Full-Information Industry Betas

Financial Management, Vol 27, No 2

Posted: 26 Aug 1998

See all articles by Paul D. Kaplan

Paul D. Kaplan

Morningstar Canada

James D. Peterson

Charles Schwab Investment Advisory

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

Suggested Citation

Kaplan, Paul D. and Peterson, James D., Full-Information Industry Betas. Financial Management, Vol 27, No 2, Available at SSRN: https://ssrn.com/abstract=107721

Paul D. Kaplan

Morningstar Canada ( email )

1 Toronto Street
Suite 500
Toronto, Ontario M5C 2W4
Canada

James D. Peterson (Contact Author)

Charles Schwab Investment Advisory ( email )

211 Main Street, SF211MN-11-107
San Francisco, CA 94105
United States
4156670879 (Phone)

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