Firm Performance and Systematic Risk

Proceedings of 2nd International Conference on Business, Management and Economics

Year: 2019


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Firm Performance and Systematic Risk

Lalit Arora , Shailendra Kumar and Utkarsh Goel



The only security specific parameter in capital asset pricing model is beta which can affect the return on a risky security. We develop a framework applicable to securities to test if the performance of firms can explain the level of their systematic risk. Findings from 203 firms across nine industries form the Indian manufacturing sector for the period of 1998–2014 indicate that profitability causes the systematic risk to decline, while the profit retention ratio is positively related to the risk. The ability of profitability, efficiency and appropriate utilization of funds to predict the firm betas is consistent with previous empirical studies. However, the positive association of profit retention ratio with the risk is an inconsistent outcome as opposed to the relevant finance theory and previous research.

Keywords: systematic risk, firm performance, panel VAR, manufacturing, India.