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THE HAMADA AND CONINE LEVERAGE ADJUSTMENTS AND THE ESTIMATION OF SYSTEMATIC RISK FOR MULTISEGMENT FIRMS
Author(s) -
Butler Kirt C.,
MOHR Rosanne M.,
Simonds Richard R.
Publication year - 1991
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1991.tb00244.x
Subject(s) - leverage (statistics) , state (computer science) , library science , management , finance , accounting , economics , mathematics , computer science , statistics , algorithm
The Capital Asset Pricing Model (CAPM) identifies beta (or systematic risk) as the only firm-specific determinant of expected return.' The key role of beta within the CAPM has led to a considerable body of theoretical beta decomposition research.'^ In general, this research has used a variety of assumptions to model the corporate determinants of beta. The theoretical research has, of course, been accompanied by related empirical work. Typically, the empirical studies have used publicly-available data to examine the ability of the operationalized models to explain and/or predict beta and equity returns. This study extends the model estimation and beta measurement literature. Using the theoretical work of Hamada (1969 and 1972), Conine (1980), and Rubinstein (1973), this study compares the relative ability of several beta estimates to explain and predict the equity returns of a sample of multis.egment firms.^ The estimation issues associated with the Hamada and Conine financial leverage adjustments are emphasized. As such, this research provides a more complete examination ofthe issues raised by Fuller and Kerr (1981) and Conine and Tamarkin (1985) as to the appropriateness of financial leverage adjustments in the estimation of divisional and multisegment firm risk. The remainder of this paper is organized as follows. The next section describes the related theoretical and empirical research. The estimation issues and measurement procedures are discussed in the third section and the empirical results are presented in the fourth section. The fmal section contains the research conclusions and recommendations.