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Bridge over ocean
1 September 2006 Financial Analysts Journal Volume 62, Issue 5

Why Company-Specific Risk Changes over Time

  1. James A. Bennett
  2. Richard W. Sias

Company-specific risk climbed steadily between 1962 and 1999 in the U.S. market
but fell sharply between 2000 and 2003. This article explores the hypothesis
that three factors are primarily responsible for observed changes in
company-specific risk: changes in the market weights of “riskier”
industries, changes in the relative role of small-capitalization stocks in the
market, and measurement error associated with changes in within-industry
concentration. Empirical tests reveal that each factor contributes to changes in
company-specific risk over time and that, combined, these three factors largely
explain changes in company-specific risk over the past 40 years.

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