The effect of financial ratios on systematic risk index

Abstract

This paper investigates the relationship between financial ratios and indicator of systemic risk in the Tehran Stock Exchange. The study selects 73 manufacturing companies of the Tehran Stock Exchange market over the period 2003-2010. The study first calculates the independent variables in the form of financial ratios and then the ratios affecting the systematic risk index are extracted using entropy method. The output of this stage is the introduction of five influential financial indicators as the independent variables of the study. Using t-test and Pearson correlation coefficient the rate of independent variables effect on the systematic risk index is evaluated and finally, using stepwise regression method, the effect of independent variables on the dependent variable is examined. According to results of our survey, the correlation coefficient of such indices as “the ratio of stock price to the profit of each share”, “Current ratio”, “each share profit ratio” and “the stockholders rights return ratio” have respectively the highest correlation with the systematic risk index.

Keywords

• Financial Ratios
• Systematic Risk
• Tehran Stock Exchange