Investment Efficiency and Beta Estimation

54 Pages Posted: 19 Jun 2024

See all articles by Lee Biggerstaff

Lee Biggerstaff

Miami University of Ohio - Department of Finance

Bradley A. Goldie

Miami University

Haim Kassa

Miami University

Abstract

Survey evidence suggests most firms use the CAPM to estimate their cost of equity. Previous research has documented these estimates can be extremely imprecise. We study the impact of the precision of beta estimates on firm investment decisions, and find that firms with precise beta estimates invest closer to their optimal levels. Using the decimalization of stock prices as an exogenous shock to the precision of beta estimates, we find evidence that supports a causal link between Beta Precision and firm investment efficiency. We employ quantile regressions to further examine the relationship between Beta Precision and investment levels and find that firms with more precise betas tend to avoid extremes in investment levels.

Keywords: Beta, Cost of Equity, firm investment

Suggested Citation

Biggerstaff, Lee and Goldie, Bradley A. and Kassa, Haim, Investment Efficiency and Beta Estimation. Available at SSRN: https://ssrn.com/abstract=4870248 or http://dx.doi.org/10.2139/ssrn.4870248

Lee Biggerstaff (Contact Author)

Miami University of Ohio - Department of Finance ( email )

Oxford, OH 45056
United States

Bradley A. Goldie

Miami University ( email )

2029 Farmer School of Business
800 E. High Street
Oxford, OH 45056
United States
(513) 529-3657 (Phone)
(513) 529-6992 (Fax)

Haim Kassa

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

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