Do idiosyncratic risk, market risk, and total risk matter during different firm life cycle stages?

Abstract

This study examines whether firm life cycle stages affects idiosyncratic risk, market risk and total risk using data of Chinese listed non-financial firms from 2007 to 2016, and further explores the relationship between idiosyncratic risk and cash flow volatility by using an interaction term. To check propensity, we further divided our main sample into SOEs (State-owned Enterprises) and non-SOEs. Findings imply that all three risks are significantly higher during introduction, growth and decline stages because their competitive advantages, resource base, and capabilities are limited. Results showing risks are lower during mature stage. Further, we examine cash flow volatility and found that, respective of firm life cycle stages, it varies in affecting these types of risks. By conducting sensitivity analysis, our results are robust to alternative specifications. This study may helpful for managers and investors while managing different investment portfolios.