The effect of firm-specific factors on systematic risk across various industries in Asean-5 countries : panel data evidence

Abstract

By nature, systematic risk cannot be diversified away. Systematic risk plays an important role in determining the expected return of investment and firms’ value. The firms’ value may increase by reducing systematic risk. Hence, firms’ stability may be at stake when systematic risk is high. Previous studies found firm-specific factors affected systematic risk in both local and international firms. This finding supports the idea that managerial financial decisions affect firm performance, which in turn influences systematic risk. Although the systematic risk is regarded as an external factor beyond the control of firms, it can be changed based on the managerial decision adopted. Numerous studies have examined the effect of firm-specific factors on systematic risk but the results are inconclusive. Prior studies merely examined a particular country or a specific industry in a single empirical study, which findings could not capture and explain the behavior of systematic risk across industries and countries. Therefore, the key factors affecting firm systematic risk across countries and industries remain an open empirical investigation. The issue of inconclusiveness and inconsistency in the literature about the effect of firm-specific factors on systematic risk motivated this study to investigate the firm-specific factors affecting systematic risk of non-financial firms across various industries in ASEAN-5 from 1997 to 2016. This study also examines the impact of the 1997 Asian financial crisis and 2008 global financial crisis on systematic risk. Using panel data regression analysis, the result shows that financial leverage is positively related to systematic risk in ASEAN-5 firms except for Singapore, thus supporting the first hypothesis. Moreover, liquidity and profitability are significantly associated with systematic risk in Malaysian firms while profitability and firm size are the main firm-specific factors affecting systematic risk in Singaporean and the Philippines firms. Similar to Malaysian firms, Thai firms with high liquidity have high systematic risk. The findings vary across industries and countries, suggesting that systematic risk behaves differently depending on the type of industry and country. In Malaysia, profitability is the only significant determinant of firm systematic risk across various industries. Meanwhile, the findings vary across industries in other ASEAN-5 countries. Next, the 1997 Asian financial crisis and 2008 global financial crisis increased the systematic risk of non-financial firms in Malaysia, Singapore, and Thailand; hence supporting the seventh and eighth hypotheses, while only the 2008 global financial crisis affected the systematic risk of Indonesian firms. The 1997 Asian financial crisis and 2008 global financial crisis affected the systematic risk of Thai firms across all industries. The findings on other ASEAN-5 countries are inconsistent across industries. This study primarily highlighted the important role of firm-specific factors affecting firm systematic risk. Understanding the determinants of firm systematic risk across different countries and industries is vital because systematic risk affects the return on investment and firms’ value. Further, the findings could shed some light on managing systematic risk by controlling firm-specific factors during a financial crisis and normal economic conditions.