Equity systematic risk (Beta) and its determinants

초록

This paper uses a contingent-claims model to derive the beta of a company's equity, from basic firm characteristics, growth opportunities and macroeconomic: variables. The model predicts that equity beta is generally an increasing function of growth opportunities, leverage ratio, earnings volatility, market price of risk, and correlation of the firm's earnings with the market portfolio; a decreasing function of earnings level, earnings growth rate, and corporate tax rate; virtually independent of bankruptcy costs; and an increasing (slightly decreasing) function of the risk-free interest rate for high (low and moderate) leverage ratios. Empirical tests carried out with a sample of U.S. firms provide support for the model's implications.

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