The Systematic Risk Behavior in the Life Cycle Stages of Companies and the Moderating Effect of Managerial Ability

Document Type : Original Article

Author

• Reyhaneh Haghighi

Faculty of Economics and Administrative sciences, Ferdowsi University of Mashhad, Mashhad, Iran

10.22067/ijaaf.2020.39278

Abstract

Firm characteristics influence systematic risk and, according to life cycle theory, these characteristics change over the life cycle following a predetermined pattern. Therefore, changes in systematic risk are expected following a predicted pattern. Given the different nature of companies and the different abilities of managers in various industries and different stages of the life cycle, it can be assumed that systematic risk in different industries and the ability to manage to affect this relationship. Therefore, the purpose of this paper is to investigate the systematic risk behavior over the life cycle and the moderating role of management ability. So, the systematic risk of 124 companies listed on the Stock Exchange during the years 2011-2017 and during different stages of the life cycle using three models of Anthony and Ramesh (1992), Dickinson (2010) and Saravia et al. (2016) and methodology Data were analyzed by simple regression and T-Student. The results show that corporate life cycle risk behaves differently in some industries such as basic steel and sugar and food industries except sugar. The management ability as a moderator relationship over the whole company rather than industry-level is effective in this relationship.

Keywords

• Systematic Risk
• Managerial Ability
• Life Cycle
• Financial Leverage

---

References

Agarwal, R. and Gort, M. (2002). Firm and product life cycles and firm survival. American Economic Review, 92(2), 184-190. https://www.jstor.org/stable/3083399

Alaghi, K. (2011). Financial leverage and systematic risk. African Journal of Business Management, 5(15), 6648-6650. Doi: 10.5897/AJBM11.335

Andreou, P.C. Ehrlich, D. and Christodoulos, L. (2013). Managerial Ability and Firm Performance: Evidence from the Global Financial Crisis. Available online: http://www.efmaefm.org

Anthony, J.H. and Ramesh, K. (1992). Association between accounting performance measures and stock prices: A test of the life cycle hypothesis. Journal of Accounting and Economics, 15(2-3), 203-227. https://doi.org/10.1016/0165-4101(92)90018-W

Azad Amir, M.H. Ghaderi, Gh. and Soltanpour, W. (2014). Determining the Life Cycle Using Cash Flow Patterns resulted from  Cash Flow Statement. The First National Conference on Management and Accounting in the New World of Business. Economics and Culture.1-11. (In Persian)

Brown, G. and Kapadia, N. (2007). Firm-specific risk and equity market development. Journal of Financial Economics, 84(2), 358-388. https://doi.org/10.1016/j.jfineco.2006.03.003

Chen, Y.R. Cheng, C.S. and Huang, Y.L. (2012). Value of cash holdings: The impact of cash from operating, investment and financing activities. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985476

Chung, K.H. (1989). The impact of the demand volatility and leverages on the systematic risk of common stocks. Journal of Business Finance & Accounting, 16(3), 343-360. Doi: 10.1111/j.1468-5957.1989.tb00023.x

DeAngelo, H. DeAngelo, L. and Stulz, R.M. (2006). Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial Economics, 81(2), 227-254. https://doi.org/10.1016/j.jfineco.2005.07.005

Ferreira, M.A. and Laux, P.A. (2007). Corporate governance, idiosyncratic risk, and information flow. The Journal of Finance, 62(2), 951-989. https://doi.org/10.1111/j.1540-6261.2007.01228.x

Fink, J. Fink, K. and He, H. (2010). Idiosyncratic volatility measures and expected return. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1692315

Gahlon, J.M. and Gentry, J.A. (1982). On the relationship between systematic risk and the degrees of operating and financial leverage. Financial Management,11(2) ,15-23. https://doi.org/10.2307/3665021

Garcia, C. Saravia, J.A. and Yepes, D.A. (2016). The weighted average cost of capital over the life-cycle of the firm: is the overinvestment problem of mature firms intensified by a higher WACC?. Available at SSRN: https://ssrn.com/abstract=2695102 or http://dx.doi.org/10.2139/ssrn.2695102

Goyal, A. and Santa‐Clara, P. (2003). Idiosyncratic risk matters!. The Journal of Finance, 58(3), 975-1007. https://www.jstor.org/stable/3094569

Graham, J.R. and Harvey, C.R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of financial economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Griffin, H.F. and Dugan, M.T. (2003). Systematic risk and revenue volatility. Journal of Financial Research, 26(2), 179-189. https://doi.org/10.1111/1475-6803.00053

Groenewald, N. and Fraser, P. (2000). Forecasting Beta: How Well Does the ‘Five‐Year Rule of Thumb’Do?. Journal of Business Finance & Accounting, 27(7‐8), 953-982. https://doi.org/10.1111/1468-5957.00341

Hamada, R.S. (1972). The effect of the firm's capital structure on the systematic risk of common stocks. The Journal of Finance, 27(2), 435-452. https://doi.org/10.2307/2978486

Hambrick, D.C. and Mason, P.A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of management review, 9(2), 193-206. https://doi.org/10.2307/258434

Hill, N.C. and Stone, B.K. (1980). Accounting betas, systematic operating risk, and financial leverage: A risk-composition approach to the determinants of systematic risk. Journal of Financial and Quantitative Analysis, 15(3), 595-637. https://doi.org/10.2307/2330401

Hong, G. and Sarkar, S. (2007). Equity systematic risk (beta) and its determinants. Contemporary Accounting Research, 24(2), 423-466. https://doi.org/10.1506/8187-56KM-6511-Q532

Jawahar, I.M. and McLaughlin, G.L. (2001). Toward a descriptive stakeholder theory: An organizational life cycle approach. Academy of management review, 26(3), 397-414. https://doi.org/10.2307/259184

Jovanovic, B. and Rousseau, P.L. (2002). The Q-Theory of Mergers. The American Economic Review .92(2), 198-204. https://www.aeaweb.org/articles?id=10.1257/000282802320189249

Karami, Gh.R. and Amrani, H. (2010). The effect of corporate life cycle on the relevance of risk and performance criteria. Financial accounting research, 2(3), 49-63. (In Persian).

Kim, D. (1993). The extent of nonstationarity of beta. Review of Quantitative Finance and Accounting, 3(2), 241-254. https://link.springer.com/article/10.1007/BF02407008

Mandelker, G.N. and Rhee, S.G. (1984). The impact of the degrees of operating and financial leverage on systematic risk of common stock. Journal of financial and quantitative analysis, 19(1), 45-57. https://doi.org/10.2307/2331000

Mensah, Y.M. (1992). Adjusted accounting beta, operating leverage and financial leverage as determinants of market beta: a synthesis and empirical evaluation. Review of Quantitative Finance and Accounting, 2(2), 187-203. https://link.springer.com/article/10.1007/BF00243802

Moores, K. and Yuen, S. (2001). Management accounting systems and organizational configuration: a life-cycle perspective. Accounting, Organizations and Society, 26(4-5), 351-389. https://doi.org/10.1016/S0361-3682(00)00040-4

Mueller, D.C. (1972). A life cycle theory of the firm. The Journal of Industrial Economics, 20(3),199-219. https://doi.org/10.2307/2098055

Mueller, D.C. (2003). The corporation: investment, mergers, and growth. Routledge.

Ramalingegowda, S. Wang, C.S. and Yu, Y. (2013). The role of financial reporting quality in mitigating the constraining effect of dividend policy on investment decisions. The accounting review, 88(3), 1007-1039. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2195739

Sadati Meidani, Z. and Gharazi, H. (2016). The Moderating Effect of Investment Tendency on the Relationship between Life Cycle and Corporate Risk, First National Conference of Modern Iranian and World Research in Management. Economics and Accounting and Humanities, Shiraz, Shooshtar University of Applied Sciences, https://www.civilica.com/Paper-MEAHBTM04-EAHBTM043-11.html. (In Persian)

Saravia, J.A. (2014). The lifecycle of the firm, corporate governance and investment performance. Documentos de trabajo Economía y Finanzas 11(2-1), 212-226. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2390124

Saravia, J.A. and Saravia-Matus, S. (2016). Corporate Governance and Transaction Cost Economics: A Study of the Equity Governance Structure. The Corporate Board: Role, Duties & Composition, 12(1) 33-44. Doi: 10.22495/cbv12i1art4

Saravia, J.A. Garcia, C. and Almonacid, P.M. (2016). The Determinants of Systematic Risk: A Firm Life-cycle Perspective. Available at SSRN: https://ssrn.com/abstract=2905762 or http://dx.doi.org/10.2139/ssrn.2905762

Schlueter, T. and Sievers, S. (2014). Determinants of market beta: the impacts of firm-specific accounting figures and market conditions. Review of Quantitative Finance and Accounting, 42(3), 535-570. https://link.springer.com/article/10.1007/s11156-013-0352-1

Schumpeter, J.A. (1943). Capitalism, Socialism and Democracy. London: George Allen & Unwin Ltd.

Stepanyan, G.G. (2012). Revisiting firm life cycle theory for new directions in finance. IÉSEG School of Management (LEM-CNRS) Socle de la Grande Arche. Available at SSRN: https://ssrn.com/abstract=2126479 or http://dx.doi.org/10.2139/ssrn.2126479

Thanatawee, Y. (2011). Life-cycle theory and free cash flow hypothesis: Evidence from dividend policy in Thailand. International Journal of Financial Research, 2(2), 52-60. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872686

Tsui, D. (2018). Value-risk tradeoffs and managerial incentives. Available at SSRN: https://ssrn.com/abstract=2685369