The determinants of systematic risk: A firm lifecycle perspective

Abstract

This paper investigates how systematic risk varies over the lifecycle of the firm. If market equity beta is determined by firm characteristics as the literature on the determinants of systematic risk holds, and if those characteristics change over the lifecycle of the firm following a definite pattern as firm lifecycle theory suggests, then market equity beta should change over the lifecycle of the firm following a predictable pattern. Our findings indicate that holding other determinants of beta constant, the coefficient of systematic risk tends to fall in magnitude following a nonlinear pattern as firm age increases. In addition, we find that the volatility of market equity beta also tends to fall over the lifecycle of the firm. We argue that our main variable of concern, that is, firm age, proxies for variables that have hitherto been omitted in the literature on the determinants of systematic risk. In particular, we maintain that firm age proxies for the mispricing propensity that young firms lose as they mature. This research is useful for both practitioners and researchers in that it may suggest ways to adjust empirical estimates of systematic risk. In addition, our results are important for research on beta forecasting as they show that the length of the stationary interval of betas is shorter for young companies, and therefore it is necessary to take into account this time varying characteristic in the estimation process in order to improve the beta forecasting.

Retracted: International expansion and audit opinion shopping: A signaling perspective

“…Perhaps the reason for this is that during a period of decline, when the company's market share is shrinking (Saravia et al., 2020), and the management within the international enterprises have meagre expectations for the future and therefore have little interest in audit collusion. However, during the growth and maturity stage of a company, the enterprise is in the development stage and is still exposed to many external threats and uncertainties (McAdam & McAdam, 2008).…”

Board diversity and systematic risk: evidence from emerging markets

“…, 2021). Saravia et al . (2021) suggest that firms with higher growth options have higher systematic risk.…”

“…Lewellyn and Muller-Kahle (2012) suggest that board duality represents an enhanced CEO power condition, leading the CEO to take risks that others would avoid. Growth opportunities have a positive relationship with systematic risk (Saravia et al, 2021). Saravia et al (2021) suggest that firms with higher growth options have higher systematic risk.…”

“…Growth opportunities have a positive relationship with systematic risk (Saravia et al, 2021). Saravia et al (2021) suggest that firms with higher growth options have higher systematic risk. Firms with higher growth opportunities are more motivated to take risks, especially in countries that do not have strict regulations (Alipour and Yaprak, 2022).…”

Income elasticity of demand and stock market beta

“…Mueller and Sirower (2003) argue using firm lifecycle theory that the vulnerability of young companies to economy‐wide shocks is higher than that of mature companies, so their market equity betas should be higher. Using a sample of US firms, Saravia et al (2021) find that the systematic risk coefficient falls in magnitude following a nonlinear pattern as firm age increases.…”