Abnormal behavior of beta after the Asian financial crisis: Focusing on the relationship with financial ratios in the Korean stock market

Abstract

Beta, as a measure of systematic risk on a firm, measures the extent to which the common stock re-turn of the firm varies with the returns of the market index. Due to the increasing interest in beta, many re-searchers have tried to figure out the powerful determinants of a common stock’s beta. This study focused on the size of a firm as a determinant. Previous research has shown that there is a significant relationship between the firm’s size and beta. In particular, most of the previous papers showed that the large firms have a smaller beta compared to the small firms. However, after the Asian financial crisis, it was shown that in the Korean stock market, the large firms have on average a greater beta compared to the small firms. Therefore, it is worth analyzing the reasons why beta shows such abnormal movements. This study tried to investigate the causes of beta’s abnormal behavior, which is shown in the Korean stock market, by using financial ratios. Financial ratios contain the basic information regarding a firm’s fi-nancial condition and performance, which might affect the stock return of an individual firm. In particular, this study tried to determine which financial ratios relatively have more impact on the abnormality of beta. Four methodologies were used to analyze which financial ratios had a significant impact on the abnormality of beta: Independent-samples t-test, factor analysis, two-group discriminant analysis, and multiple regression analysis. The key findings are as follows: First, it is significant that the firms with a large firm portfolio have on average a greater beta than the firms with a small firm portfolio. Second, seven common underlying factors among twenty-two financial ratios were retained, which were paid-in capital factor, sales-based performance factor, equity-based performance factor, financial stability factor, sales growth factor, equity growth factor, and miscellaneous factor. Third, the underlying factors among the financia...