IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?

  • Magni, Carlo Alberto

This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that: (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the capital asset pricing model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not guarantee additivity nor consistency with arbitrage pricing, so that it is unreliable for valuation, (iv) Magni's [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., 2007a. Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters 3 (2), 137-140] criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck's [De Reyck, B., 2005. On investment decisions in the theory of finance: Some antinomies and inconsistencies. European of Operational Research 161, 499-504] project valuation method, on the basis of which Magni's criticism to NPV is objected, leaves decision makers open to arbitrage losses and incorrect decisions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B6VCT-4PRRBM8-3/2/588aed87fa759a95d520d118ce664e26
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 192 (2009)
Issue (Month): 2 (January)
Pages: 549-560

as
in new window

Handle: RePEc:eee:ejores:v:192:y:2009:i:2:p:549-560
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

References listed on IDEAS
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.:

as in new window
  1. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
  2. De Reyck, Bert, 2005. "On "investment decisions in the theory of finance: Some antinomies and inconsistencies"," European Journal of Operational Research, Elsevier, vol. 161(2), pages 499-504, March.
  3. Stapleton, Richard C, 1974. "Capital Budgeting under Uncertainty: A Reformation: Comment," Journal of Finance, American Finance Association, vol. 29(5), pages 1583-84, December.
  4. Carlo Alberto Magni, 2007. "Project selection and equivalent CAPM-based investment criteria," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(3), pages 165-168.
  5. Magni, Carlo Alberto, 2006. "CAPM-based capital budgeting and nonadditivity," MPRA Paper 7290, University Library of Munich, Germany.
  6. Ekern, Steinar, 2006. "A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One?," Discussion Papers 2006/6, Department of Business and Management Science, Norwegian School of Economics, revised 25 Apr 2007.
  7. Litzenberger, Robert H. & Budd, Alan P., 1970. "Corporate Investment Criteria and the Valuation of Risk Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(4-5), pages 395-419, December.
  8. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
  9. Benninga, Simon, 2006. "Principles of Finance with Excel," OUP Catalogue, Oxford University Press, number 9780195301502, March.
  10. Lewellen, Wilbur G, 1977. "Some Observations on Risk-Adjusted Discount Rates," Journal of Finance, American Finance Association, vol. 32(4), pages 1331-37, September.
  11. Bierman, Harold, Jr & Hass, Jerome E, 1973. "Capital Budgeting Under Uncertainty: A Reformulation," Journal of Finance, American Finance Association, vol. 28(1), pages 119-29, March.
  12. Donald L. Tuttle & Robert H. Litzenberger, 1968. "Leverage, Diversification And Capital Market Effects On A Risk‐Adjusted Capital Budgeting Framework," Journal of Finance, American Finance Association, vol. 23(3), pages 427-443, 06.
  13. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23.
  14. Haley, Charles W. & Schall, Lawrence D., 1978. "Problems with the Concept of the Cost of Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(05), pages 847-870, December.
  15. Stapleton, Richard C, 1971. "Portfolio Analysis, Stock Valuation and Capital Budgeting Decision Rules for Risky Projects," Journal of Finance, American Finance Association, vol. 26(1), pages 95-117, March.
  16. Fama, Eugene F, 1996. "Discounting under Uncertainty," The Journal of Business, University of Chicago Press, vol. 69(4), pages 415-28, October.
  17. Brounen, D. & de Jong, A. & Koedijk, C.G., 2004. "Corporate Finance In Europe Confronting Theory With Practice," ERIM Report Series Research in Management ERS-2004-002-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  18. Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany.
  19. Magni, Carlo Alberto, 2002. "Investment decisions in the theory of finance: Some antinomies and inconsistencies," European Journal of Operational Research, Elsevier, vol. 137(1), pages 206-217, February.
  20. Carlo Alberto Magni, 2009. "The use of Npv and CAPM for capital budgeting is not a good idea. A reply to De Reyck (2005)," PROYECCIONES FINANCIERAS Y VALORACION 005546, MASTER CONSULTORES.
  21. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-81, March.
  22. Bogue, Marcus C & Roll, Richard, 1974. "Capital Budgeting of Risky Projects with "Imperfect" Markets for Physical Capital," Journal of Finance, American Finance Association, vol. 29(2), pages 601-13, May.
  23. Dirk Brounen & Abe de Jong & Kees Koedijk, 2004. "Corporate Finance in Europe: Confronting Theory with Practice," Financial Management, Financial Management Association, vol. 33(4), Winter.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:192:y:2009:i:2:p:549-560. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.