Three essays on firm-specific volatility

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT REQUEST OF AUTHOR.] The central objective of my dissertation is to study the behavior of firm-specific volatility in countries around the world. Consistent with existing literature, I use firm-specific volatility to measure two important concepts: the information content of stocks and firm-specific risk. In Chapter One I hypothesize that the institutional environment in a country has direct consequences on firm-specific risk. A stronger institutional environment results in higher product market competition, higher firm turnover, and higher rates of technological innovation. Consistent with my predictions, I find that creative destruction explains a significant proportion of the cross-sectional differences in firm specific volatility in 40 countries. In Chapter Two I look at the cyclical fluctuations of comovement in the US and 27 other countries during the period 1980-2005. I find that, in general, comovement tends to be countercyclical. Additionally, I find wide cross-sectional variation in the strength of association between comovement and the business cycle. This strength of association positively correlates to a measure of variability in information production. In turn, I find that the information environment can reduce variability in information production and reduce cyclical fluctuations in stock return correlations. Finally, in Chapter I find that idiosyncratic risk has explanatory power on the cross-section of expected returns in international markets. I find strong support to the theory in all countries under study. In eight of the fifteen countries surveyed the relation is significantly positive while in the remaining seven countries the relation is zero. In no instance do I find the relation to be negative. In addition, the results from my analysis are economically significant. I find that after controlling for stock characteristics (beta, size, and momentum) the response in excess returns to a 1% increase in monthly-expected idiosyncratic risk ranges across countries between zero and one half of a percent.