity which is not explained by either industry – or economy–wide factors, or by establishments ’ characteristics. Consistent with previous studies, we find that idiosyncratic shocks are much larger than aggregate random distur-bances, accounting for about 80 % of the overall uncertainty faced by plants. The extent of cross–sectoral variation in the volatility of shocks is remarkable. Plants in the most volatile sector are subject to about six times as much idiosyncratic uncertainty as plants in the least volatile. We provide evidence suggesting that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

The composition of corporate borrowing between bank loans and market debt varies substantially, both across countries and over the business cycle. This paper develops a new model of firm dynamics, where firms choose both the scale and composition of their borrowing, in order to understand the aggregate implications of variation in debt structure. Banks are assumed to differ from markets in their ability to restructure debt payments when a firm is in financial distress; however, banks ’ flexibility in distress comes at the expense of tougher lending standards. The steady-state of the model is consistent with key cross-sectional facts about debt composition: in particular, firms simultaneously use bank loans and market debt, and the share of bank loans in total debt is negatively related to its net worth. Over the business cycle, I show that asymmetric shocks to banks ’ lending costs generate substitution from bank loans to market debt, as in the US during the 2007–2009 recession. Additionally, these shocks have magnified effects if the economy is initially more bank-reliant. For example, the recession they generate is 15–30 % deeper in a version of the model calibrated to Europe than in one calibrated to the US. I then study the macroeconomic effects of corporate finance policies aimed at encouraging market debt financing by small and medium-sized firms. While these policies stimulate investment of small firms, they also induce mid-sized firms to adopt a debt structure that increases

International industry data permits testing whether the industry-speci…c impact of cross-country di¤erences in institutions or policies is consistent with economic theory. Empirical implementation requires specifying the industry characteristics that determine impact strength. Most of the literature has been using US proxies of the relevant industry characteristics. We show that using industry characteristics in a benchmark country as a proxy of the relevant industry characteristics can result in an attenuation bias or an ampli…cation bias. We also describe circumstances allowing for an alternative approach that yields consistent estimates. As an application, we reexamine the in‡uential conjecture that …nancial development facilitates the reallocation of capital from declining to expanding industries.