The pure-play technique for estimating divisional cost of capital relies on the use of betas of undiversified firms as proxy divisional betas. This article identifies in this procedure three potential sources of bias that arise from differences between diversified and undiversified firms. A new procedure for using diversified firm data to obtain product-line betas that avoids these sources of bias is developed and tested.
All Science Journal Classification (ASJC) codes
- General Business, Management and Accounting
- cost of capital
- divisional betas
- product-line betas