Do We Need CAPM for Capital Budgeting?

Ravi Jagannathan and Iwan Meier

Financial Management, 2002, vol. 31, issue 4

Abstract: A key input to the capital budgeting process is the cost of capital. Financial managers most often use the CAPM to estimate the cost of capital for which they need to know the market risk premium. Textbooks advocate using the historical value for the US equity premium as the market risk premium. The CAPM as a model has been seriously challenged in the academic literature. In addition, recent research indicates that the true market risk premium might have been as low as half the historical US equity premium during the last two decades. If business finance courses have been teaching the use of the wrong model along with wrong inputs for 20 years, why has no one complained? We provide an answer to this puzzle.

Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (20)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Do We Need CAPM for Capital Budgeting? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fma:fmanag:jagannathan02

Access Statistics for this article

Financial Management is currently edited by Bill Christie

More articles in Financial Management from Financial Management Association University of South Florida 4202 E. Fowler Ave. COBA #3331 Tampa, FL 33620. Contact information at EDIRC.
Bibliographic data for series maintained by Courtney Connors ( this e-mail address is bad, please contact ).