Productivity growth observed at the aggregate-level may affect firms very differently. Firms with significant negative reaction (about 70%) far outweigh firms with significant positive reaction (about 30%). We show that the heterogeneous reaction of firms to aggregate productivity growth underlies the negative relationship between stock return and productivity growth at the aggregate level, which contrasts with the positive relationship between firm-level stock return and firm-level productivity growth. We also find that firms whose cashflow growths are negatively affected by aggregate productivity growth are the ones whose accruals growths are positively affected. The heterogeneous reaction among firms to aggregate productivity growth exhibits significant time-variation and is larger in competitive industries, and industries with high IT intensity and younger firms. We also report firms that react positively to aggregate productivity growth tend to be growth firms in competitive industries. Our finding provides an explain to a puzzling fact proposed by Kothari, Lewellen, and Warner (2006) and Hirshleifer, Hou, and Teoh (2009), who report the signs of correlations between earnings growth and stock returns are different at the firm- and at the aggregate-levels.
JEL Classification: G12, O33
Keywords: Heterogeneity, Stock Return, Productivity, Cash Flow, Fallacy of Composition
