FINANCIAL DETERMINANTS OF SYSTEMATIC RISK IN SINGAPORE PROPERTY COMPANIES

Abstract

Financial theory and empirical evidence suggest that a firm's systematic or market related risk is related to its financial conditions. This research empirically investigates the financial determinants of systematic risk for Singapore Property Companies. The study is an examination of a sample comprising 16 property companies listed on the Stock Exchange of Singapore (SES) for the period 1 99 1 -1 998. The results indicate that systematic risk varies directly with Price/Earnings ratio, Profit Margin, Debt/Equity ratio, Return on equity, Current ratio and Interest Cover. The explanatory power of the relationship between systematic risk and financial variables exceeds that of previous studies wherein firms are pooled across industry groups. The higher explanatory power observed even with limited data suggests that better estimates of coefficient of financial determinants of systematic risk may be obtained through analysis conducted on an industry by industry basis. Furthermore, such industry-specific analysis provides useful results to practicing financial managers. With the knowledge of how the financial decisions affect the firm's systematic risk, a manager may be able to manipulate those variables so as to reduce the systematic risk for his/her firm and thus increase the market value of the firm's securities.