The Theoretical Relationship Between Systematic Risk and Financial (Accounting) Variables

On the causality analysis of the correlation between financial leverage and systematic risk: evidence from Indonesian Stock Exchange

“…In addition, these results also empirically support Bowman's (1979) findings that systematic risk is directly linked to financial leverage and accounting beta. Although Bowman (1979) demonstrates that there is no direct relationship between systematic risk and other variables, such as earnings variability, dividends, size and growth, he does not ignore the empirical results showing that systematic risk has not only linked to leverage, but also those variables, such as earnings variability, dividends, size and growth (Beaver et al, 1970).…”

“…This result, however, is consistent with the results of Sufiyati (1997), Qiu and La (2010), and Soviani (2015) where some of her results show that financial leverage is negatively related to beta. The negative correlation between financial leverage and systematic risk is confirmed, and strongly moderated by the industry and operating leverage (to some extent), supported by Bowman (1979), Mandelker and Rhee (1984), and also Ryan (1997). In spite of the significant results, however, the coefficients of financial leverage, operating leverage, and industry on the main effects show inconsistent signs.…”

“…Although Bowman (1979) demonstrates that there is no direct relationship between systematic risk and other variables, such as earnings variability, dividends, size and growth, he does not ignore the empirical results showing that systematic risk has not only linked to leverage, but also those variables, such as earnings variability, dividends, size and growth (Beaver et al, 1970). The significant empirical results of the relationship between systematic risk and the other accounting variables except for leverage may occur as the variables being tested is most likely a surrogate for another variable, e.g., dividend payout being a surrogate for accounting beta, or that causality may be operating in the opposite direction from that being hypothesized.…”

“…Meanwhile, the researchers, on the other hand, who consider the systematic risk determinants as the second domain, and who examine a relation between two domains can be viewed on the findings of Hamada (1972), Ben-Zion and Shalit (1975), Mandelker and Rhee (1984), Bowman (1979Bowman ( , p. 1981, Robichek and Cohn (1974), Melicher and Rush (1974), and Foster (1986). Although some researchers find that intrinsic business risk (i.e., the demand volatility of a firm's output due to macroeconomic conditions) is the main component of market beta (e.g., Griffin & Dugan, 2003;Mensah, 1992;Chung, 1989), most literatures acknowledge the impact of financial-and-operating leverage on market beta (e.g., Mandelker & Rhee, 1984; Gahlon & Gentry, 1982;Hill & Stone, 1980;John & Reisman, 1994;Schlueter & Sievers, 2013, etc.).…”

Impact of Earnings Smoothness on Stock Prices, Stock Returns and Future Earnings Changes - the Polish Experience

“…Indeed, research studies confirm that earnings variability and cost of equity capital are positively related (Beaver et al 1970;Rosenberg and McKibben 1973;Lev and Kunitsky 1974;Bowman 1979;Gebhardt et al 1999;Gode and Mohanram 2001;Wang and Williams 1994;Verdi 2006;Chen 2009;Markarian and Gillde-Albornoz 2010). Other researchers suggested that relatively smooth earnings might be also associated with relatively low cost of debt because lower volatility in earnings lowers the assessment of the possibility of a firm's bankruptcy (Trueman and Titman 1988).…”