On the Use of ß in Regulatory Proceedings
Volume: Volume 3, No. 2
Issue: Autumn 1972
Pages: pp. 612-621
Authors: William J. Breen and Eugene M. Lerner
Title: On the Use of ß in Regulatory Proceedings
Abstract: Public utility requires that a firm's rate of return be linked to its risk, and some analysts have urged that ß be used as the appropriate measure of risk. This study explores the use of ß in regulatory proceedings and finds it wanting. Empirical measures of ß are known to depend on (1) the estimating equation that is used, (2) the choice of market index, and (3) the specific time period that is selected. Empirical estimates of a firm's ß are shown to range from a large positive to a large negative value.
These empirical results are not surprising when it is recognized that corporate ß's depend upon managerial actions. Moreover, when managerial policies change, the estimated values of ß may be over- or understated. An internal check on the reliability of the estimated ß is shown to be given by the sign of alpha.