The Cross-Sectional Determinants of Firm Risk

Abstract

Using structural models of the firm, we examine the cross-sectional determinants of equity price risk for a large group of non-financial corporations in the United States. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and prior empirical evidence, the level of assets, firm age, and the level and volatility, as well as the growth of profitability are significant drivers of total risk. In contrast, most financial characteristics are less important with dividend policy and leverage constituting exceptions.