Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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theyfeelarenecessarychangestomakethembetterestimates
forthefuture.Ingeneral,betasreportedbydifferentservices
for the samefirm can be very different because they use
different timeperiods (someuse twoyears andothers five
years);differentreturnintervals(daily,weekly,ormonthly);
different market indices; and different postregression
adjustments.
29 While thesebetadifferencesmaybe troubling,thebeta
estimates delivered by each of these services come with
standard errors, and it is very likely that all of the betas
reportedforafirmfallwithintherangeofthestandarderrors
from the regressions.


Fundamental Betas


Thebetaforafirmmaybeestimatedfromaregressionbutit
is determined by fundamental decisions that the firm has
madeonwhatbusinesstobein,howmuchoperatingleverage
touseinthebusiness,andthedegreetowhichthefirmuses
financialleverage.Inthissection,weexamineanalternative
way of estimating betas, where we are less reliant on
historical betas and more cognizant of the intuitive
underpinnings of betas.


Determinants of Betas


Thebetaofafirmisdeterminedbythreevariables:(1)the
typeofbusinessorbusinessesthefirmisin,(2)thedegreeof
operating leverageinthe firm,and(3) thefirm’s financial
leverage.Whilemuchofthediscussioninthissectionwillbe
couchedintermsofCAPMbetas,thesameanalysiscanbe
appliedtothebetasestimatedintheAPMandthemultifactor
model as well.

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