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

  • Bartram, Sohnke M.

    (Lancaster University and SSgA)

  • Brown, Gregory

    (Unviersity of North Carolina at Chapel Hill)

  • Stulz, Rene M.

    (Ohio State University and ECGI)

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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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2009/2009-5.pdf
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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
Contact details of provider: Phone: (614) 292-8449
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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