Firm Age and Fluctuations in Idiosyncratic Risk

40 Pages Posted: 16 Mar 2006

See all articles by Jason Fink

Jason Fink

James Madison University - College of Business

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Kristin Fink

James Madison University - College of Business

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: May 2004

Abstract

This paper presents empirical evidence that fluctuations in idiosyncratic risk are largely driven by the age characteristics of the firms composing the market. Consistent with previous studies, 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 the typical public firm, combined with the increasing number of firms going public over the last 30 years, has caused the increase in idiosyncratic risk over the last four decades. We show that after controlling for the proportion of young firms in the market, this time period exhibits no trend in the time series of idiosyncratic risk. Moreover, we find some evidence of a negative trend in idiosyncratic risk after controlling for other measures of firm maturity.

Keywords: Idiosyncratic Risk

JEL Classification: G10

Suggested Citation

Fink, Jason and Grullon, Gustavo and Fink, Kristin and Weston, James Peter, Firm Age and Fluctuations in Idiosyncratic Risk (May 2004). Available at SSRN: https://ssrn.com/abstract=891173 or http://dx.doi.org/10.2139/ssrn.891173

Jason Fink

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States
540-568-8107 (Phone)

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Kristin Fink

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States

James Peter Weston (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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