The determinants of systematic risk: A firm lifecycle perspective

• Author: Paula M. Almonacid,Jimmy A. Saravia,Carlos S. García
• Date: 01 January 2021
• DOI: http://doi.org/10.1002/ijfe.1834
• Published date: 01 January 2021

RESEARCH ARTICLE

The determinants of systematic risk: A firm lifecycle

perspective

Jimmy A. Saravia | Carlos S. García | Paula M. Almonacid

Professors, Grupo de Investigación en

Banca y Finanzas, School of Economics

and Finance, Center for Research in

Economics and Finance (CIEF),

Universidad EAFIT, Medellín, Colombia

Correspondence

Paula M. Almonacid, Professor, Grupo de

Investigación en Banca y Finanzas, School

of Economics and Finance, Center for

Research in Economics and Finance

(CIEF), Universidad EAFIT, Carrera 49

Número 7 Sur 50, Medellín, Colombia.

Email: palmona1@eafit.edu.co

Abstract

This paper investigates how systematic risk varies over the lifecycle of the

firm.Ifmarketequitybetaisdetermined by firm characteristics as the lit-

erature on the determinants of systematic risk holds, and if those charac-

teristics 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 sys-

tematic risk. In particular, we maintain that firm age proxies for the mis-

pricing 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 char-

acteristic in the estimation process in order to improve the beta

forecasting.

KEYWORDS

firm lifecycle, financial leverage, intrinsic business risk, mispricing propensity, operating risk,

systematic risk

JEL CLASSIFICATION

G11; G12

“Quite apart from this regression tendency, it

is reasonable to suppose that betas do change

over time in systematic ways in response to

certain changes in the structure of compa-

nies (Blume, 1975, p. 785).”

1|INTRODUCTION

The study of the determinants of systematic risk (market

equity beta) is of great importance for the disciplines of

corporate finance and accounting (Hong & Sarkar, 2007;

Received: 2 February 2019 Revised: 29 February 2020 Accepted: 18 June 2020

DOI: 10.1002/ijfe.1834

Int J Fin Econ. 2021;26:1037–1049. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons, Ltd. 1037