Organization Size, Slack, and Regulatory Uncertainty

"Better get under cover, Sylvester. There's a storm brewing...a whopper!"
--Professor Marvel (Wizard of Oz)

Not a huge gap compared to pre-tariff war period, but it does appear that shares of smaller companies have increased less than their larger share brethren over the past couple of years.

Micro-caps hit hardest since #TradeWar began@DataArbor pic.twitter.com/DbEFl0PiIw

— Liz Ann Sonders (@LizAnnSonders) December 10, 2019

Many factors could be involved outside of trade, of course. But to the extent that there is a significant relationship with policy uncertainty, then what is the underlying explanation?

One is that larger organizations carry more slack. Slack is a pool of excess resources that can be brought to bear during uncertain times to help weather the storm. Slack can be employed to either a) insulate the organization from external forces or threats (e.g., inventory, excess capacity, staff that can contract for better deals), or b) help the organization change in a way to better adapt to the turbulent environmental conditions (e.g., R&D processes, resources for lobbying for institutional change).

Because they possess less slack, smaller organizations are more subject to the vagaries of regulatory uncertainty. Perhaps investors have been pricing this in.