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Fair & Lovely

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On the relation of systematic risk and accounting variables
Chei-Chang Chiou
Department of Accounting, National Changhua University of Education, Changhua, Taiwan, and

Systematic risk and accounting variables 517

Robert K. Su
Department of Accounting, National Chengchi University, Taipei, Taiwan
Abstract
Purpose – This paper seeks to use an analytical approach to examine the relation of systematic risk and accounting variables. Design/methodology/approach – The paper theoretically integrates the capital asset pricing model, Cobb-Douglas function and clean surplus relation to derive the relation. Findings – The analytical results suggest that determinants of systematic risk include earnings, sales growth, book value, dividend, degree of operating leverage (DOL), degree of financial leverage (DFL), market return, and risk-free return. Three general conclusions are: For a firm with positive prior-year earnings and current-year sales growth, if the combined effect of its current book value, dividend and earnings on stock price is positive (negative), then its degree of total leverage has a positive (negative) effect on systematic risk; When the effect of book value and earnings on stock price each is positive and the effect of dividend on stock price is positive (negative), then the dividend has a positive (negative) effect on systematic risk; For a firm with positive (negative) sales growth, its DOL is positively (negatively) related with its DFL for a given level of systematic risk. Originality/value – The findings have significant implications for the risk management literature and practice. Keywords Risk management, Earnings, Dividends Paper type Research paper

1. Introduction Ubiquitous risk faces firms and intensifies in global economy. A success business not only centers on profit, but also on proper risk management. Risk and return go...