Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?
Söhnke M. Bartram
Warwick Business School - Department of Finance
affiliation not provided to SSRN
Rene M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
April 22, 2009
Fisher College of Business Working Paper No. 2009-03-005
Charles A. Dice Center Working Paper No. 2009-5
Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in the level of idiosyncratic risk, but less so than firm characteristics. Idiosyncratic risk falls as government stability and respect for the rule of law improve. Idiosyncratic risk is positively related to stock market development but negatively related to bond market development. Surprisingly, we find that idiosyncratic risk is generally negatively related to corporate disclosure quality. Finally, idiosyncratic risk generally increases with shareholder protection. Though there is evidence that R2 increases with creditor rights and falls with the quality of disclosure, these results are driven by the relations between these variables and systematic risk rather than by the impact of these variables on idiosyncratic risk.
Number of Pages in PDF File: 51
JEL Classification: E44, G12, G14, G15, G32working papers series
Date posted: April 25, 2009
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