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Abstract
The gaming industry, previous to 2007, had experienced a continued increase in revenues and stock prices, but in late 2007, the industry started to be affected by a recession. To have a better understanding of the relationship between this external economic factor (recession) and a gaming company's systematic risk (beta), this study analyzed which financial ratios are significant predictors of beta and evaluated if these financial ratios better predict beta before or during the recession. The financial ratios examined in this study include return on assets, liabilities as a percentage of assets, asset turnover, quick ratio, EBIT growth rate, and market capitalization. The results revealed that market capitalization was the only variable that had significantly positive impact on beta both before and during the recession. Asset turnover was a significant predictor only before the recession while liabilities as a percentage of assets was significant only during the recession.
Keywords: Gaming industry, financial ratios, beta, systematic risk, recession
During the decade previous to 2007, the casino industry had seen significant growth in both revenue and stock price, but in late 2007, revenue and stock prices started to decline. This decrease happened at the same time as the recession that has affected the entire economy in the U.S. According to the National Bureau of Economic Research (2008), the current recession began in December 2007. The gaming industry does not always rise and fall with the U.S. economy, but in late 2007, both started to decline at a significant rate. Although the decline in the gaming industry occurred at the same time as the recession, there has been no specific research to determine what factors affect the financial risk in the gaining industry and hence the decline in stock prices.
Stock prices are affected by systematic and unsystematic risk. However, diversified investors are concerned only with the systematic risk and require a higher rate of return for stock that has a higher systematic risk. Financial executives in the gaming industry need to be concerned with what factors affect their firm's systematic risk and need to understand how to address and adjust these factors as necessary to satisfy their shareholders. Management and financial executives are faced with business decisions everyday that can affect the risk of...