Betas provide a convenient measure of systematic risk of the volatility of an asset relative to the market volatility. J.Choi & M.Richardson (n.d) stated that the asset volatility is time-varying and that financial leverage matters and has a large influence on equity volatility. Besides that, the systematic risk is defined as the probability that the financial system as a whole might become unstable, rather that the health of individual market participants (E.V.Murphy, 2012). Sometimes, systematic risk is called as market risk. According to the statement above, a summary can be made that the betas is used to determine the systematic risk where been influence by the volatility of an asset; however, the volatility is influence by the time change and financial leverage. Thus, the betas will be indirectly affected by the time change and the financial leverage.
Financial leverage is the used of borrowed money to increase production volume, thus sales and earnings. Therefore, the greater the amount of debt, the greater the financial leverage. Financial leverage is express as debt ratio. Debt ratio is the percentages of the firm long term liability against the capital employed. The company should keep the debt ratio same and to ensure that the company are always be able to pay for the debt. Bankruptcy issue may arise if the firm did not having a proper financial management.
Theoretically, to conduct an international business, the company is required to bear their own risk where they would face a larger amount of debt ratio than their domestic counterparts because they cash flow are diversified internationally due by high debt high risk. However, according to the empirical studies, the MNE the systematic risk (Beta) is higher than the domestic counterparts.
Country risk is one of the systematic risks that will give a great influence to the debt ratio. Based on business dictionary, a country risk is defined as the probability of loss due to economic...
Please join StudyMode to read the full document