TITLE
"The Impact of Cash Flow Volatility on Systematic Risk,"
Nicos A. Scordis, James Barrese, and Ping Wang, Spring 2008, Volume 31, pp 43-71.
ABSTRACT
In a word, where information is costly, volatile cash flows create information
acquisition costs that reduce value. Thus, managers act to reduce their firm’s volatility
of cash flow in anticipation of higher value for shareholders. However, when managers
reduce the firm’s cash flow volatility, they also affect the systematic risk of their firm’s
stock. The direction of the relationship between cash flow volatility and systematic risk
depends on the relative value of the firm’s growth opportunities in relation to the firm’s
assets-in-place. We use a panel sample of 542 observations from United States insurance
firms to investigate the relationship between cash flow volatility and systematic
risk. The direction of the relationship between cash flow volatility and systematic risk
has implications both for the education and for the practice of risk management. We
make recommendations for risk management programs. Our findings also have implications
for clienteles among the firm’s stockholders. While the theoretical relationship
between cash flow volatility and systematic risk can be generally applied, we only test
this relationship for a sample of insurance firms. [Key words: Cash flow volatility, beta,
total risk, systematic risk]
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