The determinants of systematic risk in the Pakistan stock market

Abstract

This study analyzes the relationship of Systematic Risk and Fundamental Accounting variables i.e. Leverage, Liquidity, Operational Efficiency, Firm Size, Profitability, Growth Rate and Dividend Payout in regard to Pakistan Stock Market, to develop and multifactor model between systematic risk and overall financial risk indicators. Thus making it easy for investor to make informed investment decision and predict Market Beta from accounting information available. By so doing it becomes possible to identify the potential cross-sectional differences which drive the empirical relationship between accounting and market based measures of risk. The model proposed highlights a clear relationship between accounting measures and market measures of risk which can be exploited in situations where accounting data alone is available to predict the Beta. The body of work that relates financial accounting risk measures to market measures of systematic risk was undertaken from 2003-2010 from a sample of 100 non -financial companies of Karachi Index.. More recent proposals on changes in accounting variables disclosure of risk mean that a rigorous theoretical model of the relationship between accounting measures and market measures of risk exists... In this paper such a model is empirically tested.