Idiosyncratic Volatility of Small Public Firms and Entrepreneurial Risk

David P. Brown () and Miguel Ferreira ()
Additional contact information
David P. Brown: University of Wisconsin-Madison, School of Business, Grainger Hall, 975 University Avenue, Madison, WI 53706, USA

Quarterly Journal of Finance (QJF), 2016, vol. 06, issue 01, 1-59

Abstract: The average idiosyncratic volatility of small public firms is a positive predictor of future stock returns. This is true for returns of both large and small firms. We consider several economic arguments for this result, including a liquidity premium, and we rule out all but one of them. Our evidence supports the entrepreneurial risk hypothesis, which states that small firms’ idiosyncratic risk is a proxy for risk faced by private business owners, who also happen to be significant shareholders of stock. Expected returns are increasing functions of entrepreneurial risk, and therefore returns are predictable using proxies for this risk, which include small-firm idiosyncratic volatility.

Keywords: Idiosyncratic risk; entrepreneurial risk; small firms (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139216500026
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:06:y:2016:i:01:n:s2010139216500026

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139216500026

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().