Thiscontrastswiththebetaof1.01thatweobtainedfromthe
regression,andis,inourview,amuchtruerreflectionofthe
risk in Disney.
Accounting Betas
Athirdapproachis toestimate themarket riskparameters
from accounting earnings rather than from traded prices.
Thus, changes in earnings at a division or a firm, on a
quarterlyoranannualbasis,canberegressedagainstchanges
inearningsforthemarket,inthesameperiods,toarriveatan
estimateof a market betato use inthe CAPM.While the
approach has some intuitive appeal, it suffers from three
potential pitfalls. First, accounting earnings tend to be
smoothedoutrelativetotheunderlyingvalueofthecompany,
resultinginbetasthatarebiaseddown,especiallyforrisky
firms,orbiasedup,forsaferfirms.Inotherwords,betasare
likelyto becloserto 1 forallfirmsusingaccountingdata.
Second, accounting earnings can be influenced by
nonoperating factors, such as changes in depreciation or
inventorymethods,andbyallocationsofcorporateexpenses
at the divisional level. Finally, accounting earnings are
measured,atmost,onceeveryquarter,andoftenonlyonce
everyyear,resultinginregressionswithfewobservationsand
not much power.
Estimating the Cost of Equity
Havingestimatedtherisk-freerate,theriskpremium(s),and
thebeta(s),we cannowestimatetheexpectedreturnfrom