Firm Value and the mis-use of the CAPM for valuation and decision making
AbstractThis paper shows that a decision maker using the CAPM for valuing firms and making decisions may contradict Modigliani and Miller’s Proposition I, if he adopts the widely-accepted disequilibrium NPV. As a consequence, CAPM-minded agents employing this NPV are open to arbitrage losses and miss arbitrage opportunities. As a result, even though the use of the disequilibrium NPV for decision-making is deductively drawn from the CAPM, its use for both valuation and decision should be rejected.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6608.
Date of creation: Oct 2005
Date of revision:
Firm value; Free Cash Flow; CAPM; Modigliani and Miller’s Proposition I; Net Present Value; disequilibrium; arbitrage; decision making;
Other versions of this item:
- Magni, Carlo Alberto, 2005. "Firm Value and the mis-use of the CAPM for valuation and decision making," MPRA Paper 7093, University Library of Munich, Germany.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Magni, Carlo Alberto, 2002. "Investment decisions in the theory of finance: Some antinomies and inconsistencies," European Journal of Operational Research, Elsevier, Elsevier, vol. 137(1), pages 206-217, February.
- Carlo Alberto Magni, 2007.
"Project valuation and investment decisions: CAPM versus arbitrage,"
Applied Financial Economics Letters, Taylor and Francis Journals,
Taylor and Francis Journals, vol. 3(2), pages 137-140.
- Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany.
- Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 55(2), pages 233-51, April.
- Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 167-81, March.
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