Firms’ idiosyncratic stock return volatility has become more volatile in the US since the 1960s. This paper investigates why individual stocks became more volatile over the 1964–2013 period using firm-level total factor productivity (TFP). On average, the volatility of idiosyncratic TFP growth rate has increased, being associated with higher idiosyncratic return volatility. The connection between TFP growth and economic profits provides an explanation for the increase in the idiosyncratic volatility of fundamental cash flows. The results are robust when using timeseries and panel regressions and controlling for cash flow and earnings variability, size, book-to-market, leverage, profitability, age, dividend yield, and stock illiquidity.
Abdoh, Hussein and Liu, Yu, Total Factor Productivity and Idiosyncratic Volatility Trends (May 28, 2020). Available at SSRN: https://ssrn.com/abstract=3612803 or http://dx.doi.org/10.2139/ssrn.3612803