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A Test of the Equivalent-Risk Class Hypothesis

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  • Gonedes, Nicholas J.

Abstract

Many students of business finance subsume the risks associated with a firm's income stream under two general cognomens, namely, “business risk†and “financial risk.†1 The degree of business risk associated with a firm's income stream is considered to be a function of all determinants of risk except those that relate to the means by which a firm's operations are financed (i.e., the nature of a firm's capital structure). In general, business risk is determined by a firm's asset structure, the purposes for which a firm's assets are used, and the efficiency and effectiveness with which a firm's assets are utilized. The determinants of business risk include the competitive position of a firm, the nature of a firm's operating expenses, the intensity of demand for a firm's products, and a firm's managerial resources, inter alia. A measurement of the variability of net operating income (i.e., earnings before interest expenses and income taxes) is usually employed as a surrogate of business risk.

Suggested Citation

  • Gonedes, Nicholas J., 1969. "A Test of the Equivalent-Risk Class Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(2), pages 159-177, June.
    • Handle: RePEc:cup:jfinqa:v:4:y:1969:i:02:p:159-177_01
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    Cited by:

    1. Groh, Alexander P. & Gottschalg, Oliver, 2009. "The opportunity cost of capital of US buyouts," IESE Research Papers D/780, IESE Business School.
    2. T. Johnson & P. A. R. Maxwell, 1976. "Homogeneous Risk Classifications for Industry Studies," The Economic Record, The Economic Society of Australia, vol. 52(1), pages 94-103, March.
    3. Groh, Alexander Peter & Gottschalg, Oliver, 2011. "The effect of leverage on the cost of capital of US buyouts," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2099-2110, August.
    4. Alexander Peter Groh & Oliver Gottschalg, 2008. "The Opportunity Cost of Capital of US Buyouts," NBER Working Papers 14148, National Bureau of Economic Research, Inc.

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