Using Comparable Companies to Estimate the Betas of Private Companies

Abstract

Comparable company analysis (CCA) has become the standard tool for measuring the beta of a non-traded firm or division. The average beta of the comparable companies is taken as the estimate for the non-traded company. We apply a framework for testing the usefulness of CCA in estimating beta to a sample of 480 U.S. companies. CCA provides a reasonably accurate estimate of beta when the comparable companies are similar in size to the private company. When the comparable companies are larger than the private companies, as will generally be the case in practice, there is a significant downward bias in the estimation. Controlling for comparability in operating leverage and dividend payout ratio improves the estimate.

Keywords: comparable companies analysis, beta

JEL Classification: C13, G12, G30