IPO Vintage and the Rise of Idiosyncratic Risk

Abstract

This paper presents empirical evidence that the recent rise in idiosyncratic risk is driven by the increasing propensity of firms to issue public equity at an earlier stage in their life cycle. We find that the age of the typical firm at its IPO date has fallen dramatically from nearly 40 years old in the early 1960s to less than 5 years old by the late 1990s. Since younger firms tend to be riskier, this systematic decline in the average age of IPOs, combined with the increasing number of firms going public over the last 30 years, has caused a significant increase in idiosyncratic risk. We show that after controlling for the proportion of young firms in the market, there is no trend in the time series of idiosyncratic risk. Moreover, we find a negative trend in idiosyncratic risk after controlling for other measures of firm maturity.