خطر و بازار سهام توسعه شرکت خاص

We show that the increase in firm-specific risk in the US stock market is the result of new listings by riskier companies. In addition, our results explain why prior researchers have found that growth opportunities, profit margin, firm size, and industry composition (among other factors) are related to increases in firm-specific risk. The new listing effect is not driven by small companies becoming riskier but instead by a riskier sub-sample of the economy becoming publicly traded. These results are consistent with prior research that documents time trends in financial market development.

Recent research shows that firm-specific risk in US equity markets has increased over the last few decades (Campbell, Lettau, Malkiel, and Xu, 2001; hereafter, CLMX). This discovery is puzzling for at least two reasons. First, the US economy has become notably more stable recently, experiencing only two mild recessions in the last 20 years. (see, e.g., McConnell and Perez-Quiros, 2000; Blanchard and Simon, 2001; Stock and Watson, 2002). Second, the volatility of broad market indices has not increased. Just as curious is that until recently the trend in idiosyncratic risk has gone largely unnoticed. In part, this could be because traditional asset pricing theory concludes firm-specific, as opposed to market-wide, risk can be diversified away and therefore should not be a priced risk factor. However, idiosyncratic risk is important for many reasons. First, high levels of idiosyncratic risk may be the result of low correlations between stocks and thereby increase the number of securities required to generate a well-diversified portfolio (see CLMX, pp. 23–27). Similarly, some investors cannot diversify (e.g., participants in employee stock option plans) and must bear idiosyncratic risk. Second, stock option prices depend on the total volatility of the underlying stock of which idiosyncratic volatility is the largest component. Third, a large and developing corporate risk management literature indicates that managers at non-financial corporations carefully manage firm-specific risks including their own equity price risk (see Pace, 1999). Fourth, the level of idiosyncratic risk could have important consequences for the amount of information conveyed by stock returns (see Durnev, Morck, Yeung, and Zarowin, 2003). Fifth, and perhaps most important, recent papers by Goyal and Santa-Clara (2003) and Ang, Hodrick, Xing, and Zhang (2006) show that idiosyncratic risk may be a priced risk factor (however Bali, Cakici, Yan, and Zhang, 2005, do not find a significant premium for idiosyncratic risk in an extended sample). Following the findings of CLMX, several papers have investigated the determinants of increasing firm-specific risk. Each of these studies finds some specific factor(s) associated with the increase in firm-specific risk. Together, they show that the trend in idiosyncratic risk is associated with trends toward lower and more volatile profit margins, smaller size, lower dividends, higher growth rates, and the rise of riskier industries (specific results of these studies are summarized in the Section 2.1). In this paper we propose a simple and unifying explanation for the increase in firm-specific risk: Increasingly risky firms have listed publicly, thus the overall composition of publicly traded firms has changed significantly over the last 40 years. In most of our tests, this new listing effect explains the vast majority of the increase in idiosyncratic risk. It also explains many of the results shown by other researchers investigating this issue (as well as some related issues). In general, we show that the new listing effect is both necessary and sufficient for explaining the trend in idiosyncratic risk. It is sufficient in so far as there is generally no significant trend in idiosyncratic risk after accounting for the year a firm lists.1 It is necessary in that the year a firm lists provides additional explanatory power beyond the variables examined in other studies. We stress that our results are not related directly to firm age. In particular, our primary finding is not that newly listed firms in general have higher idiosyncratic risk which decays as the firm matures (suggesting that an increasing proportion of newly listed firms could lead to an upward trend in idiosyncratic risk). Instead, we find that firms with increasingly and persistently higher idiosyncratic risk have been listing over the last 40 years, suggesting a fundamental change in the character of a typical publicly traded firm.2 The new listing effect also explains the decline in synchronicity (measured as R2 of a linear factor model) in the US market shown by prior literature (see CLMX and Durnev, Morck, Yeung, and Zarowin, 2003, and the cites therein). Newly listed firms have lower R2 than firms that have listed earlier, leading to a decline in R2 as more of these firms are added to the sample. There are a variety of potential sources for the changes in the riskiness of new listings. One possibility is that the riskiness of all companies exhibits long-term trends. However, we find no evidence of this in economy-wide measures of business failure rates, bad loans, or corporate profits. Another possibility is that the access to public equity markets has changed over time. So, in effect our method of categorizing firms by listing year is a crude method for characterizing the level of financial development. This is consistent with the theory and evidence presented by Rajan and Zingales (2003). They define financial development as “the ease with which any entrepreneur or company with a sound project can obtain finance” (p. 9) and show that changes over time in specific measures of financial development are not monotonic. Moreover, their equity-based indicators of financial development reveal time series properties similar to those we show for the idiosyncratic risk levels of new firms from 1926 to 2004. This final result of our analysis leads us to believe that the willingness of investors to supply equity to risky new firms varies over time and that this variation explains observed trends in idiosyncratic risk. The fundamental source of this variation could be related to cross-border trade and capital flows as suggested by Rajan and Zingales (2003) the emergence of low priced stocks, as suggested by Brandt, Brav, and Graham (2005; hereafter BBG ), or other factors. Nonetheless, the resulting variation in the types of firms undertaking new issues appears to explain not only the trend in idiosyncratic risk but also trends in other important firm characteristics such as size, profit margin, growth opportunities, and dividend policy. The remainder of the paper is organized as follows. Section 2 surveys the literature. Section 3 describes our hypothesis in greater detail, and Section 4 describes the data we use and our methodology. In Section 5 we present our key results on idiosyncratic risk. Section 6 reconciles these results with some findings from recent research. Section 7 shows that our findings are not driven by a riskier economy and relates our results to financial market development. Finally, Section 8 concludes.

The primary result in this paper is to show that the previously documented increase in idiosyncratic risk in the post-war era is the result of the new listing effect: Firms that list later in the sample have persistently higher idiosyncratic volatility than firms that list earlier. Furthermore, firms that list in any given decade do not display a time trend in idiosyncratic volatility. The importance of listing groups in explaining the time trend remains when we also control for other factors (such as firm size, profit margin, and growth options) that have been proposed by prior research as explanations for the increase in idiosyncratic volatility. Instead, we find that a firm's listing group also explains the trends in these variables. Overall, we show that this increase in firm risk is actually a sampling problem. Economy-wide firm-specific risks (like firm survival rates and average profitability) have not changed, while at the same time risk measures for the typical listed firm have increased. In essence, our findings do not necessarily refute the findings of prior research but instead provide a unifying explanation. As an illustration, suppose it is observed that the average age of the people in a swimming pool declines. Some people note that the average weight has gone down, others note that the average height has gone down. These are both potentially important and valid observations, but our analysis is akin to pointing out that the change in age is due to a bunch of kids jumping in. It is both a necessary and sufficient explanation for understanding the noted phenomenon (as well as the other observations). In our analysis, we also explore the link between the time series of average idiosyncratic volatility and financial market development. In particular, the time series of idiosyncratic volatility displays the same U-shape pattern as measures of financial market development shown by Rajan and Zingales (2003) between 1929 and 2004. We show that, in the post-war era, the increase in idiosyncratic volatility is concentrated in the part of the economy that has been able to access the public equity market because of greater financial market development. To conclude, the contribution of this paper can be seen as bringing to light inter-linkages between four recent results in financial economics: (1) CLMX who show that average idiosyncratic volatility has increased over time; (2) Fama and French (2004), who show that newly listed companies have riskier fundamentals; (3) Rajan and Zingales (2003), who examine financial market development; and (4) Morck, Yeung, and Yu (2000), who show that stock-price synchronicity is linked to per capita GDP and investor protection.