Beta and firm age

We document a robust pattern of beta declining over the age of a firm. We find that changes in systematic risk via firm characteristics and life-cycle stages are insufficient to explain this pattern. Moreover, standard proxies for the quantity and quality of information also explain this pattern onl...

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Bibliographic Details
Published inJournal of empirical finance Vol. 58; pp. 50 - 74
Main Authors Chincarini, Ludwig B., Kim, Daehwan, Moneta, Fabio
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.09.2020
Subjects
CAPM
Cost of capital
Estimation risk
Familiarity
Firm age
Time-varying beta
CAPM
Firm age
Cost of capital
Estimation risk
G0
Time-varying beta
Familiarity
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Summary:We document a robust pattern of beta declining over the age of a firm. We find that changes in systematic risk via firm characteristics and life-cycle stages are insufficient to explain this pattern. Moreover, standard proxies for the quantity and quality of information also explain this pattern only partially. To fully explain this pattern we rely on the increasingly important role of familiarity in financial decision making: familiarity is a determinant of beta and firm age is a proxy for the degree of familiarity that investors feel toward individual stocks. To illustrate the implication of our findings, we document that when we control for firm age there is support for the CAPM and its use as an input for the cost of equity capital calculation. •We document a robust pattern of beta declining over the age of a firm.•Firm characteristics and information proxies explain this pattern only partially.•Familiarity that investors feel toward individual stocks plays an important role.•When we control for firm age there is support for the CAPM.•We recommend the use of age–portfolio betas in cost of equity calculation.
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2020.05.003