Managerial Economics and Operating Beta
Managerial and Decision Economics, April 2011, 175-191
42 Pages Posted: 10 Apr 2005 Last revised: 12 Sep 2017
Date Written: December 22, 2010
Abstract
We model a firm’s unlevered beta in terms of elementary microeconomic variables. The source of uncertainty is a shock to demand. A firm decides on capital before the shock, and on labor, output, and price after the shock. Some insights are: 1) with decreasing returns to scale of production, beta has an inverse relation with price elasticity of demand, given the income elasticity of demand; 2) beta has a direct relation with the firm’s returns to scale of production; 3) due to the impact of operating leverage, beta has an inverse relation with industry concentration; and 4) for a given returns to scale, beta has a direct relation with the capital-labor ratio that strengthens as industry concentration decreases.
Keywords: Operating beta, price elasticity, income elasticity, output elasticity, capital, labor, returns to scale, competition, industry concentration, operating leverage, CAPM
JEL Classification: G13, G32
Suggested Citation: Suggested Citation
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