This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that: (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the capital asset pricing model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not guarantee additivity nor consistency with arbitrage pricing, so that it is unreliable for valuation, (iv) Magni’s [Magni, C.A., 2002. Investment decisions in the theory of finance: Some antinomies and inconsistencies. European Journal of Operational Research 137, 206–217; Magni, C.A., 2007a. Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters 3 (2), 137–140] criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck’s [De Reyck, B., 2005. On investment decisions in the theory of finance: Some antinomies and inconsistencies. European of Operational Research 161, 499–504] project valuation method, on the basis of which Magni’s criticism to NPV is objected, leaves decision makers open to arbitrage losses and incorrect decisions. 2007 Elsevier

Correct or incorrect application of the CAPM? Correct or incorrect decisions with the CAPM? / Magni, Carlo Alberto. - In: EUROPEAN JOURNAL OF OPERATIONAL RESEARCH. - ISSN 0377-2217. - STAMPA. - 192:2(2009), pp. 549-560. [10.1016/j.ejor.2007.09.027]

Correct or incorrect application of the CAPM? Correct or incorrect decisions with the CAPM?

MAGNI, Carlo Alberto
2009

Abstract

This paper focuses on inconsistencies arising from the use of NPV and CAPM for capital budgeting. It shows that: (i) CAPM capital budgeting decision-making based on disequilibrium NPV is deductively inferred by the capital asset pricing model, (ii) the use of the disequilibrium NPV is widespread in finance both as a decision rule and as a valuation tool, (iii) the disequilibrium NPV does not guarantee additivity nor consistency with arbitrage pricing, so that it is unreliable for valuation, (iv) Magni’s [Magni, C.A., 2002. Investment decisions in the theory of finance: Some antinomies and inconsistencies. European Journal of Operational Research 137, 206–217; Magni, C.A., 2007a. Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters 3 (2), 137–140] criticism of the NPV criterion refers to the disequilibrium NPV, and De Reyck’s [De Reyck, B., 2005. On investment decisions in the theory of finance: Some antinomies and inconsistencies. European of Operational Research 161, 499–504] project valuation method, on the basis of which Magni’s criticism to NPV is objected, leaves decision makers open to arbitrage losses and incorrect decisions. 2007 Elsevier
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Correct or incorrect application of the CAPM? Correct or incorrect decisions with the CAPM? / Magni, Carlo Alberto. - In: EUROPEAN JOURNAL OF OPERATIONAL RESEARCH. - ISSN 0377-2217. - STAMPA. - 192:2(2009), pp. 549-560. [10.1016/j.ejor.2007.09.027]
Magni, Carlo Alberto
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11380/584908
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