Does Macro-Asset Pricing Matter for Corporate Finance?
forthcoming in Critical Finance Review
43 Pages Posted: 20 Sep 2017 Last revised: 11 Dec 2019
Date Written: July 31, 2017
In an asset-pricing model calibrated to match the standard asset pricing empirical properties -- in particular, the time-variation in the equity premium -- we calculate the value implications of sub-optimal capital budgeting decisions. Specifically, we calculate that an investment policy that ignores the time variation in the equity premium, such as would occur with a cost of capital following the CAPM, incurs a 11.7% value loss. We also document the implications for a firm's asset returns in this context.
Keywords: Time-Varying Equity Premium, Corporate Investment, Sub-Optimal Investment Policy
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