Pergamon zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA TranspnRex.-E (Logisticsand TranspnRev.), Vol. 33, No. 2, pp. 147-158, 1997 0 1997 Elsevier Science Ltd. All rights reserved Printed in Great Britain 1366-5545197 $ I7.00 + 0.00 PII: s1366-5545(!iqooo15-x THE STOCK MARKET PERCEPTION OF INDUSTRY RISK AND MICROECONOMIC FACTORS: THE CASE OF THE US WATER TRANSPORTATION INDUSTRY VERSUS OTHER TRANSPORT INDUSTRIES MANOLIS G. KAVUSSANOS* Department of Shipping, Trade and Finance, City University Business School, London ECZY 8HB, U.K. and STELIOS N. MARCOULIS Laiki Investments, Cyprus Popular Bank, PO Box 2032, Nicosia, Cyprus (Received 4 April 1996; in revisedform 4 April 1997) zyxwvutsrqponmlkjihgfedcbaZYXWV Abstract-This paper undertakes a comparative analysis of the stock market perception of risk of U.S.-listed water transportation and other transport sectors such as air transportation, rail transportation, trucks, and other related industries such as electricity, gas, petroleum refining and real estate over the period July 1984 June 1995. This is done by relating cross-sectional differences in the returns of the companies in each industry to the stock market and to the following set of micro-economic factors: market value of equity; book to market value of equity ratio; earnings to price ratio; asset to market value of equity; and asset to book value of equity. The Seemingly Unrelated Regression methodology (SUR) is employed to estimate the above relationships due to its advantages over ordinary least squares. Our findings reveal that the water transportation industry is the only transportation industry which exhibits lower systematic risk than the market and that the asset-to- book ratio, along with the market, has explanatory power over its cross-sectional returns. Also, the micro factors which are significant in explaining stock returns vary between industries. 0 1997 Elsevier Science Ltd. I. INTRODUCTION In the practice of equity management, managers often use a two stage approach in selecting secu- rities to be included in their portfolios. In the first stage, the manager allocates portions of the portfolio to several industries and in the second, industry analysis is employed to select the most attractive stocks from the sectors selected in the first stage. This paper addresses both stages of the selection procedure: the selection of industries, by comparing the riskiness of each industry’s stock returns to the market and a set of microeconomic fundamental factors, and the stock selection process in each industry by uncovering the funda- mentals influencing stock returns in each sector. We pay particular attention to the water trans- portation industry, a sector often associated with high riskiness in comparison to other sectors in the economy. This perception of high riskiness in the sector might be a reason that even though water transportation companies go public, they do not attract a large number of investors. Kavussanos and Marcoulis (1997) show that this perception may be unfounded. In a selection of 28 water transportation companies listed in the U.S. stock exchanges, they show that the risk of this industry is numerically smaller but not significantly different than the risk faced by the average company in the market. However, potential investors are also interested in how the risk of water transportation stocks compares with that of other transport sectors and other popular industrial sectors in the economy. With the exception of Kavussanos and Marcoulis (1993, who use the CAPM to compare market risks among different transportation sectors, no other study makes such a comparison. In addition, there has been no attempt to uncover factors, other than the market, that may influence returns in these industries. Such an analysis would be revealing for investors in these industries, would *Author for correspondence. Tel: I71 -477 868 I; Fax: I7 l-477 8853. 147