Full-Information Industry Betas

Abstract

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 beats of conglomerates into the industry beta estimation process. Our results show that full-information beta estimates are substantially smaller than their pure-play counterparts.

JEL Classification: G12, G14