More on the Estimation of β for Public Utilities: Biases Resulting from Structural Shifts in True Beta
The recent Brigham-Crum criticism of the use of the Capital Asset Pricing Model (CAPM) is incorrect. CAPM is criticized for bias in cost of equity capital estimates due to perceived systematic risk levels. The critique was based on a specific correlation assumption; other correlation assumptions wou...
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| Veröffentlicht in: | Financial management 1978-10, Vol.7 (3), p.60-65 |
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| creator | Gilster, John E. Linke, Charles M. |
| description | The recent Brigham-Crum criticism of the use of the Capital Asset Pricing Model (CAPM) is incorrect. CAPM is criticized for bias in cost of equity capital estimates due to perceived systematic risk levels. The critique was based on a specific correlation assumption; other correlation assumptions would produce different results. Brigham-Crum assume a negative correlation between returns due to changes in beta and changes due to all other causes. This assumption results in a bias which systematically underestimates cost of equity capital. The earlier research also assumes in its empirical study that the increase in risk related to financially failing companies studied is systematic risk. This assumption is probably incorrect. The systematic risk is also accompanied by investor perceptions of total security risk. Exhibits. |
| doi_str_mv | 10.2307/3665013 |
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CAPM is criticized for bias in cost of equity capital estimates due to perceived systematic risk levels. The critique was based on a specific correlation assumption; other correlation assumptions would produce different results. Brigham-Crum assume a negative correlation between returns due to changes in beta and changes due to all other causes. This assumption results in a bias which systematically underestimates cost of equity capital. The earlier research also assumes in its empirical study that the increase in risk related to financially failing companies studied is systematic risk. This assumption is probably incorrect. The systematic risk is also accompanied by investor perceptions of total security risk. Exhibits.</description><identifier>ISSN: 0046-3892</identifier><identifier>EISSN: 1755-053X</identifier><identifier>DOI: 10.2307/3665013</identifier><language>eng</language><publisher>Albany, N.Y: Financial Management Association</publisher><subject>Arithmetic ; Beta ; Bias ; Business risks ; Business structures ; Capital ; Capital assets ; Capital costs ; Correlations ; Equity capital ; Estimation bias ; Financial risk ; Investment risk ; Pricing ; Public utilities ; Quarterly estimates ; Rate restructuring ; Rate setting ; Risk ; Systematic risk ; Utility rate reform ; Utility Regulation and the CAPM: A Discussion</subject><ispartof>Financial management, 1978-10, Vol.7 (3), p.60-65</ispartof><rights>Copyright 1978 Financial Management Association</rights><rights>Copyright Financial Management Association Autumn 1978</rights><lds50>peer_reviewed</lds50><woscitedreferencessubscribed>false</woscitedreferencessubscribed></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktopdf>$$Uhttps://www.jstor.org/stable/pdf/3665013$$EPDF$$P50$$Gjstor$$H</linktopdf><linktohtml>$$Uhttps://www.jstor.org/stable/3665013$$EHTML$$P50$$Gjstor$$H</linktohtml><link.rule.ids>314,776,780,799,27848,27903,27904,57995,58228</link.rule.ids></links><search><creatorcontrib>Gilster, John E.</creatorcontrib><creatorcontrib>Linke, Charles M.</creatorcontrib><title>More on the Estimation of β for Public Utilities: Biases Resulting from Structural Shifts in True Beta</title><title>Financial management</title><description>The recent Brigham-Crum criticism of the use of the Capital Asset Pricing Model (CAPM) is incorrect. CAPM is criticized for bias in cost of equity capital estimates due to perceived systematic risk levels. The critique was based on a specific correlation assumption; other correlation assumptions would produce different results. Brigham-Crum assume a negative correlation between returns due to changes in beta and changes due to all other causes. This assumption results in a bias which systematically underestimates cost of equity capital. The earlier research also assumes in its empirical study that the increase in risk related to financially failing companies studied is systematic risk. This assumption is probably incorrect. The systematic risk is also accompanied by investor perceptions of total security risk. 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| identifier | ISSN: 0046-3892 |
| ispartof | Financial management, 1978-10, Vol.7 (3), p.60-65 |
| issn | 0046-3892 1755-053X |
| language | eng |
| recordid | cdi_proquest_journals_208187805 |
| source | Jstor Complete Legacy; Business Source Complete; Alma/SFX Local Collection; Periodicals Index Online |
| subjects | Arithmetic Beta Bias Business risks Business structures Capital Capital assets Capital costs Correlations Equity capital Estimation bias Financial risk Investment risk Pricing Public utilities Quarterly estimates Rate restructuring Rate setting Risk Systematic risk Utility rate reform Utility Regulation and the CAPM: A Discussion |
| title | More on the Estimation of β for Public Utilities: Biases Resulting from Structural Shifts in True Beta |
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