Regulation, profit variability and beta

Many tests of the Peltzman hypothesis that regulation buffers the firm's cash flows examine the firm's equity beta. We model the asset beta and show that it (and the equity beta) are a function of several variables beyond those found in previous tests. Since these variables are also affected by regulation, tests of the Peltzman theory that do not hold these factors constant wilt be biased. The empirical tests in this paper hold other determinants of beta equal and find evidence consistent with the Peltzman buffering hypothesis and the model of beta.