Which Asset Pricing Model Do Firms Use? A Revealed Preference Approach
40 Pages Posted: 3 Dec 2020 Last revised: 3 Jan 2022
Date Written: December 31, 2021
Since firms time the stock market through equity net issuance, the direction of net issuance reveals the firm's net present value calculation and an asset pricing model of risk most likely to be used in the calculation. We take this insight to develop a test that infers an asset pricing model that firms use. Our market-based test confirms the narrative that the CAPM is the closest risk model to that of firms. Our results are not driven by issuance due to external financing needs and are true even for firms with an extreme size or value characteristic.
JEL Classification: G10, G12, G31, G35
Suggested Citation: Suggested Citation