Abstract

 
 
 This study explores the contemporaneous association between market determined risk measures and accounting determined risk measures using the large liquid non-financial stocks in the Indian stock market in the recent 2012-2017 period. Two measures of systematic risk and seven accounting determined risk measures are chosen based on prior research. This study uses three regression techniques, namely Ordinary Least Squares (OLS), stepwise regression and robust regression, to identify the influential accounting variables for the systematic risk measured by market beta. The results evidence that there is a high degree of contemporaneous association between market determined and accounting determined risk measures, with nearly 30% of the cross sectional variance in systematic risk explained by accounting determined risk measures. The results suggest that the accounting variables can be used in the predictive models of future risk, leading to superior decision making at the level of individual decision maker.
 
 
Highlights
Investment decision is the most crucial aspect of financial management
This study adds to this body of knowledge by examining the association between market determined risk measures and accounting determined risk measures for the large, liquid non-financial stocks in the Indian stock market in the recent 2012 - 2017 period
In order to achieve this objective, two measures of systematic risk and seven accounting determined risk measures were chosen based on prior research
Summary
Investment decision is the most crucial aspect of financial management. financial economists strive to improve the modeling of the financial markets to make better investment decisions. CAPM does not provide any information regarding the underlying factors that affect beta. The understanding of the underlying economic factors that affect beta have been the focus of many researchers since the advent of CAPM. Since the accounting data is generally considered capturing the underlying economic factors, the relationship between beta and the accounting variables is very important and has been the focus of the researchers since Beaver et al (1970). Lipe (1998) demonstrates the importance of accounting information in evaluating firms by showing that investors prefer accounting determined risk measures in their risk analysis. Beaver et al (2005, 2010, 2102b) evidenced that 90% of the explanatory power of the market-based financial risk models can be captured by relatively parsimonious accounting based models Lipe (1998) demonstrates the importance of accounting information in evaluating firms by showing that investors prefer accounting determined risk measures in their risk analysis. Beaver et al (1970) suggest that investors use accounting determined risk measures as surrogates for risk. Beaver et al (2005, 2010, 2102b) evidenced that 90% of the explanatory power of the market-based financial risk models can be captured by relatively parsimonious accounting based models
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