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Systematic Risk Characteristics of Corporate Equity

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  • Geoffrey Shuetrim

    (Reserve Bank of Australia)

Abstract

This paper finds evidence that firms may manipulate their systematic risk. This contrasts with previously held views that changes in estimates of systematic risk were an artefact of the estimators used. The central finding is that firms take actions which result in their equity betas adjusting toward unity, where equity betas are a common measure of systematic risk. This convergence phenomenon appears to result in older and larger firms having equity betas that are closer to unity than smaller and younger firms. The relationship between equity beta convergence and firm size is reconciled with the well documented negative correlation between equity betas and firm size. Also, greater deviations of systematic risk from the market average are found to be associated with a higher probability of being delisted. Having refuted the hypothesis that observed changes in systematic risk are an artefact of the estimation process, some implications for asset-market efficiency are explored.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9802.

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Date of creation: Feb 1998
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Handle: RePEc:rba:rbardp:rdp9802

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Related research

Keywords: systematic risk; equity betas; convergence;

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References

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  1. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
  2. Stambaugh, Robert F., 1982. "On the exclusion of assets from tests of the two-parameter model : A sensitivity analysis," Journal of Financial Economics, Elsevier, vol. 10(3), pages 237-268, November.
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  8. Shanken, Jay, 1985. "Multivariate tests of the zero-beta CAPM," Journal of Financial Economics, Elsevier, vol. 14(3), pages 327-348, September.
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  13. Reinganum, Marc R, 1981. "The Arbitrage Pricing Theory: Some Empirical Results," Journal of Finance, American Finance Association, vol. 36(2), pages 313-21, May.
  14. Chan, K C & Chen, Nai-Fu, 1988. " An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk," Journal of Finance, American Finance Association, vol. 43(2), pages 309-25, June.
  15. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
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  17. Blume, Marshall E & Husic, Frank, 1973. "Price, Beta, and Exchange Listing," Journal of Finance, American Finance Association, vol. 28(2), pages 283-99, May.
  18. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
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Cited by:
  1. William Shambora & Shamila Jayasuriya, 2008. "The world is shrinking: Evidence for stock market convergence," Economics Bulletin, AccessEcon, vol. 7(14), pages 1-12.

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