Creative Destruction, Stock Return Volatility, and the Number of Listed Firms

Abstract

Average idiosyncratic volatility and firm idiosyncratic volatility increase with the number of listed firms. Average industry idiosyncratic volatility increases with the number of listed firms in the industry. We explain the relation between idiosyncratic volatility and the number of listed firms through Schumpeterian creative destruction. We show that Schumpeterian creative destruction increases as the number of listed firms increases. However, there is no consistent evidence of an incremental effect of the number of non-listed firms on idiosyncratic volatility either in the aggregate or at the industry level, suggesting that listed firms play a unique role in the dynamism of the economy.

Keywords: Stock return volatility, idiosyncratic risk, creative destruction, firm age, initial public offerings, delists

JEL Classification: G10, G11, G12