Firm Age and Fluctuations in Idiosyncratic Risk
40 Pages Posted: 16 Mar 2006
Date Written: May 2004
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: Suggested Citation