Research On The Approach Of Estimating Operating Beta Of Multi-industry Enterprise

There was an outbreak of the diversification strategy of listed companies in 2014.The operating beta of multi-industry company is the key factor of determining the loan interest rate and of deciding cost of capital when EVA is used in performance assessment. In practice, making use of the stock price information, financial databases estimate the operating beta directly but break up the business first. Meanwhile, the method in theory breaks up the business first, but there exist three phenomenon: the weights of each business are unclear; the criterion of choosing pure-plays is not sure; the assumption of effective market is not according with the reality when estimating the operating of each business. Therefore, the method of estimating the operating beta of multi-industry company should be further improved in practice and theory.At first, the theoretical defects of traditional method of estimating operating beta are analyzed, and the BAPM model is used in eliminating the noise trader risk and the parameters are decided. Secondly, the determination of weights and pure-play of each business is explored after business is broken up. Thirdly, basing the real limitations that “equity beta is the same as stock beta” and “ROE, ROA or ROIC are calculated basing market value”, the traditional formula of unlevering is improved. Finally, each step is integrated in estimating operating beta and the new method is validated.Finally, this paper summarizes the steps of estimating operating beta are as followed:finding pure-play based on industry enterprise �' calculating weights �' estimating equity beta of each pure-play �' estimating operating beta of each pure-play �' estimating business beta �' weighted averaging each business beta. In terms of weights, the book value of invested capital is most proper after deriving the definition of operating beta, instead of sales, income or the market value of invested capital. The reasons for using other indicators are “representative deviation” and “path dependence”. In terms of choosing pure-plays, “Shenyin Wanguo industry classification standard” is used, and 99 pure-play in 23 industries is pick up. In terms of business beta, the steps are as followed: using “noise 500, 5 years and weekly return” to estimate equity beta �' using improved formula “βoperating=βequity/(1+D/E)” to estimate operating beta �' averaging the operating beta of pure-plays to estimate business beta. 23 business beta is estimated, the biggest of which in 0.91, the smallest is 0.31. The reasons why business beta is below 1 is that unlike stock beta, which is around “1”, operating beta is not influenced by capital structure and noise trader risks. Integrating the method of estimating operating beta and comparing with the methods in financial databases and in theory, there exists significant differences between the results in the method put forward in this paper and other method, indicating that this research is necessary.