TY  - JOUR
AU  - Da,Zhi
AU  - Guo,Re-Jin
AU  - Jagannathan,Ravi
TI  - CAPM for Estimating the Cost of Equity Capital:  Interpreting the Empirical Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14889
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14889
L1  - http://www.nber.org/papers/w14889.pdf
N1  - Author contact info:
Zhi Da
University of Notre Dame
239 Mendoza College of Business
Notre Dame, Indiana 46556-5646
Tel: 574-631-0354
E-Mail: zda@nd.edu

Re-Jin Guo
Department of Finance
University of Illinois at Chicago
University Hall 2431, M/C 168
601 South Morgan
Chicago, IL 60607
E-Mail: rguo@uic.edu

Ravi Jagannathan
Kellogg Graduate School of Management
Northwestern University
2001 Sheridan Road
Leverone/Anderson Complex
Evanston, IL 60208-2001
Tel: 847/491-8338
Fax: 847/491-5719
E-Mail: rjaganna@northwestern.edu
AB  - We argue that the empirical evidence against the Capital Asset Pricing Model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Since stocks are backed not only by projects in place, but also the options to modify current projects and undertake new ones, the expected returns on stocks need not satisfy the CAPM even when expected returns of projects do. We provide empirical support for our arguments by developing a method for estimating firms' project CAPM-betas and project returns. Our findings justify the continued use of the CAPM by firms in spite of the mounting evidence against it based on the cross-section of stock returns.
ER  -