Why company-specific risk changes over time

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.