The Beta Dilemma in Emerging Markets
Journal of Applied Corporate Finance, Vol. 22, No. 4, pp. 110-122, Fall 2010
15 Pages Posted: 27 Jun 2011
Date Written: November 1, 2010
Abstract
In emerging markets, appraisers of private companies confront a ‘beta dilemma’. If they attempt to compute the target’s cost of equity by employing the beta of a local comparable, such may simply be absent at the domestic level or, if it exists, its beta may be unreliable. If analysts use instead a US beta as a surrogate for the emerging market beta, they are haunted by an equivalence predicament for, are domestic betas equivalent across borders? We solve the data predicament by grouping emerging markets (EM) into a single, distinctive asset class for which we can compute a large enough number of reliable industry betas. The equivalence predicament is solved by formally testing whether domestic US and EM betas are statistically akin - finding that, for most industries, they are not equivalent. Our solution to the beta dilemma answers a crucial matter in emerging market valuation: When is it is better to use a local, and when a US-based, asset pricing model?
Keywords: Corporate valuation, beta, emerging markets
JEL Classification: G31
Suggested Citation: Suggested Citation