What effect does a high beta have on a company's valuation?

A high beta indicates that a company's stock is more volatile compared to the overall market. This higher volatility generally suggests that investors perceive a greater risk associated with the company's stock. In finance, higher risk typically leads to higher required returns from investors.

When a company has a high beta, investors will demand a higher return for the increased risk they are taking on. This increased required return is reflected in higher discount rates used in valuation models, such as the Discounted Cash Flow (DCF) method. As the discount rate rises, the present value of the company's future cash flows decreases, which results in a lower overall valuation for the company.

Thus, a high beta contributes to a lower valuation because it signals higher risk and leads to an increased cost of equity, affecting future cash flow assessments by investors.