Regressing the changes in profits at Bookscape against changes in profits for the S&P 500 yields the following:

Bookscape Earnings Change = 0.1003 + 0.7329 (S & P 500 Earnings Change) Based upon this regression, the beta for Bookscape is 0.73. In calculating this beta, we used net income to arrive at an equity beta. Using operating earnings for both the firm and the S&P 500 should yield the equivalent of an unlevered beta.

Technically, there is no reason why we cannot estimate accounting betas for Disney, Aracruz Cellulose and Deutsche Bank. In fact, for Disney, we could get net income numbers every quarter, which increases the data that we have in the regression. We could even estimate accounting betas by division, since the divisional income is reported. We do not attempt to estimate accounting betas for the following reasons:

1. To get a sufficient number of observations in our regression, we would need to go back in time at least 10 years and perhaps more. The changes that many large companies undergo over time make this a hazardous exercise.

2. Publicly traded firms smooth out accounting earnings changes even more than private firms do. This will bias the beta estimates downwards.

pearn.xls: This data set on the web has earnings changes, by year, for the S&P 500 going back to 1960.

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