Theoretical and Empirical Analysis of Accounting and Market Betas of Finnish and UK companies

Abstract

The research was aimed at exploring the degree of association between stock returns and market and accounting based risk measures. The analysis was conducted over a period of five years on the basis of companies’ data, which represent Finnish and UK markets. The main objectives were to ascertain whether market and accounting betas are capable of predicting future stock returns and to discover the level of correlation between risk measures in the cases of UK and Finland. Secondary numeric data was obtained from official databases and financial statements of the companies. The usage of the SPSS software enabled conducting two types of research: correlational research and multi-variate linear regression. Correlational research provided information concerning the level of association between two variables whereas the multi-variate linear regression extended this knowledge by enabling the author to determine the degree of influence of all the independent variables on the dependent. The results reveal that market beta is not capable of predicting future stock returns separately for each of the markets, but for the larger sample the market beta has illustrated its potency in reflecting the market movements on stock returns. Nevertheless, the substantial dependence of market based risk measure on extraneous factors such as sales, assets, and earnings per share indicate that accounting variables should also be considered for a precise estimation of returns. The outcomes of the accounting based risk measure analysis show that such measure possesses a more significant predicting power than market based risk measure. Therefore, while accounting based risk measure and stock returns are positively associated, there is no evidence supporting the idea that there exists a positive relationship between market and accounting based risk measures.