NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Re-Jin Guo

Department of Finance
University of Illinois at Chicago
University Hall 2431, M/C 168
601 South Morgan
Chicago, IL 60607

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Illinois at Chicago

NBER Working Papers and Publications

April 2009CAPM for Estimating the Cost of Equity Capital: Interpreting the Empirical Evidence
with Zhi Da, Ravi Jagannathan: w14889
We argue that the empirical evidence against the Capital Asset Pricing Model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Since stocks are backed not only by projects in place, but also the options to modify current projects and undertake new ones, the expected returns on stocks need not satisfy the CAPM even when expected returns of projects do. We provide empirical support for our arguments by developing a method for estimating firms' project CAPM-betas and project returns. Our findings justify the continued use of the CAPM by firms in spite of the mounting evidence against it based on the cross-section of stock returns.

Published: Journal of Financial Economics Volume 103, Issue 1, January 2012, Pages 204–220 Cover image CAPM for estimating the cost of equity capital: Interpreting the empirical evidence ☆ Zhi Daa, 1, E-mail the corresponding author, Re-Jin Guob, 2, E-mail the corresponding author, Ravi Jagannathanc, d, citation courtesy of

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us