Sector Sensitivity to Business Cycle and its Influence on the Structure of Cost of Equity

conference paper

English

This article has its aim to find out relations between sensitivity of selected sectors to the business cycle and the cost of equity, including its structure, that are required in the sector. First of all, there were selected quantities, which serve for measuring and identifying the business cycle and the market life cycle. The business cycle was considered by using the gross domestic product (GDP), calculated by the expenditure approach, and for identifying the market life cycle, there were used sales for goods, own products and services, reached on the whole market (= sector). By each sector of czech economy where these two quantities put into correlation and there was calculated the coefficient of correlation, by using the MS Excels function CORREL. The interval of values, that can reach this coefficient, was divided into three thirds to determine cyclical, neutral and anti-cyclical sectors. Consequently, there were selected three sectors, which reached an extreme value of the coefficient of correlation, so there was selected one cyclical sector with the value nearest to +1, one neutral sector with the value nearest to 0 and one anti-cyclical sector with the value nearest to -1. By these selected three sectors were found out maximal, average and minimal values of cost of equity and its partial risk rewards to know differences between the levels of risks, that are beared and considered by shareholders and other owners in the cyclical, neutral and anti-cyclical sector. To calculate cost of equity, there was used the methodics by the Czech Ministry of Industry and Trade, because of the possibility of finding out the structure of cost of equity and rate of partial risks, that are expressed in form of risk rewards. There was found out, that numbers of cyclical and neutral sectors are approximately the same, whilst only two sectors of czech economy are anti-cyclical. For researching relations between the sensitivity to the business cycle and the structure of cost of equity, there was selected civil engineering as a cyclical sector, other manufacturing as a neutral sector and manufacture of textiles as an anti-cyclical sector. To the main findings belongs, that the highest average value of all four risk rewards and also the cost of equity were reached in the anti-cyclical sector. On the contrary, there was reached the lowest average value of the risk reward to size of the company (rLA) in the cyclical sector and the lowest average value of the risk reward to entrepreneurial risk (rPOD) in the neutral sector. Average values of risk rewards to financial stability (rFINSTAB) and financial structure (rFINSTRU) reached in the cyclical and neutral sector, were approximately the same. So it follows, that the investing in shares of companies, that are acting in anti-cyclical sectors is most risky, whilst rates of risks, that are beared by shareholder and other owners, who invest in companies acting on cyclical and neutral sectors, are considerably lower and approximately the same. Generalization of the findings has its limitation, which follows from used methods. To calculate the coefficient of correlation there were used data only for 18 quarters (from I. 2007 to II. 2011), because of the impossibility of getting older data for individual quarters and because of a different classification of sectors till 2006. So it could be possible to get other results, if there were used data for other, or for more periods. And furthermore, in this research there was considered neither the life cycle of companies, acting in selected sectors, nor their market position, which is derived from the combination of phases of corporate- and market life cycle.

business cycle, market life cycle, sector sensitivity, structure of cost of equity, risk rewards

KONEČNÝ, Z.

2012

21. 9. 2012

Brno

978-80-214-4581-9

Trends in economics and management for the 21st century

198

206

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