Managerial economics and operating beta

We model a firm's unlevered beta in terms of elementary microeconomic variables. The source of uncertainty is a shock to demand. A firm decides on capital before the shock, and on labor, output, and price after the shock. Some insights are: (1) with decreasing returns to scale of production, beta has an inverse relation with price elasticity of demand, given the income elasticity of demand; (2) beta has a direct relation with the firm's returns to scale of production; (3) due to the impact of operating leverage, beta has an inverse relation with industry concentration; and (4) for a given returns to scale, beta has a direct relation with the capital–labor ratio that strengthens as industry concentration decreases. Copyright © 2011 John Wiley & Sons, Ltd.