Magni, Carlo Alberto (2007): Project valuation and investment decisions: CAPM versus arbitrage. Published in: Applied Financial Economics Letters , Vol. 3, No. 1 (March 2007): pp. 137-140.
Download (78kB) | Preview
This paper shows that (i) project valuation via disequilibrium NPV+CAPM contradicts valuation via arbitrage pricing, (ii) standard CAPM-minded decision makers may fail to profit from arbitrage opportunities, (iii) standard CAPM-based valuation violates value additivity. As a consequence, the standard use of CAPM for project valuation and decision making should be reconsidered.
|Item Type:||MPRA Paper|
|Original Title:||Project valuation and investment decisions: CAPM versus arbitrage|
|Keywords:||Investment, valuation, CAPM, arbitrage, disequilibrium NPV|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
|Depositing User:||Carlo Alberto Magni|
|Date Deposited:||08. Apr 2009 03:23|
|Last Modified:||07. May 2014 05:41|
Black, F. and Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81, 637–654.
Brealey, R. and Myers, S. C. (2000). Principles of Corporate Finance. New York: McGraw-Hill, 6th edition.
Brigham, E. F. (1975). Hurdle rates for screening capital expenditure proposals. Financial Management, 4 (3), 17–26.
Brounen, D., de Jong, A. and Koedijk, K. (2004). Corporate finance in Europe: Confronting theory with practice. Financial Management, 71–101, Winter.
Copeland, T. E. and Weston, J. F. (1988). Financial Theory and Corporate Finance. Addison-Wesley Publishing Company, Inc.
Damodaran, A. (1999). Applied Corporate Finance: A User’s Manual. New York: Wiley.
Dybvig, P. H. and Ingersoll, J. E. (1982). Mean-variance theory in complete markets. Journal of Business, 55 (2), 233–250.
Fernández, P. (2002). Valuation Methods and Shareholders Value Creation. San Diego: Academic Press.
Gitman, L. J. and Mercurio, V. A. (1982). Cost of capital techniques used by major u.s. firms: Survey and analysis of fortune’s 1000. Financial Management, 11 (4), 21–29.
Graham, J. R. and Harvey, C.R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60 (1), 187–243.
Graham, J. R. and Harvey, C. R. (2002). How do CFOs make capital budgeting and capital structure decisions?. Journal of Applied Corporate Finance, 15 (1), 8–22
Jagannathan, R. and Meier, I. (2002). Do we need CAPM for capital budgeting?. Financial Management, 31 (4), 55–77. Available online at <http://www.nber.org/papers/w8719>.
Magni, C. A. (2002). Investment decisions in the theory of finance: some antinomies and inconsistencies. European Journal of Operational Research, 137, 206–217.
Magni, C. A. (2009). Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM? European Journal of Operational Research, 192(2) (January), 549–560.
Modigliani, F. and Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48, 261–297.
Nau, R. (1999). Arbitrage, incomplete models, and other people’s brains. In M. Machina and B. Munier (Eds.), Beliefs, Interactions, and Preferences in Decision Making. Kluwer Academic Press
Nau, R. (2004). Seminar on Choice Theory. Available online at <http://faculty.fuqua.duke.edu/%7Ernau/choice /choice01.pdf>
Nau, R. and McCardle K. (1990). Coherent behavior in noncooperative games. Journal of Economic Theory, 50 (2), 424–444.
Nau, R. and McCardle K. (1991). Arbitrage, rationality, and equilibrium. Theory and Decision, 31, 199–240.
Ross, S. A., Westerfield, R. W. and Jaffe, J. (1999). Corporate Finance. Irwin: McGraw-Hill, 5th edition.
Rubinstein, M. E. (1973). A mean-variance synthesis of corporate financial theory, Journal of Finance, 28, 167– 182.
Smith, J. E. and Nau, R. F. (1995). Valuing risky projects: Options pricing theory and decision analysis. Management Science, 41 (5), 795–816.
Summers, L. H. (1987). Investment incentives and the discounting of depreciation allowances. In M. Feldstein (Ed.), The Effects of Taxation on Capital Accumulation. Chicago: University of Chicago Press.
Varian, H. R. (1987). The arbitrage principle in financial economics. Journal of Economic Perspectives, 1 (2), 55–72.