A link between the firm's operating decisions and the riskiness of its stocks was established. Differences in the production process affecting the relative shares of fixed and variable costs (i.e., the operating leverage) were found, both analytically and empirically, to be associated with risk differentials. Specifically, other things equal, the higher the operating leverage (i.e., the lower the unit variable costs) the larger the overall and systematic risk of the stocks.Various practical implications are suggested by these findings. On the firm level, it can be expected that large capital expenditures associated with an operating leverage increase will increase stock riskiness. In these cases, the cut-off rate used for the capital budgeting decision (i.e., the cost of capital) should allow for the increased risk. The use of the current cost of capital as the cut-off rate would probably result in a decrease in stock prices, adversely affecting stockholders' wealth. On the investor level, these findings might assist in the estimation of common stocks' risk given expected changes in the firm's operating leverage. Specifically, they suggest that, if a firm will experience a significant operating leverage change, the estimation of risk measures based exclusively on historical returns would be inappropriate.

Human resources, Human capital, Investments

The article reports that recent developments in finance, particularly the construction of the portfolio and efficient capital markets theories, proved to have a significant impact on accounting research. Among the major questions currently being examined is the relationship between financial statement and market-determined risk measures with the objective of inferring from the extent and timing of such a relationship the usefulness of accounting information for investment decision making. Available research generally indicates the existence of a weak to moderate association between accounting- and market-based risk measures, while very little evidence is available regarding the ability of accounting data to improve risk measurement and hence portfolio selection. Thus, both the positive and normative questions remain to a large extent unanswered, and more research in the area is obviously warranted. The objective of this study is to draw attention to a set of financial statement measures which according to organization and production theorists reflect some basic risk characteristics of the firm.