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Meaning and Problems of Identification of Beta Coefficient When Valuing Financial Institutions

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  • Milan Hrdý
  • Markéta Pláničková

Abstract

The aim of this article consists in the analysis of the beta coefficient presented in different areas for three types of financial institutions: banks, investment banks and life insurance companies. In the final evaluation, we analyse whether the beta coefficient has a high tendency to reach number one and whether there is a relatively stabilized position of the beta coefficient different from one for a certain period and a certain financial institution on a certain market and whether it is possible to avoid a relatively complicated process of beta coefficient identification in income valuation. For that reason, the analysis of the five-year beta coefficient in the years 2000-2014 was performed for the USA, developed European, emerging European, developed Asian and emerging Asian regions. The analysis proved that the beta coefficient values are lower than the "magic one", meaning that using a beta coefficient equal to one is possible only in some specific cases. Also, stability of the beta coefficient with some permitted deviation was identified only for some financial institutions and for some markets, for example 0.6 for banks on the developed Asian market and 0.35 on the US market.

Suggested Citation

  • Milan Hrdý & Markéta Pláničková, 2019. "Meaning and Problems of Identification of Beta Coefficient When Valuing Financial Institutions," Prague Economic Papers, Prague University of Economics and Business, vol. 2019(4), pages 479-495.
    • Handle: RePEc:prg:jnlpep:v:2019:y:2019:i:4:id:704:p:479-495
    DOI: 10.18267/j.pep.704
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    References listed on IDEAS

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    3. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-795, June.
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    More about this item

    Keywords

    valuation; beta coefficient; analysis; financial institutions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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