Why Are Successive Cohorts of Listed Firms Persistently Riskier?

Abstract

Prior studies show that the risk level of each new cohort of listed firms is higher than its predecessor's. We find that these risk differences are persistent and investigate two potential explanations: (1) Each cohort adopts and retains operating innovations that are associated with higher risks, and (2) increasing numbers of younger and less‐experienced firms are represented in each new cohort. Our results support the first explanation. Each new cohort uses riskier production technologies and operates in more competitive product markets than its predecessor.

Improving the measures of real earnings management

“…D1 of Brown and Kapadia (2007) and Fig. 3 of Srivastava and Tse (2016).) Similar patterns are observed in some empirical manifestations of competitive strategy, such as profitability, survival rates, special items, earnings volatility, and market-to-book ratio.…”

“…Sections 3.1.1-3.1.4 show that the oldest and youngest cohorts within industries differ in their characteristics, because of dissimilarity in life-cycle stages or technological vintages. I extend prior studies that document such patterns in the overall set of listed firms to within-industry contexts (Brown and Kapadia 2006;Srivastava and Tse 2016). Many research methods in accounting and finance assume uniformity in characteristics of same-industry firms.…”