Artificial Intelligence and Firms' Systematic Risk

55 Pages Posted: 25 Jun 2024

See all articles by Tania Babina

Tania Babina

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Anastassia Fedyk

University of California, Berkeley - Haas School of Business

Alex Xi He

University of Maryland - Robert H. Smith School of Business

James Hodson

AI for Good; Cognism; Jožef Stefan Institute

Date Written: November 18, 2023

Abstract

We leverage comprehensive data on firm-level AI investments to examine how firms' systematic risk changes with the advent of artificial intelligence (AI) during the 2010s. Firms that invest more in AI see increases in their systematic risk, measured by equity market beta. This result is unique to AI: robotics, IT, organizational capital, and general R&D investments do not display similar results during the sample period. We show that the increased market beta of AI-investing firms is not explained by financial or operating leverage, asynchronous trading, increased correlation with the tech sector, withinindustry concentration, or correlated investor flows. Instead, our results are consistent with AI investments creating new growth options for firms: AI-investing firms become more growth-like, and the effect on market betas is twice larger on the market upside than on the downside. Overall, our findings provide direct evidence that firms' investments in new technologies such as AI create growth options and affect the composition of the firms' risk profiles.

Keywords: Artificial intelligence, technology, systematic risk, market beta, asset pricing, growth options, cost of capital

Suggested Citation

Babina, Tania and Fedyk, Anastassia and He, Alex Xi and Hodson, James, Artificial Intelligence and Firms' Systematic Risk (November 18, 2023). Available at SSRN: https://ssrn.com/abstract=4868770 or http://dx.doi.org/10.2139/ssrn.4868770

Tania Babina

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://TaniaBabina.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://taniababina.com

Anastassia Fedyk (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Alex Xi He

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

HOME PAGE: http://www.alexxihe.com/

James Hodson

AI for Good ( email )

800 Arlington Boulevard
El Cerrito, CA 94530
United States
9177449036 (Phone)
9177449036 (Fax)

HOME PAGE: http://ai4good.org

Cognism ( email )

92 Albert Embankment
London, SE17TT
United Kingdom

HOME PAGE: http://cognism.com

Jožef Stefan Institute ( email )

Jamova cesta 39
Ljubljana, 1000
Slovenia

HOME PAGE: http://ailab.ijs.si

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