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Beta and firm age

Ludwig B. Chincarini, Daehwan Kim and Fabio Moneta

Journal of Empirical Finance, 2020, vol. 58, issue C, 50-74

Abstract: We document a robust pattern of beta declining over the age of a firm. We find that changes in systematic risk via firm characteristics and life-cycle stages are insufficient to explain this pattern. Moreover, standard proxies for the quantity and quality of information also explain this pattern only partially. To fully explain this pattern we rely on the increasingly important role of familiarity in financial decision making: familiarity is a determinant of beta and firm age is a proxy for the degree of familiarity that investors feel toward individual stocks. To illustrate the implication of our findings, we document that when we control for firm age there is support for the CAPM and its use as an input for the cost of equity capital calculation.

Keywords: Time-varying beta; Cost of capital; CAPM; Firm age; Estimation risk; Familiarity (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:58:y:2020:i:c:p:50-74

DOI: 10.1016/j.jempfin.2020.05.003

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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