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EACVA_EBVM_2_2023_Meitner_Lee_how to directly estimate unlevered betas.pdf (1.56 MB)

Dealing with historical capital structure volatility in valuation: how to directly estimate unlevered betas

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posted on 2023-11-21, 13:39 authored by Matthias Meitner, Kenneth LeeKenneth Lee

Deriving unlevered betas is a standard exercise for valuation professionals when using the Capital Asset Pricing Model (CAPM). In this article we show that the traditional indirect approach (first deriving levered betas, then recalculating them using beta unlevering formulas) can lead to severely wrong results if capital structures are non-stable over time. A better approach is the direct estimation of unlevered betas (first translating each equity return data point into an asset return data point, then running the regression with these „unlevered“ returns). This approach allows to take financial risk properly into account when debt-to-equity ratios are volatile.

History

School

  • Loughborough Business School

Published in

The European Business Valuation Magazine (EBVM)

Volume

2

Issue

3

Pages

20 - 26

Publisher

EACVA GmbH European Association of Certified Valuators and Analysts

Version

  • VoR (Version of Record)

Rights holder

© EBVM

Publisher statement

This paper appears here with the permission of the publisher.

Publication date

2023-09-30

Copyright date

2023

ISSN

2940-8849

Publisher version

Language

  • en

Depositor

Dr Ken Lee. Deposit date: 18 November 2023

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