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Determinants of Market Beta: The Impacts of Firm-Specific Accounting Figures and Market Conditions

51 Pages Posted: 27 Apr 2011 Last revised: 10 Feb 2013

Tobias Schlueter

University of Cologne - Department of Banking & Finance

Soenke Sievers

University of Paderborn - Faculty of Business Administration, Economics and Business Computing

Date Written: February 4, 2013

Abstract

This article examines and extends research on the relation between the capital asset pricing model (CAPM) 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.

Keywords: CAPM, cost of capital, accounting beta, intrinsic business risk, growth risk, instrumental variables

JEL Classification: C36, G11, G12

Suggested Citation

Schlueter, Tobias and Sievers, Soenke, Determinants of Market Beta: The Impacts of Firm-Specific Accounting Figures and Market Conditions (February 4, 2013). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1813535 or http://dx.doi.org/10.2139/ssrn.1813535

Tobias Schlueter (Contact Author)

University of Cologne - Department of Banking & Finance ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
00492214701670 (Phone)

Soenke Sievers

University of Paderborn - Faculty of Business Administration, Economics and Business Computing ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

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