The purpose of the current paper is to propose a bottom-up approach as a complement in risk return analyses, particularly suitable for private firms and divisional evaluation. Considering the European market, where the model of the private firm is prevalent, the proposed approach appears more suitable than the mere use of top down methods for the beta estimation and it allows to increase the accuracy when predicting firm future returns. Among others, the CAPM is the most widespread risk return model across the financial analyst community and firms. The success of this model could be explained as a consequence of market data prominence, especially in Anglo-Saxon countries. Conversely, in other countries, such as Italy, Germany etc., firm’s economic fundamentals are more significant than market data. The prominence of firm fundamentals in many European countries is consistent with the ability to implement a bottom up approach. In fact, this kind of approach take into account both environmental and business drivers of risk. In the matter of question, the bottom up approach allows the study of systematic risk as a function of firm fundamentals. Thus, the adoption of bottom up approaches could give critical insights on equity beta maneuverability through managerial decisions. In other words, it creates the possibility to deepen the formation process of operating risk. The paper is structured in three sections: 1. The literature review on the CAPM and the beta estimation. 2. A bottom up approach to unlevered risk considering the role both of intrinsic business risk and of operating leverage 3. The analysis of unlevered beta, according the bottom up model, both in stationary and the dynamic states. Therefore, firm investments, fixed costs and the difference between market sales per unit and variable cost per unit are considered; at first, stationary, then non-stationary 4. A recapitulation matrix that combines the analysis of stationary and non-stationary states
A NEW BOTTOM UP APPROACH TO UNLEVERED RISK IN A MANAGERIAL AND A FINANCIAL PERSPECTIVE / Renzi, Antonio; Sancetta, Giuseppe; Orlando, Beatrice. - (2013). (Intervento presentato al convegno CONFERENCE IN HONOUR OF GIUSEPPE BURGIO tenutosi a Roma - Sapienza University nel 5-6 novembre 2013).
A NEW BOTTOM UP APPROACH TO UNLEVERED RISK IN A MANAGERIAL AND A FINANCIAL PERSPECTIVE
RENZI, ANTONIO;SANCETTA, Giuseppe;ORLANDO, BEATRICE
2013
Abstract
The purpose of the current paper is to propose a bottom-up approach as a complement in risk return analyses, particularly suitable for private firms and divisional evaluation. Considering the European market, where the model of the private firm is prevalent, the proposed approach appears more suitable than the mere use of top down methods for the beta estimation and it allows to increase the accuracy when predicting firm future returns. Among others, the CAPM is the most widespread risk return model across the financial analyst community and firms. The success of this model could be explained as a consequence of market data prominence, especially in Anglo-Saxon countries. Conversely, in other countries, such as Italy, Germany etc., firm’s economic fundamentals are more significant than market data. The prominence of firm fundamentals in many European countries is consistent with the ability to implement a bottom up approach. In fact, this kind of approach take into account both environmental and business drivers of risk. In the matter of question, the bottom up approach allows the study of systematic risk as a function of firm fundamentals. Thus, the adoption of bottom up approaches could give critical insights on equity beta maneuverability through managerial decisions. In other words, it creates the possibility to deepen the formation process of operating risk. The paper is structured in three sections: 1. The literature review on the CAPM and the beta estimation. 2. A bottom up approach to unlevered risk considering the role both of intrinsic business risk and of operating leverage 3. The analysis of unlevered beta, according the bottom up model, both in stationary and the dynamic states. Therefore, firm investments, fixed costs and the difference between market sales per unit and variable cost per unit are considered; at first, stationary, then non-stationary 4. A recapitulation matrix that combines the analysis of stationary and non-stationary statesI documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
