Determinants of Idiosyncratic Volatility for Internet Companies: Evidence from China
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Internet companies are developing rapidly and are harder to value due to a greater uncertainty regarding their future growth. This study is using a group of listed Chinese internet companies to investigate whether the idiosyncratic volatility (“IV” hereafter) of Chinese internet companies is significantly higher than that of the control firms, and, if so, whether such a higher IV is driven by measures of greater uncertainty regarding their future growth. I compare the internet companies to three control groups, including (1) all other A-shares firms, (2) firms that are most identical in accounting figures but from other industries, and (3) high-tech firms. There are three main findings. Firstly, I find that the IV of Chinese internet companies is significantly higher than the first and second control groups. Secondly, IV has shown a more significant effect on the stock returns of the Chinese internet companies than all control groups. Thirdly, I find that the book-to-market ratio of internet firms has a more significantly negative effect on IV than that of all control firms. In sum, my results imply that internet companies have more firm-specific risk due to the uncertainty of their future growth. I believe that my study can contribute to a better knowledge on how to value an internet company.