I came across an example that provided an example of a company that was labeled ‘private’. And from this, the question wants us to assume the Pastor model would be best to get the required return for this company. I get that a private company has little liquidity since its not publicly held, but aren’t we also supposed to assume it doesn’t have a beta since its privately held?
What is the difference between privately held, vs closely held, vs publicly held- as it pertains to which model would be appropriate to calc the required return…I know that in some cases we can’t use the Fama nor Pastor models because the company wouldn’t have a beat- wouldn’t those cases be if the company was closely held? Isn’t that the same as saying its a private company?
the beta has nothing to do with the legal form of the company but it represents its exposure to systematic (market risk) risk one-factor model (CAPM).
Is a private company exposed to systematic risk ?
Yes, it is ! Imagine a financial crisis where the economy is going down. it will affect the private company, closely held or public company business thus its expected return. it means there is an exposure to systematic risk consequently there is a beta.
As Javad05 said above, beta measures systematic risk (macroeconomic risk) which affects all companies in the whole market, private and public. Beta can be calculated using historical data, the problem is that private companies don’t disclose information about their earnings as public companies do, that’s why it is difficult to calculate the beta of a private company. This doesn’t imply they lack of a beta.
Privately held: Shares are not publicly traded. If you want to own a share of these companies, you must offer a private negotiation. From low to high discounts are made to the share price (risk perception and uncertainty about information and forecasts)
Closely held: Public companies but held by a low number of shareholders, very probable stocks are not traded continuously and shows a stable price. Shareholders commonly invest in the long-term and don’t sell their positions to new investors. Tax implications are important.
Publicly held : Public companies owned by a large number of shareholders. Stocks are actively traded and prices are volatile. If you want a stake, just buy at the Stock Exchange at a market price.