Aswath Damodaran 135
A Test
Assume that you are comparing a European automobile manufacturing firm with
a U.S. automobile firm. European firms are generally much more constrained
in terms of laying off employees, if they get into financial trouble. What
implications does this have for betas, if they are estimated relative to a
common index?
a) European firms will have much higher betas than U.S. firms
b) European firms will have similar betas to U.S. firms
c) European firms will have much lower betas than U.S. firms
European firms will have more fixed costs, leading to higher betas. This might
put these firms at a competitive disadvantage relative to US firms.
Are there ways in which you can bring your operating leverage down as a firm?
Make more of your fixed costs into variable costs (Build in escape
clauses into lease agreements, for instance). Negotiate flexibility in wage
contracts or use part time employees to deal with surplus business.
Spin off assets that are capital intensive (Coca Cola spun off its bottlers
in the early 1980s)
