Firm-Specific Risk and Equity Market Development

Abstract:     
We examine the increase in firm-specific risk in the U.S. stock market which has been documented by prior research. We show that the observed increase is due solely to 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.

Number of Pages in PDF File: 50

Keywords: Idiosyncratic Risk, Firm-specific Risk, Market Risk

JEL Classification: G11

working papers series