The development of downside accounting beta as a measure of risk

• Authors: Rutkowska-Ziarko Anna , Pyke Christopher
• Languages of publication: EN

Abstracts

EN

This paper develops a new method for measuring market risk called downside accounting beta (DAB). To test the validity of DAB the method is applied to the financial data for 14 food companies listed on the Warsaw Stock Exchange during a 6-year period. DAB calculates how changes in the profitability of the whole sector affects the profitability of a given company. The paper concludes that when calculating DAB using Return on Assets (ROA) and Return on Equity (ROE) there is a positive correlation with market betas. The practical implication of this research is that investors, owners and managers can use DAB to calculate the systematic risk of companies not listed on stock markets and consequently to identify the levels of risk associated with companies within the sector.

Keywords

EN

downside accounting betas; downside risk; lower partial moments; semi‑variance; capital asset pricing; food company sector

• Publisher: Uniwersytet Ekonomiczny w Poznaniu
• Journal: Economics and Business Review
• Year: 2017
• Volume: 3(17)
• Issue: 4
• Pages: 55-65

Dates

published

2017-12-30

Contributors

author

Rutkowska-Ziarko Anna

• University of Warmia and Mazury in Olsztyn, The Faculty of Economics, Department of Quantitative Methods, ul. M. Oczapowskiego 4, 10-719 Olsztyn, Poland,

author

Pyke Christopher

• Lancashire School of Business and Enterprise, Greenbank Building, University of Central Lancashire, Preston, PR1 2HE, United Kingdom,

References

• Amorim, A., Lima I., & Murcia, F. (2012). The Effect of the Firm’s Capital Structure on the Systematic Risk of Common Stocks. Cont. Fin. – USP, São Paulo, 23(60), 199-211.
• Campbell, J., Polk, C. & Voulteenaho T. (2009). Growth or Glamour? Fundamentals and Systematic risk in Stock Returns. The Review of Financial Studies, 23(1), 305-344.
• Estrada J. (2002). Systematic risk in emerging markets: the D-CAPM, Emerging Markets Review, 3, 365-379.
• Galagedera, U., & Brooks R. (2007). Is co-skewness a better measure of risk in the downside than downside beta? Evidence in emerging market data, Journal of Multinational Financial Management, 17, 214–230.
• Hamada, R. (1972). The Effect of the Firm’s Capital Structure on the Systematic Risk of Common Stocks, The Journal of finance, 27(2), 435-452.
• Harlow, W., & Rao, R. (1989). Asset pricing in a generalized mean-lower partial moment framework: theory and evidence, Journal of Financial and Quantitative Analysis, 24, 285–311.
• Hill, N., & Stone, B. (1980). Accounting Betas, Systematic Operating Risk, and Financial Leverage: A Risk-Composition Approach to the Determinants of Systematic Risk, The Journal of Financial and Quantitative Analysis, 15(3), 595-637.
• Klebaner, F., Landsman, Z., Makov, U., Jing Yao, J. (2017). Optimal portfolios with downside risk, Quantitative Finance, 17(3), 315-325.
• Konchitchki, Y., Luo Y., Ma, M., Wu, F. (2016). Accounting-based downside risk, cost of capital, and macroeconomy, Rev Account Study, 21, 1-36.
• Markowski, L. (2015). Conditional Volatility Exposures in Asset Pricing in the Downside and Classical Framework, Research In Economics And Business: Central And Eastern Europe, 7(1), 5-22.
• Mensah, Y. (1992). Adjusted Accounting Beta, Operating Leverage and Financial Leverage as Determinants of Market Beta, Review of Quantitative Finance and Accounting, 2, 187-203
• Nekrasov, A. & Shroff, P. (2009). Fundamentals-Based Measurement in Valuation, The Accounting Review, 84 (6), 1983-2011.
• Pla-Santamaria, D., Bravo, M. (2013). Portfolio Optimization Based on Downside Risk: A Mean-semivariance Efficient Frontier from Dow Jones Blue Chips, Annals of Operations Research, 20 (1), 189–201.
• Post T., & Van Vliet P. (2006). Downside risk and asset pricing. Journal of Banking and Finance, 30, 823–849.
• Price K., Price B., Nantell T.J. (1982). Variance and lower partial moment measures of systematic risk: some analytical and empirical results, The Journal of Finance, 37(3), 843-855.
• Rutkowska-Ziarko, A. (2015). Influence of profitability ratio and company size on profitability and investment risk in the capital market, Folia Oeconomica Stetinesia, 15(23), 151-161.
• Rutkowska-Ziarko, A. (2013). Fundamental Portfolio Construction Based On Semi-Variance, Olsztyn Economic Journal, 8(2), 151-162.
• Sarmiento-Sabogal, J. & Sadeghi, M. (2015). Estimating the cost of equity for private firms using accounting fundamentals, Applied Economics, 47(3), 288-301.
• Toms, S. (2014). Accounting-based Risk Management and the Capital Asset Pricing Model: An Empirical Comparison, Australian Accounting Review, 24 (2), 127–133.
• Toms, S. (2012). Accounting-based Risk Measurement: An Alternative to Capital Asset Pricing Model Derived Discount Factors, Australian Accounting Review, 22, 398–406.
• Sharpe W. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, The Journal of Finance, 19(3), 425-44.

Identifiers

DOI

10.18559/ebr.2017.4.4