The effects of firm characteristics on systematic risk of firms quoted at the Nairobi stock exchange: An empirical study
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Date
2003-11Author
Obuyekha, Patrick
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The business environment, in which firms operate, is characterized by
scarcity of resources and numerous uncertainties and as such, investors
need to factor in the element of risk in business decisions. In financial
theory, it is predicted that the higher the risk of an investment, the higher
the expected return demanded by an investor. The capital asset pricing
model leads to the conclusion that there are two types of risk in the
economy: systematic and unsystematic risk. In efficient markets
unsystematic risk (the assets risk that can be diversified away) should
not be important to the investor. The systematic risk is measured by the
beta coefficient.
A central role of financial information is to alter investors' belief about
the assets return and risk. For a fully diversified investor, information
about unsystematic risk will be of little value; but will need asset
information useful in altering assessment of market risk (beta). This is
because for a fully diversified portfolio the problem of risk reduces to
choosing portfolio level for beta.
This paper investigates the determinants of the beta coefficient of firm's
stock returns through analysis of the firms underlying characteristics. We
examine those firm characteristics that have an impact on the individual
firm's stock movements in relation to the market. In this study, the
influence of a firm's financial leverage, operating leverage, size,
profitability, dividend payout ratio, business risk, liquidity and growth
on beta are examined. The study aims to establish whether there is a
relationship between certain firm characteristics and systematic risk.
The research findings are mixed with the relationship between firm
characteristics and systematic risk being found to be relatively weak
when betas are derived from unweighted returns are regressed against
the firm characteristics. There is however a significant relationship
between firms financial characteristics and systematic risk when betas
derived from the weighted returns are used. Using five-year predictor
variables, growth, liquidity and size are found to be statistically
significant. The relationship is stronger when three year average
independent variables are used with profitability, growth, dividend
payout ratio and firm size being significant. This indicates that these firm
characteristics can be useful in the prediction of systematic risk of firms.
Citation
Masters in Business Administration, University of Nairobi (2003)Publisher
University of Nairobi Faculty of Commerce