Which Asset Pricing Model Do Firms Use? A Revealed Preference Approach

40 Pages Posted: 3 Dec 2020 Last revised: 3 Jan 2022

See all articles by Thummim Cho

Thummim Cho

London School of Economics & Political Science (LSE) - Department of Finance

Amirabas Salarkia

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: December 31, 2021

Abstract

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

Cho, Thummim and Salarkia, Amirabas, Which Asset Pricing Model Do Firms Use? A Revealed Preference Approach (December 31, 2021). Available at SSRN: https://ssrn.com/abstract=3737412 or http://dx.doi.org/10.2139/ssrn.3737412

Thummim Cho (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Amirabas Salarkia

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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