Time-Varying Accounting Betas and Risk Estimation for Thinly Traded Stocks: Finnish Evidence

Abstract

This paper provides new evidence on the usefulness of time- varying accounting betas on risk estimation for infrequently traded stocks. While the traditional approach assuming constancy in market and accounting index model parameters does not lead to statistically significant relationships between accounting and market betas in the thinly traded Finnish stock market, we report that the correlation between these two risk measures is significant when they are estimated using the time-varying estimation approach. We find a stronger correlation between accounting betas and market model betas based on annual stock returns than when market model betas are estimated using shorter return intervals. It also appears that accounting betas are not as significantly related to firm size as the market betas are. Finally, the results indicate that the correlation between market betas and accounting betas based on reported earnings that are deliberately smoothed by managers is lower than that of adjusted earnings that are unmanaged' to better reflect the underlying business conditions.

JEL Classification: J41, G14, G32, J33, M41, G12