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Determinants of market beta: the impacts of firm-specific accounting figures and market conditions

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  • Tobias Schlueter
  • Soenke Sievers

Abstract

This article examines and extends research on the relation between the capital asset pricing model market beta, accounting risk measures and macroeconomic risk factors. We employ a beta decomposition approach that nests competing models with different business risk proxies and allows to frame cross-model comparison. Because model tests require estimated independent variables resulting in measurement error, we empirically estimate three comparable model specifications with instrumental variable estimators and for the first time provide thorough instrument diagnostics in this setting. Correcting for the heretofore neglected weak instruments problem we find that growth risk (i.e., the risk of firm sales variations that are inconsistent with the market wide trends), is the business risk that explains cross-sectional variations in market beta best. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Tobias Schlueter & Soenke Sievers, 2014. "Determinants of market beta: the impacts of firm-specific accounting figures and market conditions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 535-570, April.
    • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:3:p:535-570
    DOI: 10.1007/s11156-013-0352-1
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    2. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.
    3. T.G. Saji, 2018. "Predicting Market Betas," Paradigm, , vol. 22(2), pages 160-174, December.
    4. Thomas Gramespacher & Armin Bänziger, 2019. "The Bias in Two-Pass Regression Tests of Asset-Pricing Models in Presence of Idiosyncratic Errors with Cross-Sectional Dependence," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-17, June.
    5. Horváth, Lajos & Li, Bo & Li, Hemei & Liu, Zhenya, 2020. "Time-varying beta in functional factor models: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    6. Julio Sarmiento & Mehdi Sadeghi & Juan S. Sandoval & Edgardo Cayon, 2021. "The application of proxy methods for estimating the cost of equity for unlisted companies: evidence from listed firms," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 1009-1031, October.
    7. Kei Ikeda, 2017. "Impact of Japanese Banks' Strategic Stockholdings on their Cost of Capital," Bank of Japan Working Paper Series 17-E-4, Bank of Japan.
    8. Dorsaf Ben Aissia & Narjess Skhiri Hellara, 2019. "Systematic risk, the tradeoff of leverage and IPO first-day returns," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 239-256, July.
    9. Liu, Hao & Zhang, Hao & Gao, Ya-Chun & Chen, Xu-Dong, 2022. "Firm age and beta: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 244-261.

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    More about this item

    Keywords

    CAPM; Cost of capital; Accounting beta; Intrinsic business risk; Growth risk; Instrumental variables; C36; G11; G12;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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