Empirical Estimates of Beta When Investors Face Estimation Risk

ABSTRACT 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.