Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?

Söhnke M. Bartram, Gregory Brown, René M. Stulz

NBER Working Paper No. 14931
Issued in April 2009
NBER Program(s):   CF

Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in the level of idiosyncratic risk, but less so than firm characteristics. Idiosyncratic risk falls as government stability and respect for the rule of law improve. Idiosyncratic risk is positively related to stock market development but negatively related to bond market development. Surprisingly, we find that idiosyncratic risk is generally negatively related to corporate disclosure quality. Finally, idiosyncratic risk generally increases with shareholder protection. Though there is evidence that R2 increases with creditor rights and falls with the quality of disclosure, these results are driven by the relations between these variables and systematic risk rather than by the impact of these variables on idiosyncratic risk.

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Document Object Identifier (DOI): 10.3386/w14931

Published: Why Are U.S. Stocks More Volatile? SÖHNKE M. BARTRAM, GREGORY BROWN, RENÉ M. STULZ† Article first published online: 19 JUL 2012 DOI: 10.1111/j.1540-6261.2012.01749.x © 2012 The American Finance Association Issue The Journal of Finance The Journal of Finance Volume 67, Issue 4, pages 1329–1370, August 2012

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