On the relation of systematic risk and accounting variables

Purpose – This paper seeks to use an analytical approach to examine the relation of systematic risk and accounting variables. Design/methodology/approach – The paper theoretically integrates the capital asset pricing model, Cobb-Douglas function and clean surplus relation to derive the relation. Findings – The analytical results suggest that determinants of systematic risk include earnings, sales growth, book value, dividend, degree of operating leverage (DOL), degree of financial leverage (DFL), market return, and risk-free return. Three general conclusions are: For a firm with positive prior-year earnings and current-year sales growth, if the combined effect of its current book value, dividend and earnings on stock price is positive (negative), then its degree of total leverage has a positive (negative) effect on systematic risk; When the effect of book value and earnings on stock price each is positive and the effect of dividend on stock price is positive (negative), then the dividend has a positive (negative) effect on systematic risk; For a firm with positive (negative) sales growth, its DOL is positively (negatively) related with its DFL for a given level of systematic risk. Originality/value – The findings have significant implications for the risk management literature and practice.