Innovation and idiosyncratic risk: an industry- and firm-level analysis

Recent studies find that idiosyncratic risk (IR)the degree to which firm-specific returns are more volatile than aggregate market returnshas increased since the 1960s and attribute this to economy-wide factors such as the role of the IT revolution. Yet no innovation data is used in these studies. To gain further insights into the relationship between technology and IR, our aricle studies whether firms and industries that are more RD intensive are in fact characterized by higher IR due to how innovation affects the uncertainty of expected future profits. While the industry-level results prove inconclusive, a clear relationship is found between firm-level RD intensity and firm-level volatility of returns.