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

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

No 14931, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E44 G12 G14 G15 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-rmg
Date: 2009-04
Note: CF
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