Assessing the Risk Relevance of Accounting Variables in Dynamic Market Conditions

4 Pages Posted: 12 Jul 2011

See all articles by Mark Brimble

Mark Brimble

Griffith University - School of Accounting, Banking and Finance - Nathan and Logan Campuses; Centre for Financial Independence and Education

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Date Written: July 12, 2011

Abstract

Purpose - This paper examines the contemporary association between accounting information and a number of measures of systematic (beta) risk that incorporate dynamic market features. The goal is to determine the fundamental accounting drivers of beta and to assess whether their explanatory variable power has changed or declined over time.

Design/methodology/approach - Beta estimates are calculated using adjustments for thin-trading, central tendency, leverage and time variance. Accounting risk variables are derived from theoretical foundations and prior empirical research, and classified as operating, financial or growth.

Findings - Results show a strong association between accounting variables (operating and growth) and systematic risk that is consistent over time, but with some industry and size differences and possible country effects. Accounting variables are able to capture dynamic risk shifts and generally are able to outperform naïve M-GARCH and industry betas in predicting next year’s systematic risk.

Practical Implications - Internal management and external decision making. Enables the development of more efficient ex post risk measures, isolating actual risk determinants rather than just determining the level of risk, overcoming the problem that conventional ex-post measures cannot be used for non-listed entities, initial public offering firms, or those that do not have sufficient trading history, reduces the noise found in traditional risk estimates that rely on historical security returns, and the development of trading and valuation strategies.

Originality Value - This is the first paper that assesses the association between a range of dynamic risk measures and accounting variables and tests whether this long run association has changed over time.

Keywords: accounting risk drivers, M-GARCH beta, accounting beta

Suggested Citation

Brimble, Mark and Hodgson, Allan C., Assessing the Risk Relevance of Accounting Variables in Dynamic Market Conditions (July 12, 2011). Available at SSRN: https://ssrn.com/abstract=1884051 or http://dx.doi.org/10.2139/ssrn.1884051

Mark Brimble (Contact Author)

Griffith University - School of Accounting, Banking and Finance - Nathan and Logan Campuses ( email )

University Drive
Logan, Queensland 4131
Australia
(07) 373 55311 (Phone)

Centre for Financial Independence and Education ( email )

Brisbane, Queensland 4111
Australia

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
224
Abstract Views
1,018
rank
151,154
PlumX Metrics