The Impact of Cash Flow Volatility on Systematic Risk

Journal of Insurance Issues, Vol. 31, No. 1, pp. 43-71, 2008

37 Pages Posted: 19 Jan 2009 Last revised: 20 Jan 2009

See all articles by Nicos Scordis

Nicos Scordis

School of Risk Management and Insurance, Tobin College of Business, St John's Unversity

James Barrese

St. John's University - School of Risk Management, Insurance and Actuarial Science

Ping Wang

St. John's University - School of Risk Management, Insurance and Actuarial Science

Date Written: Spring 2008

Abstract

In a word, where information is costly, volatile cash flows create information acquisition costs that reduce value. Thus, managers act to reduce their firm's volatility of cash flow in anticipation of higher value for shareholders. However, when managers reduce the firm's cash flow volatility, they also affect the systematic risk of their firm's stock. The direction of the relationship between cash flow volatility and systematic risk depends on the relative value of the firm's growth opportunities in relation to the firm's assets-in-place. We use a panel sample of 542 observations from United States insurance firms to investigate the relationship between cash flow volatility and systematic risk. The direction of the relationship between cash flow volatility and systematic risk has implications both for the education and for the practice of risk management. We make recommendations for risk management programs. Our findings also have implications for clienteles among the firm's stockholders. While the theoretical relationship between cash flow volatility and systematic risk can be generally applied, we only test this relationship for a sample of insurance firms.

Keywords: Cash flow volatility, beta, total risk, systematic risk

JEL Classification: G22

Suggested Citation

Scordis, Nicos and Barrese, James and Wang, Ping, The Impact of Cash Flow Volatility on Systematic Risk (Spring 2008). Journal of Insurance Issues, Vol. 31, No. 1, pp. 43-71, 2008, Available at SSRN: https://ssrn.com/abstract=1329403

Nicos Scordis (Contact Author)

School of Risk Management and Insurance, Tobin College of Business, St John's Unversity ( email )

101 Astor Place
New York, NY 10003
United States

James Barrese

St. John's University - School of Risk Management, Insurance and Actuarial Science ( email )

United States

Ping Wang

St. John's University - School of Risk Management, Insurance and Actuarial Science ( email )

United States

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