Asset liquidity, business risk, and beta
Global Finance Journal, 2021, vol. 48, issue C
Extant literature posits that because of leverage, equity beta estimates from a single factor capital asset pricing model based on an equity-only market index are biased. We show analytically that this leverage bias is intimately related to the firm's asset structure per se, the firm's asset liquidity (i.e., cash holdings) and business risk. This is mainly because riskless cash holdings and risky real assets jointly determine the relevant risk for asset pricing. We empirically confirm that asset liquidity and business risk can marginally explain the leverage bias in the cross-section of stocks returns.
Keywords: Multifactor asset pricing; Asset liquidity; Cash holdings; Business risk (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:48:y:2021:i:c:s1044028320301319
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