How is the accounting beta estimated according to the Accounting Beta Method?

The accounting beta is estimated through regression analysis, which involves statistical methods to determine the relationship between a company's accounting returns and market returns. In this context, regression analysis allows us to examine how changes in a company's financial performance—often measured through metrics like earnings or cash flow—correlate with changes in market performance or stock returns.

By plotting the accounting returns against the market returns and finding the slope of the resulting line, the accounting beta becomes apparent. This slope indicates the sensitivity of the company's accounting performance in relation to market movements, providing a measure of systematic risk from an accounting perspective.

Although market comparisons, historical betas, and financial statement evaluations are important tools in finance, they do not specifically apply to the estimation of accounting beta in the way that regression analysis does. This method’s statistical precision and ability to capture the relationship between the accounting figures and the broader market make it the preferred choice for estimating accounting beta.