The Relationship Between Market And Accounting Determined Risk Measures: Reviewing And Updating The Beaver, Kettler, Scholes (1970) Study

Abstract

The association between market-determined risk measures and accounting-determined risk measures was originally explored in the 1970s by Beaver, Kettler, and Scholes (BKS). The results of the BKS (1970) study suggest that accounting information is usefulness in assessing firm specific risk. Since BKS, there have been few studies conducted to determine if these results still hold today. This cross-sectional study re-examines the relationship between market and accounting-determined risk measures. A total of 222 randomly selected publicly traded companies were examined to determine if there is a relationship between the accounting risk measures of dividend payout ratio, leverage, and earnings variability and the market risk measure of beta. The relationship is further analyzed by classifying the results based on the company’s size (market capitalization). Our study suggests that the original BKS (1970) results hold true in today’s market with some exceptions. These findings reiterate the importance of accounting policy choice and full disclosure in the financial statements, as accounting information proves to be a possible alternative to market risk information. This demonstrates that full disclosure is important to help capital markets determine a company’s risk profile.