Full-Information Industry Betas

The process of estimating an industry cost of capital is complicated by the fact that many firms operate in multiple industries. Conglomerates are typically excluded from a pure-play industry analysis since their operations span more than one line of business. We argue that excluding these firms int...

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Bibliographic Details
Published in:Financial management 1998-07, Vol.27 (2), p.85-93
Main Authors: Kaplan, Paul D., Peterson, James D.
Format: Article
Language:English
Subjects:
Banking industry
Beta
Business conglomerates
Business structures
Capital assets pricing model
Capital budgets
Capital costs
Capital expenditures
Conglomerate corporations
Conglomerates
Divisions
Equity
Estimates
Estimation methods
Financial analysis
Industrial market
Industry
Industry analysis
Industrywide conditions
Information industry
Market capitalization
Real estate industry
Regulated industries
Risk assessment
Securities analysis
Securities markets
Tobacco industry
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Summary:The process of estimating an industry cost of capital is complicated by the fact that many firms operate in multiple industries. Conglomerates are typically excluded from a pure-play industry analysis since their operations span more than one line of business. We argue that excluding these firms introduces and upward bias into industry beta estimates. This is because the betas of large-market-capitalization firms tend to be lower than the betas of small-capitalization firms. Betas are estimated for 66 industries using both a pure-play and a full-information approach. The full-information approach incorporates industry-specific information contained in the betas of conglomerates into the industry beta estimation process. Our results show that full-information beta estimates are substantially smaller than their pure-play counterparts.
ISSN:0046-3892
1755-053X
DOI:10.2307/3666295