Empirical Estimates of Beta When Investors Face Estimation Risk




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    • Simon Fraser University and Southern Methodist University, respectively. Comments from workshops at The Ohio State University, Northwestern University, The University of Queensland, and The Australian Graduate School of Management, and especially from C. Barry, G. Richardson, S. Sefcik, the co-editor, David Mayers, and an anonymous referee are gratefully acknowledged.


We examine empirical implications of models of differential information that formalize the following intuition: securities for which there is relatively little information are perceived as relatively more risky because of the greater uncertainty surrounding the exact parameters of their return distributions. The implication that beta risk for low information firms should decline as information increases is confirmed with several data sets. We find such a decline over the first several periods subsequent to initial public offerings and initial listings. There is also an abrupt risk decline at the first annual earnings announcement.