Middle Eastern Finance and Economics ISSN: 1450-2889 Issue 5 (2009) EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/MEFE.

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The Fundamental Determinants of Systematic Risk and Financial Transparency in the DFM General Index
Tarek I. Eldomiaty Corresponding Author Associate Professor of Finance, Misr International University College of Business Administration and International Trade PO Box 1 Heliopolis 11341, Cairo - Egypt E-mail: tarek_eldomiaty@hotmail.com Tel: 002-02-44771560; Fax: 002-02-44771566 Mariam H. Al Dhahery National Bank of Abu Dhabi, Credit Officer PO Box 59212 AL Ain, United Arab Emirates E-mail: Aldhahery@nbad.ae Tel: +9713-7514949; Fax: +9713-7513636 Muna Al Shukri Khalifa Bin Zayed Air Force College, Department of Statistics PO Box 1380 (Academic Wing), AL Ain United Arab Emirates Tel: +9713-7122798; Fax: +9713-7855086 Abstract This research study examines the association between firms fundamental financial information and systematic risk in the DFM General Index. The methodology utilizes a stepwise regression analysis to identify the financial ratios that are associated with firms beta significantly. The data are obtained from Reuters Financial database for the firms included in DFM General Index which are classified into three categories: Banking, Insurance and non-financial firms. The results indicate that the fundamental determinants of systematic risk in the banking sector are (a) Assets / Equity (b) Book Value Per Share. The fundamental determinants of systematic risk in the insurance sector are (a) Book Value Per Share, (b) Cash Operating / Assets, (c) Cash Operating / Fixed Assets Purchased, (d) Earnings Before Interest, Tax, Depreciation / Assets, (e) Total Liability / Equity. The fundamental determinants of systematic risk in the non-financial sector are (a) Book Value Per Share, (b) Cash Flow / Book Value Per Share, (c) Earnings Before Interest, Tax, Depreciation Per Share, (d) Total Liability / Total Assets (e) Sales / Receivables, (f) Sales / Total Assets. In terms of the association with systematic risk, it was also found out that the financial reports of the DFM Index are not quite transparent to shareholders which offers little help control and manage firms systematic risk. This study has an intrinsic value in three ways (1) the study is a practical attempt to create a link between financial reporting and the control and management of systematic risk in the DFM General Index, (2) the study identifies the most significant financial information to be published in firms financial reports in order to control and manage systematic risk, (3) the study shows the
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Electronic copy available at: http://ssrn.com/abstract=1571028

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Middle Eastern Finance and Economics - Issue 5 (2009) methodology to be followed to create an informative link between financial reporting and systematic risk. This study has also certain policy-level implication regarding the scope of transparency that it shows what is to be considered a compulsory financial information to be included in financial reporting. Keywords: Beta, Financial Transparency, DFM general index. JEL Classification Codes: P34; G30

I. Introduction
The literature on finance and investment, in general, and in financial economics, in particular, includes well established theoretical and empirical studies that show the importance of incorporating a risk factor when valuing a financial security. The most well known measure of financial risk is the systematic risk measured by beta. The importance of beta is also derived from the fact that it creates a link between the stock market (primarily thought investors expectations) and firms decisions. The assumption is that when a firm makes a wrong decision, it affects the investors expectations about the value of its stock. Therefore, stock price changes result in changes in firms systematic risk. This is the reason behind the interest in systematic risk. The high systematic risk affects the value of the stock negatively. Since the measurement of systematic risk takes into consideration the stock market index returns, a school of thought has shown the importance of beta (Kothari et al., 1995; Kandel and Stambaugh, 1995). Recently, Hsia et al., 2000 has proved that beta is alive. That is, beta explains some of the market anomalies. Since beta creates a link between the firm and the stock market, an interesting issue to examine is the determination of the financial factors that affect beta. This study aims at examining the association between firms financial ratios and systematic risk measured by beta. The foundation of this relationship is that stock prices change according to changes in firms fundamental financial information published in the financial reports (Gonedes, 1973). The latter includes the information contained in the balance sheet, income statement and cash flow statement. This study uses the financial ratios (both in accrual basis and cash flow basis) which are the most convenient form of financial information that integrates the three statements all together. Why Beta in the DFM? This study includes many considerable financial aspects that are important to the DFM investors as well as policy makers. These are outlined as follows. 1. This study is the first attempt (to the authors best knowledge) to estimate systematic risk (or beta) in the DFM. 2. Since the DFM is one of the most important emerging financial markets in the GCC, it is quite informative to the investors, as well as to the policy makers, to take into account the financial factors to be used when valuing common stock. The first factor is the estimation beta (which is done in this study). The second factor is the financial information firms must covey to investors to help them reach the real value of the common stocks. 3. The estimation and publishing of securities beta in timely manner helps speed up the development of the DFM since it is well known that the stability of a stock market is positively associated with the stability of the systematic risk. 4. This study introduces a proposed measure of financial transparency in the DFM which is beta. The assumption here is that when firms financial reports include historical values as well as an estimation of beta, they (financial reports) are to be considered transparent in terms of helping the investors and other stock market dealers reach the real value of the common stocks they are trading.

Electronic copy available at: http://ssrn.com/abstract=1571028

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According to the objective of the study, four hypotheses are to be tested. These are as follows: H1: A negative relationship exists between firms liquidity and systematic risk. H2: A negative relationship exists between firms assets efficiency and systematic risk. H3: A positive relationship exists between firms debt ratios and systematic risk. H4: A negative relationship exists between firms profitability ratios and systematic risk. The study is organized as follows. Section II discusses the theoretical background of the fundamental financial determinants of beta. Section III describes the variables examined in the study. Section IV describes the data and the methodology. Section V reports the results of the analysis. Section VI discusses the results of the study. Section VII concludes.

II.

Fundamental Financial Determinates of Systematic Risk: Theoretical and Empirical Background

Investment risk is generally defined as the uncertainty of the expected return at any given time in the future. With common stocks, risk is created by uncertainty as to the future movement of stock prices in general, as well as by the uncertainty concerning development affecting each specific company and its industry. The expected sensitivity of a stock's price to changes in the general stock market is referred to as "market risk," Systematic risk or beta. Price changes related to company or industry development are referred to as "specific risk" (Levitz, 1974). The beta, or systematic risk, factor is a variable of considerable interest and importance in the field of financial economics (Fama, 1993). Essentially, the capital asset pricing model (CAPM) implies that, at equilibrium, investors will only be rewarded for the systematic risk that they are prepared to incur unsystematic risk going unrewarded (Theobald, 1980). The determination, or estimation of the beta factor is a matter of great interest to investors (Cunningham,1973; Arsad and Coutts, 1997). That is, stock prices, especially the estimation of intrinsic prices, depend on the estimation of beta. Precision is of importance, since the measurement errors in beta estimates will constitute unsystematic risk components. According to the market model, the return on asset j is: rj= j + j rm +j Where rm, is the market return, j is the expected return when rm is zero, j is the market sensitivity of asset j, and j is an error term with zero expectation. The measurement of risk has always been considered one of the most interesting issues in the literature of finance. Capital Asset Pricing Theory states that the proper measure of risk of a security is the undiversifiable or systematic risk, commonly referred to as the beta of the security (Wagner and Lau, 1971). Rosenberg and Guy (1995) indicate that the estimation of beta has two uses: a tool for performance evaluation and a guide to investment strategy. The theory of capital markets illustrates that beta can be fairly used to evaluate past investment performance. This is quite helpful to the investors as well as to other market dealers in order to correct investment decision if needed. The use of beta for the purpose of investment strategy is much related to the formation of portfolios. In this case, beta helps formulate a portfolio that materialized the relationship between risk and return. This is considered one of the main targets of market dealers (Saint-Laurent, 2006). Gonedes, (1973) offers a seminal work on the association between the use of accounting numbers (primarily financial ratios) and the estimation of systematic risk. He states that, in general, over a period of time, there may be a systematic correspondence between some types of events reflected in market prices and accounting numbers. That is, over time, there may be a correlation between the information impounded in market prices and that impounded in accounting numbers.
B B B B B B B B B B B B

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III. Variables and Proxies

Dependent Variable Since the main focus of the study is to examine the association between the fundamentals financial information and firms systematic risk, the latter is measured by beta which is the dependent variable. The measurement of beta is well known in the literature (Altman et al., 1974; Bohren, 1997; Campbell et al., 1997; Shanken and Zhou, 2007). Beta is calculated as follows. Cov(R j , R M ) j = 2

M Where Cov(R j , R M ) denotes to the covariance between the stock returns and the DFM general

2 index returns. M is the variance of the DFM general index returns. Beta is calculated annually using monthly returns.

Independent Variables

The independent variables refer to the fundamental financial information published by Reuters for the firms included in the DFM general index. The published financial information is divided into two main types. The first is the fundamental financial ratios calculated on an accrual basis. The second is the fundamental financial ratios calculated on a cash-flow basis. The authors combined the two types of financial information to reach a comprehensive view of the published financial information about each firm included in the DFM index. It is worth to mention that the fundamental financial information differs according to the type of industry. The firms included in the DFM general index are classified into three categories: banks, insurance and non-financial. The fundamental financial information examined for each category is included in Appendix 1.
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IV. Data and Methodology

Data

The data used in this study is obtained from Reuters for the twenty six firms included in the DFM general index. Six firms were excluded due to the lack of enough data ending up with a sample of twenty firms included in the study. The data used in this study are annual data which cover the years 2005, 2006, and 2007 where the financial year ends at the first half of the years 2007. The descriptive statistics of the variables examined in the study are in the appendixes 2-4.
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Methodology

The methodology examines the association between firms systematic risk and the fundamental financial information published by Reuters financial database. An OLS model (backward stepwise) is run between the financial fundamentals (the independents) for each industry (banking, insurance and non-financial) and firms systematic risk. The best chosen model is the one associated with the lowest standard error. The general estimating equation takes the form that follows.
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n y tk = k + nk X ntk + tk i =1

k = number of firms in each group (banks, insurance, non-financial). t = time (annual data). k = The constant of the regression equation X = The independent variables (fundamental financial ratios) ntk

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= The coefficient of the independent variables nk = The error term of the regression equation. tk The regression equations are test for multicollinearity using the Variance Inflation Factor (VIF). The heteroskedastic effects are corrected using the Whites HCSE technique, which improves the significance of the OLS estimates.

V. Results
The main objective of this study is to examine the association between fundamental financial information and firms systematic risk. Since the fundamental financial ratios differ according to the type of industry, the results are presented in three tables. Table (1) shows the results for the banking sector, table (2) shows the results for the insurance sector, table (3) shows the results for the nonfinancial sector and table (4) shows the results for the all firms in the DFM General Index. In the four tables, the t-statistics are shown between brackets. The regression equations are free from multicollinearity (VIF<5). The heteroskedastic effects are corrected using the Whites HCSE, which improves the significance of the OLS estimates. The statistical properties of the four models conform to the acceptable statistical standards.
Table 1: Regression Coefficients of Fundamental Determinants of Systematic Risk in the Banking Sector1
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Dependents: Systematic Risk (Beta) Independents: Constant Assets / Equity Book Value Per Share Cash Operating / Assets N F statistics D-W test Theil Inequality Coefficient Bias Proportion

Coefficients 1.0208 -0.0610 (-2.86)** -0.0041 (-2.68)** -1.6564 (-1.52) 10 8.53*** 0.7151 2.76 0.119 0.0000

****PD-W test significant at 2% two-sided level of significance *** PSignificant at the level 1% ** PSignificant at the level 5% * PSignificant at the level 10%

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Table 2:

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Regression Coefficients of Fundamental Determinants of Systematic Risk in the Insurance SectorFPT2
Coefficients 4.4524 -0.1097 (-4.67)P***P -22.5961 (-6.57)P***P 0.0094 (3.92)P**P 15.0892 (5.02)P***P -2.5816 (-3.05)P**P 10 6.94P**P 0.7675 1.20 0.1471 0.0000

Dependents: Systematic Risk (Beta) Independents: Constant Book Value Per Share Cash Operating / Assets Cash Operating / Fixed Assets Purchased Earnings Before Interest, Tax, Depreciation / Assets Total Liability / Equity N F statistics D-W test Theil Inequality Coefficient Bias Proportion
R
2

Table 3:

Regression Coefficients of Fundamental Determinants of Systematic Risk in the Non-Financial Sector3

Coefficients 0.4783 -0.0845 (-3.46)*** -0.4104 (-2.63)** 0.9441 (1.19) 0.8719 (3.24)*** 0.0482 (3.01)*** 0.0987 (2.85)** -0.2306 (-2.55)** 16 4.08** 0.5902 2.32 0.0706 0.0000

Dependents: Systematic Risk (Beta) Independents: Constant Book Value Per Share Cash Flow / Book Value Per Share Cash Operating / Total Assets Earnings Before Interest, Tax, Depreciation Per Share Total Liability / Total Assets Sales / Receivables Sales / Total Assets N F statistics D-W test Theil Inequality Coefficient Bias Proportion
R
2

****PD-W test significant at 2% two-sided level of significance *** PSignificant at the level 1% ** PSignificant at the level 5% * PSignificant at the level 10% ****PD-W test significant at 2% two-sided level of significance *** PSignificant at the level 1% ** PSignificant at the level 5% * PSignificant at the level 10%

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Table 4: Regression Coefficients of Fundamental Determinants of Systematic Risk in the three Sectors4

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Dependents: Systematic Risk (Beta) Independents: Constant Earnings Before Interest, Tax, Depreciation after Dividends / # of Shares Earnings Before Interest, Tax, Depreciation / Total Assets Book Value Per Share N F statistics D-W test Theil Inequality Coefficient Bias Proportion

Coefficients 0.6709 0.0355 (3.66)P***P 1.2844 (2.23)P**P -0.0136 (-5.56)P***P 37 8.78P***P 0.3934 1.57 0.2026 0.0000

VI. Discussion
The Banking Sector

Table (1) shows the significant fundamental financial information that affects banks systematic risk. Two financial ratios are found statistically significant: (a) Assets / Equity (b) Book Value Per Share. The negative relationship between the two ratios and beta indicates that the higher the beta the lower the level of the two ratios. It is wroth to note that both ratios reflect the historical values of firms assets. This negative relationship may carry a negative impression about the book value of the firm. From an accounting point of view, it is expected that a firms assets historical value decreases by time due to depreciation unless the firm adds to its assets. The explanation in the banking sector is that the additions to assets were much lower than the increases in the systematic risk. This is true since the banking sectors growth of assets decreased from 42.36% in the year 2005 to 33.55% in the year 2006. 5 It is fair to say that the turbulence in the stock market, which increases the systematic risk, was much higher than banks concerns about adding to their assets.
TPF FPT

The Insurance Sector

Table (2) shows the significant fundamental financial information that affects firms systematic risk in the insurance sector. Five financial ratios are found statistically significant: (a) Book Value Per Share, (b) Cash Operating / Assets, (c) Cash Operating / Fixed Assets Purchased, (d) Earnings Before Interest, Tax, Depreciation / Assets, (e) Total Liability / Equity. Ratios (a) and (b) have negative relation with beta which conforms to what is happening in the banking sector that the increases in beta is considered a cause of lack of interest to add to firms assets. Ratios (c) and (d) have positive relation with beta. Although the numerator of the two ratios is an income-related item, the denominators are the fixed assets and total assets. This confirms the same explanation as in the banking sector that insurance firms assets are decreasing much higher than the increases in the income-related items causing a
4

****PD-W test significant at 2% two-sided level of significance *** PSignificant at the level 1% ** PSignificant at the level 5% * PSignificant at the level 10% The growth rate is measured by compound growth g = Ln xt
xt 1

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positive relation with beta. The raw data of the insurance sector show that cash operating growth rate has increased from -9.50% in the year 2005 to 4.39% in the year 2006 while assets growth rate decreased from 86.05% in the year 2005 to 33.98% in the year 2006. 6 It is also worth noting that fixed assets growth rate decreased from 95.56% in the year 2005 to -32.10% in the year 2006. The negative sign of the last ratio (Liability / Equity) indicates that the firms financing resources are decreasing as beta increases.
TPF FPT

The Non-Financial Sector

Table (3) shows the significant fundamental financial information that affects firms systematic risk in the non-financial sector. Six financial ratios are found statistically significant: (a) Book Value Per Share, (b) Cash Flow / Book Value Per Share, (c) Earnings Before Interest, Tax, Depreciation Per Share, (d) Total Liability / Total Assets (e) Sales / Receivables, (f) Sales / Total Assets. The negative signs of (a) and (b) ratios carry the same implications as in the banking and insurance sectors that the increases in beta in the non-financial sector discourage additions to firms assets. This is true since the raw data in the non-financial sector show that the average beta has increased from 0.8116 in the year 2005 to 0.9242 in the year 2006 while the assets growth rate has decreased from 53.55% in the year 2005 to 48.99 in the year 2006. 7 The negative sign of Sales / Total Assets ratio indicates that stock market fluctuations, which causes beta to increase, affect firms business (in terms of sales) negatively. The positive sign of the Total Liability / Total Assets also carries the same implication as in the insurance sector that firms financing resources are decreasing as beta increases. The positive sign of the EBIT per share can be explained by calculating the growth rates of EBIT, number of shares outstanding and beta. The growth rates of the three variables have decreased from 2005 to 2006. That is, the growth rate of EBIT has decreased from 117.33% in the year 2005 to 44.54% in the year 2006. The growth rate of the number of shares outstanding has decreased from 3.04% in the year 2005 to 1.72% in the year 2006. The growth rate of beta has decreased from 40.08% in the year 2005 to 16.95% in the year 2006. 8 This conforms to the theoretical positive relationship between risk and return. The positive relationship between Sales / Receivables and beta is due to the fact that the growth rates of both variables are decreasing. That is, the growth rate of firms sales has decreased from 56.34% in the year 2005 to 40.67% in the year 2006 while the growth rate of beta has decreased from 40.08% in the year 2005 to 16.95% in the year 2006. 9
TPF FPT TPF FPT TPF

What about the Common Financial Ratios in the DFM General Index?

This section discuses the analysis of the common financial ratios that are applicable to all firms in the DFM General Index. Table (4) shows the significant fundamental financial information that affects the systematic risk of the firms listed in the DFM General Index. Three financial ratios are found statistically significant: (a) Earnings Before Interest, Tax, and Depreciation after Dividends / Number of Shares, (b) Earnings Before Interest, Tax, Depreciation after Dividends / Total Assets, and (c) Book Value Per Share. The positive sign of the a) and (b) carry the same implications as in the non-financial sector. That is, in all firms included in the DFM General Index, the growth rate of shares outstanding and growth rate of total assets have been decreasing as well as the growth rate of beta resulting in the observed positive relationship. The raw data present the evidence. The growth rate shares outstanding decreased from 8.21% in the year 2005 to 2.17% in the year 2006. The growth rate of total assets decreased from 60.87% in the year 2005 to 40.19% in the years 2006. The growth rate of beta
6

TP PT Assets growth rate is measured by compound growth while cash operating growth rate is measured by simple growth rate (xt xt 1 ) ABS xt 1 due to negative cash flows in some years.

TP PT Assets growth rate is measured by compound growth. TP8PT The growth rates of number of shares outstanding is measured by compound growth while beta and EBIT growth rates are measured by simple growth rate g = ( xt xt 1 ) ABS xt 1 due to negative values in some years.
9

TP PT Sales growth rates are measured by compound growth rate.

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decreased from 19.38% in the year 2006 to 4.17% in the year 2006. The negative sign of the Book Value Per Share is expected as it happened in the three sectors due to the decreasing growth rate of total assets.
Transparency of Financial Reporting and Fundamental Determinants of Systematic Risk

This section shows a comparison between the financial ratios found associated with beta significantly and the financial ratios published by the firms in the annual financial reports. 10
TPF FPT

Table 5:

The Scope of Financial Reports Transparency in DFM General Index

Mentioned in Financial Reporting Mentioned in Mashreq Bank financial reports only Mentioned in Mashreq Bank financial reports only Mentioned in Shuaa Capital psc financial reports only Mentioned in Mashreq Bank financial reports only Not Mentioned in Financial Reporting

Financial Determinants of Systematic Risk Banking Sector Assets / Equity Book Value Per Share Insurance Sector Book Value Per Share Cash Operating / Assets Cash Operating / Fixed Assets Purchased Earnings Before Interest, Tax, Depreciation / Assets Total Liability / Equity Non-Financial Sector Book Value Per Share Cash Flow / Book Value Per Share Earnings Before Interest, Tax, Depreciation Per Share Total Liability / Total Assets Sales / Receivables Sales / Total Assets DFM General Index Earnings Before Interest, Tax, Depreciation after Dividends / # of Shares Earnings Before Interest, Tax, Depreciation / Total Assets Book Value Per Share

Table (5) shows a comparison between the financial ratios found significant with beta and the financial ratios mentioned in firms financial reports. It is obvious that only two firms (out of the 20 firms examined) show a slight care about financial analysis. Three ratios found of interest: Assets / Equity, Book Value Per Share, and Earnings Before Interest, Tax, Depreciation Per Share. This means that the financial reports, although satisfy the accounting purposes fairly, they can not be used for either common stocks past performance evaluation or for formulating an investment strategy (i.e., formulation of portfolios). Therefore, in terms of systematic risk and financial investment decision making, the transparency of the current format of financial reports is quite low.

VII. Conclusion
This study shows the association between firms fundamental financial ratios and systematic risk. The literature, as well as the results in this study, shows that a close relationship exists between changes in stock prices (which results in changes in systematic risk) and the fundamental financial information a firm publishes in the financial reports. Certain conclusions can be drawn from the results. First, the
10

TP PT The annual financial reports are downloaded from DFM website and Securities and Commodities Authority.

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book value of firms assets and its growth rate are quite significant determinants of systematic risk. In the three sectors, the additions to assets were much lower than the increases in the systematic risk. It is realized that in the banking and insurance sectors the increases in systematic risk are considered a cause of lack of interest to add to firms assets. In addition, in both sectors, assets are decreasing much higher than the increases in the income-related items causing a positive relation with beta. Second, in the non-financial sector, it is realized that stock market fluctuations, which causes beta to increase, affect firms sales negatively. Third, in both the insurance and non-financial sectors, firms financing resources are decreasing as beta increases. Finally, the analysis of the common financial ratios in the DFM General Index shows that the growth rate of shares outstanding and growth rate of total assets have been decreasing as well as the growth rate of beta resulting in the observed positive relationship.
Managerial Implications and Recommendations

According to the results of the study, firms management has to take into account the factors that follow. 1. In the three sectors, management should develop the investment and financing strategies to increase total assets. This helps improve the investors confidence in firms business which ultimately helps decrease systematic risk. 2. In the banking sector, management should develop investment strategies to increase assets greater than equity or to decrease its equity greater than the increases in assets. 3. In the insurance sector, firms need also to develop investment strategies to increase its assets in order to lower systematic risk. In addition, when systematic risk is lowered, firms financing resources will be improved. 4. In the non-financial sector, the management should improve EBIT per share, number of shares outstanding and sales growth.
Policy Implications and Recommendations

The results of the study have very close relationship to the issue of transparency of financial reporting. One of the financial reporting objectives is to provide certain information to the investors that help them reach a fair value of their investment and ultimately stabilize stock prices which results in stabilized systematic risk. According to the results of this study, number of implications and recommendations can be made. These are as follows. 1. There should be mandatory rules for the firms to publish information about systematic risk in the financial reports. 2. Firms financial reports contain quite few, or barely, financial ratios that are found associated with systematic risk. Financial reports contain only the three basic financial statements: balance sheet, income statement and cash flow statement. No financial ratios-based analysis in published which renders financial reports of no useful use to the investors especially in the case of monitoring systematic risk. The current format of financial reporting takes into account only the legal considerations of reporting while ignores the financial analysis considerations. In this case, the current format of financial reports can be considered transparent to accountants only, thus limits the use of financial reports by many other stakeholders who are involved with firms business. 3. There should be a mandatory rule for the firms to follow certain methodology, like the one applied in this study, to relate the financial ratios to be published to systematic risk. Eventually, this helps improve firms business in terms of its assets, financing resources and sales.

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References
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] Altman, E. I., Jacquillat, B. and Levasseur, M. 1974. Comparative Analysis of Risk Measures: France and the United States. Journal of Finance, 29: 1495-1511. Arsad, Z. and J. A. Coutts. 1997. Security Price Anomalies in London International Stock Exchange: A Sixty Year Perspective. Applied Financial Economics, 7:455-464. Bohren, O. 1997. Risk Components and the Market Model: a Pedagogical Note. Applied Financial Economics, 7: 307-310. Campbell, J. Y., Lo, A. W. and Kackinaly, A. C. 1997. The Econometrics of Financial Markets. N.J. Princeton University Press. Cunningham, S.W. 1973. The Predictability of British Stock Market Prices, Applied Statistics, Vol.3. Fama, E. F. 1993. Common Risk Factors in the Returns on Common Stocks and Bonds. Journal of Financial Economics, 33: 3-56. Gonedes, N.J. 1973. Evidence on the Information Content of Accounting Numbers: Accounting-Based and Market-Based Estimates of Systematic Risk, Journal of Financial and Quantitative Analysis, 8: 407-43. Hsia, C. C., Fuller, B. R. and Chen, B. Y. J. 2000. Is Beta Dead or Alive? Journal of Business Finance and Accounting 27(3): 283-311. Kandel, S. and R. F. Stambaugh. 1995. Portfolio Inefficacy and the Cross-Section of Expected Returns. Journal of Finance, 50: 157-184. Kothari, S. P., Shanken, J. and Sloan, R. G. 1995. Another Look at the Cross-Section of Expected Stock Return. Journal of Finance, 50: 185-224. Levitz, G. D. 1974. Market Risk and the Management of Institutional Equity Portfolios. Financial Analysts Journal, January-February, 53-91. Rosenberg, B and Guy, J. 1995. Prediction of Beta from Investment Fundamentals. Financial Analysts Journal, January-February, 101-112. Saint-Laurent, P. 2006. Risk 101: Systematic and Unsystematic Risk, Make Sure your Client Understand the Difference. Portfolio Advisor, January, 19-20. Shanken, J. and Zhou, G. 2007. Estimating and Testing Beta Pricing Models: Alternative Methods and their Performance in Simulations. Journal of Financial Economics, 84: 40-86. Theobald, M. 1980. An Analysis of the Market Model and Beta Factors Using UK Equity Share Data. Journal of Business Finance and Accounting, 7(1): 49-64. Wagner, W. H. and Lau, S. C. 1971. The Effect of Diversification On Risk. Financial Analysis Journal, November-December, 48-53.

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Appendix 1
The Fundamental financial ratios examined in the study
Banks Book Value Per Share Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Net Interest Margin Cost Income Ratio Return on Equity Return on Total Assets Dividend / Net Cash Operating Net Cash Operating / Share Net Cash Operating / Fixed Asset Purchase Net Cash Operating / Fixed Assets Net Cash Operating / Total Assets Fixed Asset Purchase / Total Assets Cash Flow / BVPS Dividend / EBITDA EBITDA / Share EBITDA / Fixed Assets EBITDA / Total Assets EBITDA Before Dividends / Share EBITDA After Dividends / Share Insurance Book Value Per Share Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Return on Equity Return on Total Assets Net Cash Operating / Share Net Cash Operating / Fixed Asset Purchase Net Cash Operating / Fixed Assets Net Cash Operating / Total Assets Fixed Asset Purchase / Total Assets Cash Flow / BVPS EBITDA / Share EBITDA / Fixed Assets EBITDA / Total Assets EBITDA Before Dividends / Share Non-Financial BVPS Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Sales/Total Assets Sales/Receivables Operating Margin Pretax Income Margin Return on Equity Return on Total Assets Net Cash Operating / Share Net Cash Operating / Revenue Net Cash Operating / Total Assets Cash Flow / BVPS EBITDA / Share EBITDA / Total Assets EBITDA Before Dividends / Share EBITDA Before Dividends / Revenue

Appendix 2
Descriptive Statistics of the Variables Examined in the Banking Sector
Beta Book Value Per Share Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Net Interest Margin Cost Income Ratio Return on Equity Return on Total Assets Net Cash Operating / Share Net Cash Operating / Fixed Asset Purchase Net Cash Operating / Fixed Assets Net Cash Operating / Total Assets Fixed Asset Purchase / Total Assets Cash Flow / BVPS EBITDA / Share EBITDA / Fixed Assets EBITDA / Total Assets EBITDA After Dividends / Share Mean 0.53 24.09 6.92 5.90 0.81 2.62 34.39 17.59 3.14 2.51 -18.06 -5.55 -0.02 0.0021 -0.07 3.67 13.32 0.03 2.28 Median 0.46 4.58 7.04 5.95 0.84 2.27 34.99 19.79 3.15 -0.32 -12.54 -2.64 -0.01 0.0020 -0.11 0.71 7.04 0.03 -0.32 SD 0.36 34.09 3.06 3.06 0.10 0.98 5.95 6.18 0.82 9.87 55.96 44.82 0.09 0.0012 0.44 6.66 17.38 0.01 9.81 Min 0.20 1.18 2.63 1.63 0.62 1.79 22.86 5.94 1.83 -2.83 -110.28 -80.17 -0.18 0.0007 -0.89 0.07 1.73 0.02 -3.60 Max 1.39 85.17 11.46 10.46 0.91 4.57 42.63 23.96 4.43 30.40 65.74 96.22 0.12 0.0038 0.64 17.88 59.29 0.05 29.87

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Appendix 3
Descriptive Statistics of the Variables Examined in the Insurance Sector
Beta Book Value Per Share Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Return on Equity Return on Total Assets Net Cash Operating / Share Net Cash Operating / Fixed Asset Purchase Net Cash Operating / Fixed Assets Net Cash Operating / Total Assets Fixed Asset Purchase / Total Assets Cash Flow / BVPS EBITDA / Share EBITDA / Fixed Assets EBITDA / Total Assets EBITDA Before Dividends / Share Mean 1.00 20.04 1.66 0.64 0.36 17.00 14.24 1.24 90.35 59.02 0.07 0.02 0.12 0.66 21.69 0.08 1.19 Median 0.38 17.15 1.66 0.58 0.36 13.22 10.34 1.06 34.91 16.33 0.08 0.00 0.12 0.34 22.73 0.04 1.04 SD 2.12 20.14 0.38 0.38 0.16 21.13 17.20 1.38 144.82 106.05 0.08 0.04 0.14 1.03 21.63 0.11 1.40 Min -0.07 1.11 1.08 0.08 0.07 -7.97 -5.45 -0.06 -0.11 -2.09 -0.06 0.00 -0.11 -0.27 -2.09 -0.02 -0.30 Max 6.95 62.87 2.32 1.32 0.57 51.64 42.92 4.52 470.51 347.46 0.21 0.13 0.38 3.38 71.05 0.36 4.51

Appendix 4
Descriptive Statistics of the Variables Examined in the Non-Financial Sector
Beta BVPS Total Assets/Equity Total Liabilities/Equity Total Liabilities/Total Assets Sales/Total Assets Sales/Receivables Operating Margin Pretax Income Margin Return on Equity Return on Total Assets Net Cash Operating / Share Net Cash Operating / Revenue Net Cash Operating / Total Assets Cash Flow / BVPS EBITDA / Share EBITDA / Total Assets EBITDA Before Dividends / Share EBITDA Before Dividends / Revenue Mean 0.90 3.01 2.91 1.86 0.47 0.41 2.70 38.37 40.39 20.48 12.33 0.22 0.12 0.02 0.10 0.50 0.13 0.12 0.00 Median 0.86 2.11 1.79 0.75 0.42 0.35 2.32 38.45 41.38 19.88 10.55 0.05 0.07 0.03 0.05 0.45 0.12 0.00 -0.02 SD 0.29 3.12 2.78 2.78 0.23 0.34 1.76 27.13 24.05 11.47 8.26 1.06 0.71 0.14 0.44 0.40 0.09 1.14 0.74 Min 0.39 1.04 1.18 0.16 0.14 0.07 0.35 7.34 7.79 4.73 2.39 -1.21 -1.27 -0.35 -0.57 0.05 0.03 -1.21 -1.27 Max 1.55 13.78 11.57 10.53 0.91 1.33 6.06 91.63 87.22 45.06 26.69 3.72 2.09 0.27 1.52 1.40 0.32 4.06 2.29