Abstract
In this article the association between accounting and market-based measures of risk on the JSE and the dependence of the association on a number of design elements are examined. The results obtained show that in the South African context a significant positive relationship exists between market beta and a variety of earnings and cash flow-based accounting betas. No evidence is found to validate the supposed superiority of cash flow-based betas over earnings-based betas. Furthermore, the results indicate that this relationship is sensitive to a number of experimental design considerations. The significance between market and accounting betas was improved when the sample size was increased, when longer time horizons were used and when the sample was restricted to companies in the same sector. The book value of equity was shown to be a better deflator than the market value.
Highlights
The purpose of this article is to explore the relationship between accounting-based and market-based measures of systematic risk; and to investigate the effect of certain elements of research design on the significance of the hypothesized relationship
In this article the association between market and accounting betas under a variety of research designs is investigated, namely: the size of the sample; the length of the measurement period; the accounting sample market return measure; the choice of the return deflator; and the homogeneity of sample companies in respect of financial year-end and sectoral characteristics. Results obtained from this analysis showed that in the South African context a significant positive relationship exists between market beta and a variety of earnings and cash flow-based accounting betas, no evidence was found to validate the supposed superiority of cash flow based betas over earnings based-betas
If Sample H (20 years of weekly data on 228 companies selected from the entire JSE) may be regarded as a good approximation of the 'market', it would appear that Vasicek's (1973) parame
Summary
The purpose of this article is to explore the relationship between accounting-based and market-based measures of systematic risk; and to investigate the effect of certain elements of research design on the significance of the hypothesized relationship. In this article the association between market and accounting betas under a variety of specifications is investigated and the sensitivity of the association to certain elements of research design is examined especially with regard to the size of the sample; the length of the measurement period; the choice of the return deflator; and the homogeneity of companies in the sample in respect of financial year-end and sectoral characteristics. This flexibility is achieved through extensive automation of the research effort. Results of the analysis are presented in a subsequent section, while a summary is offered in the final section
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