A Proposed Model to Examine the Effect of Unsystematic risk on Company’s Value: An Empirical Study

Abstract

Finance theory implies that there is a direct relationship between risk and return because when investors bear high risk they require a higher rate of return to compensate them. Previous literature suggests that CAPM is based on unrealistic assumptions. In fact not every investor holds fully diversified portfolios, instead Individual investors are likely to hold undiversified portfolios due to a number of reasons, and some of them are transaction costs, information costs and choice of investment style. As such, many authors have recently proclaimed that investors must require higher rates of return for holding under-diversified portfolios in order to compensate the existing of idiosyncratic volatility in their portfolios. In other words, many authors have recently demanded the necessity to price unsystematic risk. Therefore, this has triggered the researcher to investigate the effect of unsystematic risk on firm’s value. The data consist of 28 non-financial publicly listed companies in Egyptian Stock Exchange (EGX100) during the period of 2010-2016. By using Panel Data regressions model, the Effect of Unsystematic risk is determined on the company’s value by identifying the effect of company specific factors on EVA. The EVA serving as a proxy for firm’s value has been used as the dependent value. On the other hand, the independent variables used to present the Company specific risk factors in the study include: Revenue Growth, Financial leverage, Operational Performance, Profitability, Liquidity, Size, and Corporate Governance (board size, board composition and duality). The results reveal that there is a relationship between each of the Operational Performance (OP), Liquidity (LIQ), and Duality (DUAL) with the EVA, and all the variables are holding a positive sign, which indicates that they all have a positive effect in determining the value of EVA.