TY  - JOUR
AU  - Jagannathan,Ravi
AU  - Meier,Iwan
TI  - Do We Need CAPM for Capital Budgeting?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8719
PY  - 2002
Y2  - January 2002
UR  - http://www.nber.org/papers/w8719
L1  - http://www.nber.org/papers/w8719.pdf
N1  - Author contact info:
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

Iwan Meier
HEC Montreal
3000, chemin de la Cote-Sainte-Catherine
Montreal (Quebec) H3T 2A7
Canada
E-Mail: iwan.meier@hec.ca
AB  - A key input to the capital budgeting process is the cost of capital. Financial managers most often use the CAPM for estimating the cost of capital for which they need to know the market risk premium. Textbooks advocate using the historical value for the U.S. 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 U.S. 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 twenty years, why has no one complained? We provide an answer to this puzzle.
ER  -