Earticle

초록

영어

For decades, most business schools and companies have taught and behaved as if the capital asset pricing model (CAPM) can be used to estimate firms’ cost of equity capital for capital budgeting purposes. I examine whether the CAPM can be used for such purposes and prove that it cannot and must not. The most obvious reason for this rejection is the CAPM itself, which never allows for use in evaluating firms’ investment projects, if understood correctly. Using the CAPM for capital budgeting is essentially applying a pricebased theory to a cash-flow-based world and a perfect diversification model to undiversified firms, both of which are illogical jumps and never automatically guaranteed. I prove this in five independent rationales based on differences between securities and real investment, between stock prices and cash flows, between beta and standard deviation of returns, and based on problems in stocks with very low or even negative betas. In addition, a case illustration, two explanations for the ongoing inappropriate use of the CAPM for capital budgeting applications, a testable hypothesis, and a summary of previous surveys on the topic are also provided. This paper will provide theoretical rationales and practical interpretations of the significant differences between firms’ hurdle rates and the costs of capital reported in survey studies, in order to help practitioners or researchers establish more scientific and practical methods of determining appropriate discount rates for firms in the future.

목차

Abstract
I. Introduction
II. The Mismatch of the CAPM and Capital Budgeting
A. Securities vs. Real Investments
B. Beta vs. Standard Deviation
C. Zero Beta
D. Negative Beta
E. Stock Prices vs. Cash Flows
F. Illustration
III. Discussion
A. Possible Reasons for CAPM’s use as an educational convention
B. A Hypothesis on Beta and the Discrepancy between the Two Rates
C. Previous Studies on the Topic
IV. Concluding Remarks
References

키워드

저자

• Jin Yoo [ College of Economics and Finance, Hanyang University ]

참고문헌

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간행물

표지보기 관심저널 등록

• 간행물명

  한국재무학회 학술대회

• 간기

  부정기

• 수록기간

  2006~2024

• 십진분류

  KDC 325 DDC 330