ABSTRACT
The borrowing ratio is measured in market value. The advantage of this measure is that it is consistent with the prediction that is being tested which assumes that financial leverage is measured in market value. The effect of variability of earnings/cyclicality on market beta is tested by examining whether industry classification of firms affects their market values. The average beta value of the control group will take the place of the constant in the OLS regression. There are two main reasons for representing expected growth and variability of earnings/cyclicality by variables which are different from the measures used by W. H. Beaver, P. Kettler and M. Scholes. One of the reasons is that Datastream does not have the necessary data for long periods of time for many firms. The second reason is that there are alternative variables that can be used as proxies for expected growth and variability of earnings/cyclicality.
