Does Macro-Asset Pricing Matter for Corporate Finance?

forthcoming in Critical Finance Review

43 Pages Posted: 20 Sep 2017 Last revised: 11 Dec 2019

See all articles by Yongjin Kim

Yongjin Kim

City University of Hong Kong

Bryan Routledge

Carnegie Mellon University - David A. Tepper School of Business

Date Written: July 31, 2017

Abstract

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

Suggested Citation

Kim, Yongjin and Routledge, Bryan R., Does Macro-Asset Pricing Matter for Corporate Finance? (July 31, 2017). forthcoming in Critical Finance Review. Available at SSRN: https://ssrn.com/abstract=3038700 or http://dx.doi.org/10.2139/ssrn.3038700

Yongjin Kim (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon Tong
Hong Kong

Bryan R. Routledge

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-7588 (Phone)
(412) 268-7064 (Fax)

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