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Systematic Risk and the Theory of the Firm

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  • Marti G. Subrahmanyam
  • Stavros B. Thomadakis

Abstract

The mean-variance capital-asset-pricing model forms the basis for much of the theoretical and empirical work in modern financial economics. While this model defines the relevant measure of the risk of a security β in a general equilibrium context, the relationship between this measure and the microeconomic variables of a firm has not been studied in the literature. This paper develops a model of the firm under uncertainty and derives the relationship between systematic risk and such firm variables as monopoly power, demand elasticity, and the labor-capital ratio. The general conclusions are surprisingly robust and point to several interesting empirically testable hypotheses.

Suggested Citation

  • Marti G. Subrahmanyam & Stavros B. Thomadakis, 1980. "Systematic Risk and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(3), pages 437-451.
    • Handle: RePEc:oup:qjecon:v:94:y:1980:i:3:p:437-451.
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    Citations

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    Cited by:

    1. Abdoh, Hussein & Varela, Oscar, 2017. "Product market competition, idiosyncratic and systematic volatility," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 500-513.
    2. Shinn‐Shyr Wang & Kyle W. Stiegert & Tirtha P. Dhar, 2010. "Strategic Pricing Behavior under Asset Value Maximization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(2), pages 151-170, June.
    3. Lee, Cheng-Few & Chen, K. C. & Liaw, K. Thomas, 1995. "Systematic risk, wage rates, and factor substitution," Journal of Economics and Business, Elsevier, vol. 47(3), pages 267-279, August.
    4. Belen Blanco & Juan M. Garcia Lara & Josep A. Tribo, 2015. "Segment Disclosure and Cost of Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(3-4), pages 367-411, April.
    5. So, Jacky C. & Nyerges, Richard T., 1995. "International loans and the risk-return behavior of commercial banks: Some evidence from the capital market," Global Finance Journal, Elsevier, vol. 6(2), pages 135-153.
    6. Tang, Tanya (Ya) & Fisher, Gregory J. & Qualls, William, 2016. "Interfirm alliance configuration as a strategy to reduce shareholder risks," Journal of Business Research, Elsevier, vol. 69(3), pages 1199-1207.
    7. Madhusmita Bhadra & Doyeon Kim, 2023. "Income elasticity of demand and stock market beta," International Finance, Wiley Blackwell, vol. 26(2), pages 225-240, August.
    8. Kit Pong Wong, 1995. "Cournot oligopoly and systematic risk," Journal of Economics and Business, Elsevier, vol. 47(4), pages 385-395, October.
    9. Mykhaylo Shkolnikov & Lane Chun Yeung, 2024. "From rank-based models with common noise to pathwise entropy solutions of SPDEs," Papers 2406.07286, arXiv.org.
    10. Fabian Hollstein & Marcel Prokopczuk & Christoph Matthias Würsig, 2024. "Market power and systematic risk," Financial Management, Financial Management Association International, vol. 53(2), pages 233-266, June.
    11. Vivek Sharma, 2011. "Stock returns and product market competition: beyond industry concentration," Review of Quantitative Finance and Accounting, Springer, vol. 37(3), pages 283-299, October.
    12. Gwangheon Hong & Sudipto Sarkar, 2007. "Equity Systematic Risk (Beta) and Its Determinants," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 423-466, June.
    13. Sloan, Frank A. & Trogdon, Justin G. & Mathews, Carrie A., 2005. "Litigation and the value of tobacco companies," Journal of Health Economics, Elsevier, vol. 24(3), pages 427-447, May.
    14. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Paper Series 496, University of Wisconsin, Agricultural and Applied Economics.
    15. Belén Blanco & Juan M. Garcia Lara & Josep A. Tribó Giné, 2009. "The Complementarity Between Segment Disclosure and Earnings Quality, and its Effect on Cost Capital," Working Papers 1005, Departament Empresa, Universitat Autònoma de Barcelona, revised Feb 2010.
    16. Yixin Liu & Yilei Zhang & Pornsit Jiraporn, 2016. "Firm Risk-Taking and CEO Visibility," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-23, September.
    17. Tobias Binz, 2020. "How do firm and market characteristics affect airports’ Beta risk?," Competition and Regulation in Network Industries, , vol. 21(3), pages 297-312, September.
    18. Wang, Shinn-Shyr & Stiegert, Kyle W., 2006. "The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation," Staff Papers 12606, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    19. Sherrill Shaffer, 2008. "Earnings Valuation And Sources Of Growth," CAMA Working Papers 2008-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    20. Bughin, J., 1999. "Oligopoly profit-sharing contracts and the firm's systematic risk1," European Economic Review, Elsevier, vol. 43(3), pages 549-558, March.

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