This paper empirically examines the hypothesis that the stock price of publicly traded companies serves as a common signal to privately held firms and contribute to aggregate fluctuations by creating commonalities among private firms. Using data from Korea for the period of 2000-2015, we find evidence for the hypothesis with industry-level aggregate volatility and the stock price of small-size public companies. Specifically, a positive cross-sectional relation exists between the volatility of an
industry and the presence of small—but not large—public firms in the industry. Further, the positive relation is attributable to the commonality in private firms’ growth around the stock price of small—but not large—public industry peers. We also find that the industry volatility that is related to the stock price of small public firms is the one that is unique to the industry and unrelated to marketwide movements. Our results suggest that small-size public companies play a unique role in aggregate fluctuations by making private firms cohesive within an industry but distinct across industries. In short, small-size public companies serve as a counterbalance to larger public firms who impose market-wide shocks across companies in different industries.
Keywords: Aggregate fluctuation; Private firms; Public peers; Firm size; Industry; Stock price
JEL classification: G14; G31; G32
