A Study On The Association Between Systematic Risk And Financial Variables Of Chinese Public Companies

Risk and return are inseparable in the market, especially in the security markets which situation changes constantly, risk is a concept that people pay most attention to. In 1963, William Sharp, etc first classified risk as systematic risk and nonsystematic risk, and defined beta coefficient to measure systematic risk. This plays an important role in modern investment theory. Beta Coefficient has therefore become a hot topic among scholars in the field of finance in the last thirty years.At the end of 1990, Shanghai and Shenzhen Stock Exchanges were established one after the other. Since then Stock markets have officially entered China's economic system. In the last twenty years, the stock markets have developing rapidly. Although there are setbacks in progress, they play a key role in economy development. However, our stock markets also face serious challenges, which results in much higher systematic risk than that in the western markets. One of the issues is that the prices of individual stocks are same direction fluctuation with the market. The effect of diversification is insignificant. Considering all these, this study will measure the proportion of systematic risk in the total risk in our A share stock market and suggest on how to control and avoid systematic risk in order to protect stakeholders and establish a solid foundation for economy development.There are many factors that can affect systematic risk, and the cause of it is also complicated. Generally speaking, the factors that have significant effects on systematic risk include financial risk, macro-economic trends, and companies'basic characteristics. The last factor such as financial variables,operating risk, plays the most important role in deciding the market risk. This paper will first find in theory that the association between systematic risk and financial variables based on MM theory, dividend discount pricing model, and capital asset pricing model, and then verify that systematic risk has relationship with company size, profitability, and growth ratio etc. After sampling China's IT public companies in A share market during the period of 2005-2009, and building a multiple regression model to investigate the relationship between systematic risk and financial variables. The result shows that in IT industry beta coefficient has inverse relationship with company size, profitability, market value variables, and direct relationship with growth ratio.Through empirical studies, this paper comes to a conclusion that systematic risk accounts for a great scale in China's stock market, and that eight financial variables selected can explain almost half of the systematic risk of an individual stock. And therefore, accounting variables should be monitored to reduce systematic risk. Other suggestions of decreasing risk include enterprises optimizing capital structure, more reasonable system being established for companies getting into and out of market, and more accurate and relevant information being disclosed by public companies. Besides, developing institution investors and educating the investors are also effective ways.