This study examines the association between accounting variables and systematic risk. Furthermore, it extends previous Australian research by formulating models based on accounting variables to predict systematic risk. The accuracy of systematic risk prediction based on the models is also examined, by a comparison with other benchmark forecasting techniques which do not consider firms' accounting information. Finally, this study examines whether accounting variables have an incremental explanatory power in predicting systematic risk to the use of historical price data alone.
The results confirm the expectation that there is a positive association between accounting beta, operating leverage, financial leverage and earnings variability with systematic risk. Among all accounting variables that are examined in this study, financial leverage has the strongest association with systematic risk A negative relationship between dividend payout ratio and current ratio is also confirmed. However, a negative association between growth and systematic risk and a positive association between firm size and systematic risk are unexpected. In terms of predictive power, the results indicate that the accounting variable based forecasting models formulated in this study provide the lowest forecasting error. However, it is not statistically significantly lower than that provided by other benchmark techniques. Lastly, the results indicate that there is an incremental explanatory power of accounting variables in predicting systematic risk to the use of beta calculated from historical price data alone.