Firm Systematic Risk Research Articles

Firm systematic risk after the Russia–Ukraine invasion

We explore the systematic risk effects of the Russia–Ukraine war on European non-financial firms during the period 2021Q1–2022Q4. Using quarterly firm-level data, we find that, after the Russia–Ukraine conflict, European non-financial firms experienced a statistically significant increase of systematic risk (Beta). Moreover, we also find that firms with higher foreign sales reduced their exposure to such unprecedented geopolitical event, showing a statistically significant lower Beta in the aftermath of the announcement of the Russian invasion of Ukraine. Results are robust also using alternative measures of firm risk as well as after running alternative econometric approaches.

Corporate governance and firm risk-taking: the moderating role of board gender diversity

PurposeThis study aims to explore the moderating role of board gender diversity (BGD) in the relationship between corporate governance mechanisms (i.e. board size, board independence, chief executive officer (CEO) gender, CEO duality and ownership concentration) and firm risk-taking.Design/methodology/approachUsing a sample of 192 non-financial publicly traded Italian firms over 2014–2018, this study tests the proposed research hypotheses and assess the moderating effect of BGD.FindingsDrawing on agency theory and resource dependence theory, this study finds a significant relationship between corporate governance mechanisms and firm risk-taking, which is significantly moderated by BGD. BGD accentuates the negative effect of board size, independent directors, CEO gender and CEO duality on firm systematic risk and attenuates the positive impact of CEO duality on firm unsystematic risk. The results, which are consistent with the risk-reduction effect of BGD, are robust to the use of alternative measures of firm risk-taking.Practical implicationsWomen’s presence on corporate boards plays a critical role in the board’s involvement in risk-taking. Hence, investors and stakeholders should consider women on corporate boards as a crucial risk-mitigating factor.Originality/valueThis paper contributes to our knowledge on risk management by demonstrating the moderating role of BGD while relating corporate governance mechanisms and firm risk-taking.

Corporate risk management and pension investment policy

In this paper, we study whether firms manage their pension risk exposures within an integrated corporate risk management framework or they manage their pension and firm risk exposures independently following the adoption of fair value pension reporting regulation (IAS 19). Controlling for known factors affecting the risk-taking in pension plan investments, we document a robust negative association both at the cross-section and over time between pension risk and firm systematic risk and operating asset risk during the post-IAS 19 adoption period. The findings suggest that firms manage pension risk as an integral part of firm risk, consistent with a coordinated risk management explanation. Overall, our evidence highlights that pension investment strategy is a dynamic process that is ultimately determined by sponsoring firms' strategic corporate risk management considerations and the important role that changing pension reporting regulation plays in shaping these dynamics. Our conclusions have potential wider implications for ongoing reforms in financial reporting and disclosure policy settings.

The Financial Value of Advertising Exposures and Expenditures

Previous research studying the financial impact of advertising on firm financial performance has typically measured the effect of aggregate advertising expenditures. This research implicitly relies on the correlation between advertising exposures and expenditures. However, the extant advertising literature has demonstrated that these variables are not perfectly correlated. Using a unique context (stadium naming rights agreements) in which the firm receives a random number of exposures per dollar of advertising expenditures, we separately identify the effects of exposures from expenditures. We develop three analyses to test the impact of advertising exposures and expenditures on firm stock returns and systematic risk. We estimate a stock returns model to find that unexpected advertising exposures are associated with an increase in stock returns. Using an event study methodology, we find that higher advertising expenditures result in a decrease in firm stock returns. Finally, we find that advertising exposures lower firm systematic risk, while advertising expenditures weakly increase firm systematic risk. These results provide insight into prior findings which have found highly heterogeneous effect sizes with substantial sensitivity to modeling assumptions.

Growth options, option exercise and firms’ systematic risk

We develop and empirically test a theoretical model which analyzes the impact of growth options, profitability, and operating and financial leverage on equity’s systematic risk. Conditioning on the relative magnitude of advertising expenditure to research and development (R&D) expenditure, we find that higher beta is associated with higher return volatility, lower book to market ratio, lower return on assets, higher operating and financial leverage, and larger market capitalization (Size). Conditioning on R&D intensity, we show that an increase in the moneyness of firm options, or the exercise of firm options (approximated by increases in capital expenditure, advertising expenditure or profitability) result in more significant decreases in beta. Dynamically estimated high-frequency betas appear to perform well in capturing variation in firm systematic risk associated with growth option factors.

The impact of board diversity on operating performance and firm risk: Evidence from the Italian market.

This paper analyses the relationship between board diversity and some board operating performance but also the relationship between board diversity and enterprise risk. The analyses, carried out on a sample of 249 Italian companies during the period 2006-2009, show that diversity affects the operating performance of the board. The results show a significant positive relationship between the presence of independent women board directors and the frequency of the board meetings, but a negative relationship between the number of meetings and the nationality diversity. With regard to the intermediate performance, there is a significant relationship with gender diversity. Besides, the analysis shows a negative relationship between firm systematic risk and number of foreign directors

Comovement and the News

I introduce an approach for the empirical analysis of asset price comovement that relates the inter-firm textual similarity of newswire items to their equity return correlation. I find that this measure of information environment similarity can predict an economically meaningful portion of future cross-firm price comovement even after accounting for the pair’s contemporaneous return correlation. I also demonstrate how the effectiveness of information environment similarity as predictor of comovement responds to aggregate market states, and offer empirical support for an existing theory of information driven comovement. Finally, I explore the newswire’s role as a provider of information about individual firm systematic risk.

Linkages Between Value Based Performance Measurements and Risk Return Trade Off: Theory and Evidence

In this study we attempt to investigate the linkages between value-based performance measurements and risk-return trade off in a way to explain cross sectional asset returns. On the side of value based performance measurements, three groups of variables are used as a sorting factor: traditional measures which consist of accounting based and market based; recently popularized measures such as Economic Value Added and Market Value Added and theoretically sound measures such as foreign investor allocation and firm systematic risk indicators. The goals of the study are (i) to show how value based measurements techniques relate to risk return trade off and (ii) how these measures affect the cross sectional asset returns in manufacturing industry. Empirical results indicate that foreign investor allocation as a sorting factor produces much more meaningful risk return positive linear relation for cross sectional asset returns than traditional and recently popularized measures.

Cross-Sectional Analysis of Risk-Neutral Skewness

The authors investigate the association of various firm-specific and marketwide factors with the risk-neutral skewness (RNS) implied by the prices of individual stock options. The analysis covers 149 U.S. firms over a four-year period. The authors find that, consistent with earlier studies, the RNS of individual firms varies significantly and negatively with firm size, firm systematic risk, and market volatility and varies significantly and positively with the RNS of the market index. The authors also find that most of the variation in individual RNS is explained by firm-specific rather than marketwide factors. The authors also document several interesting new results that are clearly unambiguous and significantly stronger than in earlier work, or opposite to earlier evidence, or for variables that have been examined for the first time. The results show that 1) market sentiment has a negative and significant effect on RNS; 2) the higher a firm’s own volatility, the more negative the RNS, a relationship that is in the same direction as for overall market volatility; 3) greater market liquidity is associated with more negative RNS, but the liquidity that is relevant for RNS is that of the options market, rather than that in the underlying stock. Surprisingly, volatility asymmetry is not relevant for RNS. Finally, the leverage ratio is not negatively but positively and strongly related with RNS.

Market and Industry Structure and Corporate Cost of Capital

The impact of the structural attributes of industries on the cost of capital to constituent firms is examined within the framework of the Capital Asset Pricing Model (CAPM). The relationship between industry structure and systematic risk which the CAPM posits as the sole determinant of security returns is investigated using regression methodology. The results show that industry characteristics such as capital intensity, capital to labour ratio and entry barriers such as advertising have a significant influence on systematic risk and, hence, on the cost of capital to firms. RECENT US studies (e.g. Sullivan [1982]) have investigated the relationship between market power and the stock market return on equity using the Capital Asset Pricing Model (CAPM). Within the CAPM framework, investor required return is a linear function of systematic risk. The impact of industry structure on expected return is, therefore, likely to be transmitted through investors' perceptions of the relationship between the structural variables and firm systematic risk. Some recent theoretical studies have attempted to model such a relationship. This paper reports an empirical examination of the predictions resulting from these and other related models for a sample of UK firms. Our results show that industry structural characteristics e.g. capital intensity have a significant influence on systematic risk and hence cost of capital of firms, although the predictions of the extant theoretical models are only partly confirmed. The next section identifies a number of microeconomic determinants of corporate systematic risk. Section III discusses the methodology employed in the study. Section IV describes the sampling procedure and explanatory variables. Results are discussed in Section V. The final section provides a summary and the conclusions.