The Association Between a Market Determined Measure of Risk and Alternative Measures of Risk
INVESTIGATIONS of beta from the market model of portfolio theory have been numerous. Although many agree that beta may be a useful measure of risk, relatively little work has been done comparing beta to measures of risk traditionally thought to be economically important and to specific corporate decisions. In this paper we look at the association between betas for common and nonconvertible preferred stocks and several traditional accounting measures of risk which measure various aspects of the firm's asset and capital structure. We also find that selected nonaccounting corporate decisions appear to be associated with market risk levels of the firm's common and preferred stocks at least as strongly as accounting variables, when either set of variables is used alone. Finally, it is shown that combinations of the two sets of variables provide additional information beyond that available with either set of variables alone. After discussing beta and the market model briefly, we discuss the traditional measures of risk and the variables based on corporate decisions to be used in the study. Then, after describing our samples of preferred stocks and common stocks, we present the. empirical results obtained for the single firms and portfolios in our