Monday, April 18, 2005

Is risk increasing or decreasing?

IPO Vintage and the Rise of Idiosyncratic Risk by Jason Fink, Kristin Fink, Gustavo Grullon, James Weston

While well documented, increased risk (and in particular increased firm specific risk) has been a puzzle for researchers for quite some time. With improve transparency and deeper markets, one could speculate that risk should be decreasing, but researchers have not been finding this. For instance:
"recent studies by Campbell, Lettau, Malkiel, and Xu (2001) (henceforth CLMX), Malkiel and Xu (2003), Fama and French (2004), Wei and Zhang (2004), and Jin and Myers (2004) document that, over the past 30 years, U.S. public firms exhibit higher firm specific return volatility, more volatile income and earnings, lower returns on equity, and lower survival rates. The recurring theme in all these studies is that firm risk, however defined, has increased."
But now Fink, Fink, Grullon, and Weston may provide the explanation: firms are going public sooner. When the age of firms is controlled for, there does not appear to be an increase in systematic risk and in fact there may be a decrease!
"We argue that the rise in firm specific risk can be explained by the interaction
of two reinforcing factors: a dramatic increase in the number of new listings and a
simultaneous decline in the age of the firm at IPO."

"we find that after controlling for age and other measures of firm maturity (e.g., book-to-market, size, profitability, etc.), there is a negative trend in idiosyncratic risk."
Go ahead and read it! Interesting and a quick read! (and the Finks are at JMU (one of my favorite places) so you know it has to be good!!!!)

Suggested Citation
Fink, Jason, Fink, Kristin, Grullon, Gustavo and Weston, James Peter, "IPO Vintage and the Rise of Idiosyncratic Risk" (February 2005). 7th Annual Texas Finance Festival Paper.

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