Fundamentals of the Firm and Beta Estimation

Abstract

For publicly traded firms, it is common to estimate the beta and the cost of equity assuming the perspective of the marginal investor. Unfortunately, the same assumption cannot be applied directly to the private firms. Indeed, it is quite common that investor is the entrepreneur and he/she is not diversified. Also, for the private firms there are not a historical price information that are needed to estimate beta. One way to solve the problem is the “fundamental beta”. It estimates the Beta of the firm on the basis of its fundamentals by applying the coefficient estimates on the basis of the analysis developed on the on the publicly traded firms. In this paper we estimate the beta on the fundamentals of the U.S. publicly traded firms in the year 2022.