Knowledge that Transforms

Note: ME = Median, M = Mean, S.D. = Standard Deviation of the distributions of the estimated parameters, respectively. The parentheses contain the corresponding statistics for the distributions of the t-values, JEP S = as; ?lEP X/X = ax */logsoe = elasticity of EP with respect to X at X, where X = any explanatory variable in equation (I) other than size (S); X = mean value of X; e = 2.718. a Details of the regression results may be obtained from the author upon request.

In the 1960s and early 1970s many conglomerate companies were treated as the glamour shares of the stock market and they traded at high price-earnings ratios. One reason for this glamour status was the belief that these conglomerates had dynamic, entrepreneurial management and when this was injected into taken-over firms greatly increased efficiency and profits would ensue, which would ultimately be reflected in a superior share price performance. The current note examines this hypothesis by presenting the results of a research study into the actual stock market performance of conglomerate firms in the United Kingdom. Following Professors Weston, Smith and Shrieves (this REVIEW, 1972) the study uses a capital asset pricing model approach in measuring performance . Contrary to Weston et al. 's findings the current study found that conglomerates did not display superior risk-adjusted stock market performance. The findings are consistent, however, with other studies in the United States (Melicher and Rush, 1973; Brenner and Downes, 1979), as well as with previous studies into takeovers in Britain (Firth, 1976 and 1979) which showed no stock market gains resulting from making acquisitions.

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In recent years the model of capital asset valuation (CAPM) proposed by Sharpe (1964), Lintner (1965), and Mossin (1966) has become the predominant representation of capital markets for empirical work and in the development of normative financial theory. In light of the model's popularity, the contradictory empirical evidence contained in studies of capital market behavior is disturbing. Researchers report findings of deviations of estimated parameters from theoretical values (Black et al., 1972; Fama and MacBeth, 1973; Miller and Scholes, 1972), non-linear rather than linear riskreturn relationships (Fama and MacBeth, 1973; Jensen, 1972), and indications of the incompleteness of the model's measure of risk (Fama and MacBeth, 1973; Rao and Miller, 1968). Further, the observed results have not been attributed to the econometric problems known to exist (Miller and Scholes, 1972). In this paper we argue that the conventional approach to testing the CAPM is subject to a peculiar in variables problem and cannot be expected to be successful even if the underlying model is valid. The CAPM is an equilibrium condition with equilibrium asset prices implicitly deflating the risk and the return measures denominated in rates of return. If disequilibrium observations are employed, then erroneous prices deflate both regressor and regressand in the regression model of the CAPM. As Casson (1973) has shown, estimated model parameters will not be consistent. The effect of this problem is difficult to relate to previous empirical evidence. The ,B estimates employed in these studies were produced by -a method that exhibits an equivalent errors in deflating variable problem. Our findings, however, indicate that reported results cannot be considered inconsistent with the validity of the hypothesized relationship. Finally, we show that the CAPM regression model can be recast in terms of asset prices rather than rates of return in order to produce consistent estimates of the parameters of interest.

Menachem Brenner, David H. Downes, A Critical Evaluation of the Measurement of Conglomerate Performance using the Capital Asset Pricing Model, The Review of Economics and Statistics, Vol. 61, No. 2 (May, 1979), pp. 292-296

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on CRMID continues to be insignificant. The growth variable is also robust, retaining its value and significance. The conclusions are that highly concentrated industries adjust faster than either competitive or partially oligopolistic industries, while the partially oligopolistic industries adjust significantly faster than the competitive industries. When growth is introduced into the equation, the highly concentrated industries retain their significantly faster adjustment speed, but there is no significant difference between the competitive and partially oligopolistic industries. This implies that there is a relationship (in the data-not necessarily causal) between partial oligopolies and growth, but not between highly concentrated industries and growth.

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