The Beta Dilemma in Emerging Markets

Abstract:     
In emerging markets, appraisers of private companies confront a ‘beta dilemma’. If they attempt to compute the target’s cost of equity by employing the beta of a local comparable, such may simply be absent at the domestic level or, if it exists, its beta may be unreliable. If analysts use instead a US beta as a surrogate for the emerging market beta, they are haunted by an equivalence predicament for, are domestic betas equivalent across borders? We solve the data predicament by grouping emerging markets (EM) into a single, distinctive asset class for which we can compute a large enough number of reliable industry betas. The equivalence predicament is solved by formally testing whether domestic US and EM betas are statistically akin - finding that, for most industries, they are not equivalent. Our solution to the beta dilemma answers a crucial matter in emerging market valuation: When is it is better to use a local, and when a US-based, asset pricing model?

Number of Pages in PDF File: 15

Keywords: Corporate valuation, beta, emerging markets

JEL Classification: G31

Accepted Paper Series