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- Title
THE IMPACT OF THE DEMAND VOLATILITY AND LEVERAGES ON THE SYSTEMATIC RISK OF COMMON STOCKS.
- Authors
Chung, Kee H.
- Abstract
This article investigates the real determinants of the systematic risk of common stocks. It has been well documented analytically and empirically that the degrees of financial and operating leverage, which are mainly determined by the firm's capital and asset structures, are major determinants of the systematic risk of common stocks. On the other hand, although it has been argued that the intrinsic business risk, which is generally defined as the volatility of the firm specific variables to the general economic conditions, is an important determinant of beta. The article empirically examines the joint effect of the intrinsic business risk of the firm and the degrees of operating and financial leverage on the systematic risk of common stocks. The empirical findings show that a significant portion of the cross-sectional variation in beta can be explained by the cross-sectional difference in the demand beta which represents the intrinsic business risk of the firm in the output market and the degrees of financial and operating leverage. The article also shows that a large portion of the cross-sectional variation in beta can be explained by systematic business risk alone which represents the joint effect of the output market uncertainty and operating risk of the firm.
- Subjects
ECONOMIC demand; MARKET volatility; STOCKS (Finance); BETA (Finance); OPERATING leverage; EMPIRICAL research; FINANCIAL leverage; FINANCIAL management
- Publication
Journal of Business Finance & Accounting, 1989, Vol 16, Issue 3, p343
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1989.tb00023.x