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Systematic Risk Characteristics of Corporate Equity

Author

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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.

Suggested Citation

  • Geoffrey Shuetrim, 1998. "Systematic Risk Characteristics of Corporate Equity," RBA Research Discussion Papers rdp9802, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9802
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    File URL: http://www.rba.gov.au/publications/rdp/1998/pdf/rdp9802.pdf
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    References listed on IDEAS

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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.

    More about this item

    Keywords

    systematic risk; equity betas; convergence;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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