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

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Author Info
Bartram, Sohnke M. (Lancaster University and SSgA)
Brown, Gregory (Unviersity of North Carolina at Chapel Hill)
Stulz, Rene M. (Ohio State University and ECGI)

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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 R[superscript 2] 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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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2009-5.

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Date of creation: Apr 2009
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Handle: RePEc:ecl:ohidic:2009-5

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  1. Ozgur S. Ince & R. Burt Porter, 2006. "INDIVIDUAL EQUITY RETURN DATA FROM THOMSON DATASTREAM: HANDLE WITH CARE!," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 29(4), pages 463-479. [Downloadable!] (restricted)
  2. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Steven Drucker & Manju Puri, 2005. "On the Benefits of Concurrent Lending and Underwriting," Journal of Finance, American Finance Association, vol. 60(6), pages 2763-2799, December. [Downloadable!] (restricted)
  4. Acharya, Viral V & Amihud, Yakov & Litov, Lubomir P., 2008. "Creditor Rights and Corporate Risk-taking," CEPR Discussion Papers 6697, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Rene M. Stulz, 2005. "The Limits of Financial Globalization," NBER Working Papers 11070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Stulz, Rene M., 2005. "The Limits of Financial Globalization," Working Paper Series 2005-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. Brown, Gregory & Kapadia, Nishad, 2007. "Firm-specific risk and equity market development," Journal of Financial Economics, Elsevier, vol. 84(2), pages 358-388, May. [Downloadable!] (restricted)
  8. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October. [Downloadable!] (restricted)
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  9. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February. [Downloadable!] (restricted)
  10. Bekaert, Geert & Harvey, Campbell & Lundblad, Christian T., 2006. "Liquidity and Expected Returns: Lessons from Emerging Markets," CEPR Discussion Papers 5946, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, Ren? M. & Williamson, Rohan, 2003. "Corporate Governance and the Home Bias," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 87-110, March. [Downloadable!]
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