Evaluating the Effectiveness of Accounting Beta in Explaining Stock Returns: An Extended CAPM Approach

Authors

  • Hoora Nikfalah * Department of Financial Management, Faculty of Management, Economics and Accounting, Karaj Branch, Islamic Azad University, Karaj, Iran.

https://doi.org/10.22105/tqfb.v2i2.83

Abstract

The purpose of this study is to evaluate the effectiveness of accounting betas and downside risk–based accounting betas in explaining and pricing stock returns within the extended Capital Asset Pricing Model (CAPM). To this end, the performance of accounting betas based on Return on Assets (ROA), Return on Equity (ROE), and Return on Sales (ROS) is examined, both in their conventional and downside risk forms, alongside the classical market beta and control variables. The study's statistical population comprises large, index-forming firms listed on the Tehran Stock Exchange, and the final sample includes 25 non-financial companies over the period 2015–2024. Quarterly data are employed, and the empirical analysis is conducted using panel-data regression techniques in EViews. The results indicate that the classical CAPM alone lacks sufficient explanatory power to account for cross-sectional differences and average stock returns in the Iranian capital market. However, incorporating the accounting beta based on ROA, particularly in its downside risk form, significantly enhances the explanatory power of the extended CAPM. In contrast, accounting betas based on ROE and ROS, whether in conventional or downside risk forms, do not exhibit statistically significant explanatory power in most model specifications. Moreover, the findings suggest that downside accounting betas do not necessarily provide significant incremental information beyond their conventional counterparts. Overall, the findings indicate that the effectiveness of accounting betas in asset pricing models is selective, and only certain measures (most notably the downside accounting beta based on ROA) can provide a more comprehensive representation of the systematic risk affecting stock returns when used alongside the classical market beta.

Keywords:

Accounting beta, Lower partial moment, Capital asset pricing model

References

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Published

2025-06-05

Issue

Vol. 2 No. 2 (2025): Transactions on Quantitative Finance and Beyond

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Articles

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How to Cite

Nikfalah, H. (2025). Evaluating the Effectiveness of Accounting Beta in Explaining Stock Returns: An Extended CAPM Approach. Transactions on Quantitative Finance and Beyond, 2(2), 109-119. https://doi.org/10.22105/tqfb.v2i2.83
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