Financial Variables Impact on Common Stock Systematic Risk

Transcription

1 Financial Variables Impact on Common Stock Systematic Risk HH.Dedunu Department of Accountancy and Finance, Rajarata University of Sri Lanka, Sri Lanka. Abstract The ultimate goal of companies financial management is to increase market value of shareholders equity. The concept of systematic risk is a major factor that should be consider for making decisions regarding the portfolios of common stock investments. Therefore, it is important for the portfolio/financial managers of a company to get awareness about the factors which are affect for the systematic risk of common stock for making right investment decisions. By considering the significance of systematic risk in common stock, the goal of the current study is to find the impact of financial variables on systematic risk of common stock. To achieve the goal of the study, selected 50 companies from CSE including manufacturing sector, beverage food and tobacco sector and hotel sector companies for the period of and selected profitability, dividend payout, liquidity and leverage as financial variables. Financial variables have been tested by descriptive statistics, correlation analysis and regression analysis. In this study, according to regression results showed that dividend payout had a negative significant relationship with systematic risk while profitability, liquidity and leverage had a positive relationship. Pearson Correlation analysis showed that all the variables are insignificantly affected for beta. Also, profitability and liquidity had a positive relationship with systematic risk and the dividend payout and leverage represented a negative correlation with beta. These findings are material for the investors and all decision makers for the purpose of right decision making. Key Words: Financial Variable, systematic risk, common stock Introduction This research considered about the impact of financial variables on systematic risk of common stock of companies listed in Colombo Stock Exchange (CSE). In estimation of financial securities, a very important aspect associated to risk is systematic risk, which has been discussed in financial theories and also examined empirically in previous studies.therefore, major risk associated with common stock is systematic risk.the systematic risk, also known as un-diversifiable risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization s point of view. It cannot be avoided through diversification.systematic risk is estimated through beta. Risk associated with investment defines the return that an investor wants from his investment. There is a direct association among risk and expected return. It means that if uncertainty on any investment is higher it will also increase the expected return of that particular investment. Therefore, financial variables affect for the systematic risk of common stocks are most significant information for company to enhance the shareholder s wealth. A large body of evidence suggests that various financial and accounting variables directly affect for differential betas among common stock. 23

2 The effects of financial variables on systematic risk would make the financial managers understand about how changes in the financial decisions influence the systematic risk of their common stocks and affects the shareholders' wealth. It is useful for investors also. If investors would be able to forecast systematic risk probably, they will able to construct efficient portfolios. For that purpose, an investor should have a better understanding about the systematic risk on common stock. Systematic risk of a company is vital because it indicates the risk of the company in relation to the market risk. Therefore, to understand the determinants of systematic risk is vital for companies financial managers to increase shareholders value, keep company away from bankruptcy and to attract investors. So, this research work is aimed at answering thewhat kind of impact placed by financial variables on systematic risk of common stock in firms listed in CSE Literature Review Portfolio and capital market theories have directed to the development of a basic concept of systematic risk, which is also known as the beta or the un-diversifiable risk or the market risk. It measures the sensitivity or volatility of a firm's common stock relative to the overall market. The risk measure for a given portfolio of assets was first developed by Markowitz in 1952 and In his portfolio model, the variance of the portfolio's rate of return was demonstrated to be a significant determinant of the portfolio's risk under a logical set of assumptions.many researchers in the past have focused on empirical links between the systematic risk and various financial and accounting variables. In some studies, liquidity, leverage, operating efficiency, profitability, dividend payout, firm size, growth, tax rate, market value of equity and financial risk has been used to determine the systematic risk. Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses. Income is money generated from the activities of the business. Expenses are the cost of resources used up or consumed by the activities of the business. ( dividend payout ratio is the percentage of earnings paid to shareholders in dividends. The ratio is used to determine the ability of an entity to pay dividends, as well as its reliability in doing so. The ratio also reveals whether a company can sustain its current level of dividend payouts. ( Liquidity can be defined as the capacity of stocks trades without high price spread and in a minimum time (Abdelwahed et al., 2010). Systematic risk is related with market while unsystematic risk is related with the individual firm. Further, the systematic risk is a decider for the market s evaluation of any firm s financial production and marketing policies (Rowe & Kim, 2010).A study followed by Gupta & Gurjar(2014) investigated the systematic risk involved in the stock of selected companies listed in National Stock Exchange. Study conducted for the period from to Beta and average return are the variables included in this study and beta has been calculated using regression analysis. Results showed beta is greater than one; it indicates the systematic risk is higher than the average. Due to that, asset with a greater beta implies a greater systematic risk as well as greater expected return.by considering the prior studies followed by researchers, most of the research s concluded that systematic risk is a very important concept to invest the funds in stocks or portfolios. Because, the return of stocks is change due to the change in market situation and uncontrollability of industry factors. 24

3 Thus, investors should pay more attention to the risk and return from their investments while considering industry factors. A study done bylogue and Mervile(1972), showed that success of any firm depends upon profitability and in profitable firms the chances of systematic risk reduce. In this study concluded a negative relationship with beta and profitability. Similarly, previous findings of Schemer &Mathison(1996), Gu & Kim(2002), Lee & Jang(2006) and Rowe & Kim (2010)indicated a negative relationship between profitability and systematic risk. In another study Alaghi(2013), aimed to find the factors that are determine the systematic risk. Data covered for the period from 2001 to 2011 and including a sample of 457 non- financial companies in Teheran Stock Exchange (TSE). In here, results indicate that profitability have a positive relationship with beta. A study put forward by Iqbal & Ali Sha(2012), investigated the relationship among financial variables and systematic risk for the period from 2005 to 2009 from 93 non-financial firms listed in Karachi Stock Exchange by considering liquidity, leverage, operating efficiency, dividend payment, market value of equity, firm size, growth and profitability. The results from the regression analysis, descriptive analysis and common effect model showed that profitability is positively associated with the systematic risk. A study followed bycarter & Schmidt(2008), focused on how dividends affect a firm's level of systematic risk. Observation was based for the period from 2002 to 2006 including 88 firms from the Standard & Poor's 500 Index. The results revealed inverse relationship between dividend payout ratios and the systematic risk of the firm. Another study conducted by Adhikari(2015), aimed at advancing empirical evidences on financial factors determining systemic risk and data considered for 2009 to 2013, from 15 listed companies in Nepal Stock Exchange. Findings concluded that firm size and profitability are positively associated with the systemic risk, while the dividend payment is negatively related to the risk. Former studies followed by Breen & Lerner(1973), Borde(1998) and Gu & Kim(2002) have concluded negative impact of dividend payout on systematic risk.according to the prior researches, most research s indicated that dividend payout ratio and firm s beta has a negative relationship. Reason can be concluded as, if the firms paying high dividend due to their high profits, the uncertainty of returns diluted. Therefore, beta and dividend payment have a negative relationship. A study conducted by Salari(2014), for the purpose to investigate the relation between systematic risk of common stock and financial ratios of accepted companies in TSE. Data considered for four years period of 2006 to 2009 and selected 226 companies as the sample. Results investigated that financial ratios especially working capital ratio to total asset, current ratio and quick ratio have significant and positive impact on systematic risk.in this empirical finding limiting to four years. Therefore, to mitigate that limitation current study based on seven years. According to Rowe & Kim(2010), expected to analyzed which financial ratios are significant predictors of beta in casino industry for the period from 2005 to 2008 by using 19 public traded gaming companies financial information. Findings reveal that quick ratio is insignificant determinant of beta during the recession and nonrecession period. However, most studies have found out a negative relationship between systematic risk and liquidity. Logue and Mervile(1972); Moyer & Chatfield(1983);Gu & Kim(1998) and Lee & Jang(2006)found 25

4 negative relationship among systematic risk (beta) and liquidity. In here, researchers mentioned the reason for negative relationship as, systematic risk is decreased due to the increase of liquidity. As cited bygu & Kim(2002), found positive and nonlinear relationship between leverage and systematic risk. Frequent studies followed by Lee and Jang(2006), Bowman(1979), Logue and Mervile(1972) and Borde(1998) suggested that leverage is negatively correlated with beta. Another study conducted by Tan et al., (2015), concerned to find the overall impact of financial leverage and other determinants of systematic risk followed through the years from 2007 to 2013 using data set of 50 non- financial publicly listed companies in the Philippine Stock Exchange. It founded that financial leverage have a significant positive relationship with systematic risk. Methodology The present study is intended to examine the impact of financial variables on systematic risk of common stock. The design of the methodology is based on prior researches. The study employed data from companies listed in CSE and covered 50 companies in manufacturing sector, beverage food and tobacco sector and hotel sector. The study is covered a period of The population of this study consists 287 companies listed in CSE under the base year is 2016.In this study, the sample include 50 companies in manufacturing sector, beverage food and tobacco sector and hotel sector which are listed in CSE over the period from 2009 to 2016 and it cover 8 years.this study investigates the influence of four financial variables in assessing the systematic risk of common stocks of listed manufacturing companies, beverage food and tobacco companies and hotels listed in CSE in the period In this research data selected from secondary sources. Those selected from published financial statements in CSE web site of that 50 companies listed in CSE. The analysis of descriptive statistics, correlation analysis and regression analysis statistical techniques selected to analyze the study.the study independent variable was systematic risk and independent variable was Financial Variables according to that study developed following conceptual framework. Independent Variable Figure 1: Conceptual Framework Financial Variables Profitability Dividend Payout Liquidity Leverage Dependent Variable Systematic Risk Following hypothesis developed based on the above conceptual framework H 1 : Profitability had a negative impact on the systematic risk of common stock. H 2 : Dividend payout ratio had a negative impact on the systematic risk of common stock. H 3 : Liquidity had a negative impact on the systematic risk of common stock. H 4 : Leverage had a positive impact on the systematic risk of common stock. 26

5 In this study quantitative research methods were used by the researcher. The quantitative approach involves gathering and analyzing numerical data. This study has been supplied sample of financial data for essentially requires a certain mathematical and statistical techniques. The nature of research area is very important when deciding methodology and this research methodology should be very practical. As well as several numbers of period selecting for accurate representation of this study. In order to carry out this research, descriptive statistics, model analysis (regression analysis) and correlation analysis are used. Result and Discussion The study used selected companies CSE published financial statement s information for this analysis. According to simple random sampling study selected 50companies of manufacturing, beverage food and tobacco and hotel sectors companies are used and seven year s average valueshas used for this study. SPSS 20 package have used for analysis data. Mainly consider descriptive statistics method, Pearson correlation coefficients, regression and R squares in this research. Relationship between independent and dependent variables have measure by used correlation coefficients, regression and R squares. Descriptive Statistics Descriptive statistics are useful to make general conclusions about collect data. According to this study mainly identified the independent variables descriptive statistics and dependent variables descriptive statistics separately. Mean value of beta (SR) was This means that the systematic risk on average of the selected companies is greater than market risk that is always equal to 1, which implies that the listed companies are moderate risky than market. Profitability measures indicate that average rate of return on investment was 9.2%. Then the dividend payment has a mean value of and the variability of standard deviation was ± Liquidity has average score of with std. deviation of ±0.634 which indicates the listed companies on average have enough cash and receivables to cover their current liabilities. Finally, Leverage has mean of 0.379with deviation of ±0.132 indicating that on average 13.2% of the assets are financed by debt. The descriptive statistics reveal that there is high variability in liquidity of the selected listed companies of CSE. Correlation Analysis Correlation Analysis is used to measure the significance between the independent and dependent variables. Variable association refers to the wide variety of coefficients which measure the strength of a relationship. According to theoretically, higher value of correlation between two variables, the more related these variables are to each other. 27

6 Table 1: Correlations Analysis SR PF DIV LQ Systematic Risk (SR) 1 Profitability (PF) Dividend Payout (DIV) Liquidity (LQ) ** 1 Leverage (LV) ** *. Correlation is significant at the 0.05 level (2-tailed). **. Correlation is significant at the 0.01 level (2-tailed). Source: Data Analysis The result for multiple linear correlations between the systematic risk and four financial variables shows in table 1. The significant value of for correlation coefficient of ROA (Total Return on Assets) suggested that systematic risk had an significant positive correlation with the profitability. This result was compatible with the previous findings of Logue and Mervile(1972), Gu & Kim(2002), Rowe & Kim(2010), etc. The Pearson Correlation of dividend payout ratio was this means the dividend payout ratio is negatively affected with beta. The empirical findings of Carter & Schmidt(2008) and Adhikari(2015) showed that dividend payment is negatively correlated with beta. Findings of current study also found that inverse relationship.the correlation coefficient of in liquidity (quick ratio) which indicated that the quick ratio had a significant positive correlation with systematic risk at the desired levels. Leverage had in Pearson Correlation and significant value was less than 0.05 which indicated that the leverage had ansignificant negative correlation with the systematic risk. Regression Analysis Regression analysis used to identify the relationship between independent variables and dependent variables. According to this study mainly consider the correlation amount, R square value of model summary table, significant F value in ANOVA table, and Regression equation built by Standardized coefficient amount for identified the relationship between independent variables and dependent variables. 28

7 The results of regression analysis of systemic risk per share on return (profitability), dividend payout, liquidity and leverage for the sample companies over seven years of data for a total of 50 observations are shown in below tables. Table 2: Model Summary Regression Model R R Square Adjusted R Square Std. Error of the Estimate a a. Predictors: (Constant), LV, DIV, LQ, PF Source: Data Analysis The above table 2 represents the model summary of systematic risk and financial variables. According to the regression model summary, R square value is 0.52and it reveals that the 52% of independent variables effect for the variance of dependent variable. Table 3: ANOVA b Model Sum of Squares Df Mean Square F Sig. 1 Regression a Residual Total a. Predictors: (Constant), LV, DIV, LQ, PF b. Dependent Variable: SR Source: Data Analysis The P value denoted by Sig. is This means that if the population mean values are exactly equal, the model only has a 2.8% chance of finding differences that can be observed in the sample. In the present study ANOVA test obtained the significant value is less than the 0.05, therefore there is a significant effect of financial variables on the systematic risk (beta value). The F ratio measure how different the means are relative to the variability within each sample. Theoretically, if F ratio is greater than 1 it mentioned that there are no real effects and it shows the model is appropriate. In this current results, the F value is conclude that there were no more real effects and the regression ANOVA model is appropriate for current study. 29

8 Table 4 Coefficients a Unstandardized Coefficients Standardized Coefficients T Sig. Model B Std. Error Beta 1 (Constant) PF DIV LQ LV a. Dependent Variable: SR Source: Data Analysis The results of impact of profitability (ROA), dividend payout ratio, liquidity (quick ratio) and leverage on systematic risk are reported in Table 4.Multiple linear regression was run in the form of model developed. The unadjusted coefficient of constant factor (0.874) implied that the independent variables in the model explained 87.4 percent of variations in the systematic risk. Profitability (total ROA ratio) showed a regression coefficient of and its attached significantvalue of confirmed that the variable was insignificant at the 5 percent level. It showed that profitability is positively and insignificantly effect for the beta. Dividend payout ratio had a regression coefficient of and its attached significant value of indicating that the variable was significant at the 5 percent level, which the dividend payout is a major financial variable of systemic risk of stock of the sample companies.because, the dividend payment is significant and negatively affect for systematic risk. Then the liquidity (quick ratio) had a regression coefficient with a significant value of which is less than 5 percent level. Therefore, liquidity had a positive significant impact on beta value of common stock.and finally, leverage had a regression coefficient of and its significant value is The leverage variable was not significant. Because, the P value denoted by Sig. was largely greater than the 0.05.According to the regression coefficient and significant value, leverage is positively correlated with beta and concluded that it was insignificant due to larger P value. According to the results obtained, the regression equation can be presented as follows. SR = α + β 1 PF + β 2 DIV+ β 3 LQ+ β 4 LV+ Ԑ... Eq1 SR = PF DIV LQ LV Eq2 The above regression coefficient represents the amount of change in the independent variables when one unit of constant factors increase or decrease. If one-unit increase, profitability increased at and dividend 30

9 payout decreased at likewise, liquidity is increased at and leverage at The significant values attached to all the regression coefficients were found to behave as expected, except that of the profitability and liquidity variables. Because of the direction of impact from dividend payout and leverage were theoretically supportive. The sign attached to the regression coefficient of profitability and liquidity variables was positive. Conclusion The main goal of a company is to increase shareholders value. The total risk of the investment is measured by the variance or, most commonly the Standard deviation of the return. To understand the factors related to systematic risk is very useful for investors and company managers. This study examined the link between systematic risk and profitability, dividend payout, liquidity and leverage variables. On the basis of previous studies four hypotheses have assumed to test the above mentioned variables. Descriptive statistics, correlation and regression analysis used for estimation. Study included 50 non-financial companies listed in CSE for the period of 2009 to According to regression analysis, there is an insignificant positive relationship between profitability and beta, significant negative relationship of dividend payment and beta, significant positive relationship with liquidity and systematic risk and finally a positive insignificant relationship with leverage and beta were obtained as results.based on Pearson Correlation all the variables are insignificantly affect for systematic risk. Findings represented that there is positive relationships of profitability and liquidity with the dependent variable beta. Similarly, confirmed that a negative relationship lies between beta with dividend payout and leverage variable of firms listed in CSE.Managers can estimate these factors to control systematic risk and to improve financial performance of a firm. The findings of the current research support previous researches. Financial variables do play significant role in determining systematic risk. The conclusion resulting from this study is that systematic risk is significantly determined by financial variables of the listed companies. Based on the findings study recommended all financial managers and investors should be aware of systematic risk of common stock of various sector companies to do financial investments more securely and financial managers should have a better awareness of how the systematic risk of their firms are affect for investors. This study is essential for investors and finance managers to understand what kind of relationship exist between financial variables and systematic risk. Following are some suggestions for future researches.the sample size of the study is small and considered only three sector companies listed in CSE without the financial firms. So suggest to do researches by considering more sectors of CSE and a large number of sample. In here analyzed only four financial variables, so request to analyze more additional determinants of systematic risk for improving the overall level of explanation. 31

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