Discount Factor in Analyst’s Notes in Russian Capital Market (37 Analytical Teams): Testing Predicted Beta with Liquidity Adjustment
Vanguard Scientific Instruments, Vol. 3, 2010
24 Pages Posted: 17 Dec 2011 Last revised: 31 Jan 2012
Date Written: 2010
We review 187 research papers of 37 financial analysts in Russian capital market on 2000-2010 time horizons with question: 'How analysts choose discount factor in DCF construction for calculation fair market value'. 96% of the analysts that justify the DCF construction on Russian capital market use CAPM. The present paper assesses the CAPM predicted beta coefficient which is employed by a number of Russian investment companies (sell side analyst’s equity research) in the calculation of a discount rate for future cash flows valuation in DCF model. A shift from the historical to the predicted beta coefficient is due to low marketability of the majority of Russian stocks which results in rather low historical beta coefficients obtained by regressing on historical data. The paper assesses a new method of calculating the beta coefficient suggested by Aton Investment Company which dismisses company’s industry-specific characteristics while accentuating company’s size (measured by market capitalization) and liquidity (measured by the free-float coefficient), the values of the beta coefficients thus defined range between 1 and 2. The sample size is 72 Russian stocks traded on the Russian Trading System (RTS) Stock Exchange. The sample period is from 2007 to the first half of 2008.
Keywords: CAPM, historical beta, free-float, adjusted beta, discount for lack of marketability, predicted beta adjusted for liquidity
JEL Classification: G12, M21
Suggested Citation: Suggested Citation