Idiosyncratic volatility of small public firms and entrepreneurial risk

David P. Brown, Miguel A. Ferreira

Research output: Contribution to journalArticle

2 Citations (Scopus)

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. Read More: http://www.worldscientific.com/doi/abs/10.1142/S2010139216500026?journalCode=qjf
Original languageEnglish
Article number1650002
Pages (from-to)1-59
Number of pages59
JournalQuarterly Journal of Finance
Volume6
Issue number01
DOIs
Publication statusPublished - 2016

Keywords

  • Idiosyncratic risk
  • entrepreneurial risk
  • small firms

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