Assessing the risk relevance of accounting variables in diverse economic conditions

Brimble, Mark and Hodgson, Allan (2007) Assessing the risk relevance of accounting variables in diverse economic conditions. Managerial Finance, 33 8: 553-573. doi:10.1108/03074350710760296


Author Brimble, Mark
Hodgson, Allan
Title Assessing the risk relevance of accounting variables in diverse economic conditions
Journal name Managerial Finance   Check publisher's open access policy
ISSN 0307-4358
1758-7743
Publication date 2007-01-01
Sub-type Article (original research)
DOI 10.1108/03074350710760296
Open Access Status DOI
Volume 33
Issue 8
Start page 553
End page 573
Total pages 21
Place of publication Bingley, W. Yorks., United Kingdom
Publisher Emerald Group Publishing
Language eng
Formatted abstract
Purpose – This paper aims to examine 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 enable 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.
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
 
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Created: Wed, 02 Mar 2011, 20:45:02 EST by Karen Morgan on behalf of UQ Business School