Pharmaceutical Industry and Idiosyncratic Risk

Abstract

The study tries to develop a model that contains variables that can be used to determine both the market risk and the idiosyncratic risk unique to the
pharmaceutical industry, which is characterized as a capital intensive industry and mainly deals with producing products that are considered long-term investment. The results suggest that significant determinants for the market risk are size, leverage, and efficiency when capital is excluded and size, capital, and efficiency when leverage is excluded. The significance and the signs o f the regression coefficients imply that market investors consider that the larger the size of the pharmaceutical company the lower is the market risk and have higher the leverage or debt ratio the larger is the market risk and V finally higher is the efficiency of the company the lower is the market risk. Further the results indicate that the significant determinants of idiosyncratic risk are size and earnings variability whether leverage or capital is included in the determinants set. These two significant determinants provide increased guidance to investors seeking diversification to minimize specific risk.