Possible explanations of no-synergy mergers and small firm effect by the Generalized Capital Asset Pricing Model

The Sharpe-Lintner Capital Asset Pricing Model (CAPM) and the General Capital Asset Pricing Model (GCAPM) suggested by Levy (1978), Merton (1987), and Markowitz (1989) are compared and analyzed. Under the GCAPM we obtain the following main results: 1) the value additivity principle breaks down, which explains mergers and acquisitions; 2) beyond a certain limit, the profit from additional merger is negative; and 3) in a GCAPM equilibrium, small firms earn an abnormal profit in comparison to what is predicted by the CAPM. These results, which are indeed observed in the market, are fully consistent with the GCAPM, but are in contradiction to the CAPM.     

Multifactor Asset Pricing Models

Since the early 1960s, the mean-variance Capital Asset Pricing Model (CAPM) has been a dominant paradigm in modern finance. Recently, the accumulation of anomalous evidence, and a realisation that empirical tests of the model are tautologically related to the efficiency of the market index, have pushed that paradigm to a point of crisis. This paper reviews alternative asset pricing models which coexisted with the CAPM and may provide plausible substitutes. The major distinguishing feature of these models is that they predict multiple risk factors and, with the exception of the Arbitrage Pricing Theory (APT), are extensions of the CAPM.     

Analyzing the German accounting triad — “Accounting Premium” for IAS/IFRS and U.S. GAAP vis-à-vis German GAAP?

This paper critically examines the impact of voluntary adoption of Internationally Accepted Accounting Principles (IAAP, i.e., IAS/IFRS and U.S. GAAP) on the cost of equity capital in Germany. We find that (1) overall cost of equity-capital estimates in the Capital Asset Pricing Model (CAPM) for companies applying IAAP are significantly lower compared to those applying German GAAP, (2) an enhanced multi-factor model which incorporates the accounting-regime differences (called “GM model”) absorbs the cost of equity-capital differences, and (3) changes of the institutional background in Germany and of the accounting standards lead to different cost of equity capital effects for subperiods of the 1998–2004 voluntary-adoption period, while particularly controlling for effects like self-selection, cross-listing, and New Market (Neuer Markt) listing.The central thesis advanced in this paper is that changes in the accounting standards and the institutional infrastructure can influence the impact of applying IAAP. Therefore, we suggest incorporating an accounting factor into the cost of equity-capital analysis.     

Yes,The APT Is Testable

The Arbitrage Pricing Theory (APT) has been proposed as an alternative to the mean-variance Capital Asset Pricing Model (CAPM). This paper considers the testability of the APT and points out the irrelevance for testing of the approximation error. We refute Shanken's objections, including his assertion that Roll's critique of the CAPM is applicable to the APT. We also explain the testability of the APT on subsets, and we explore the relationship between the APT and the CAPM.     

Capital market equilibrium in a mean-lower partial moment framework

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive formulae for the equilibrium values of risky assets that hold for arbitrary probability distributions. We show that when the probability distributions and portfolio returns are either normal, stable (with the same characteristic exponent between 1 and 2 and the same skewness parameter, not necessarily zero), or Student-t distributions, our CAPM reduces to the traditional mean-scale CAPM's. Consequently, since the traditional equilibrium models are special cases of our model, the mean-lower partial moment framework is guaranteed to do at least as well in explaining market data. As an application of our theory, we derive an acceptance criterion for capital investment projects and note that corporate finance theory results developed, for example, in the well-known mean- variance framework carry over to the mean-lower partial moment framework.     

Unbiased estimation of expected return using CAPM

Estimation of expected return is required for many financial decisions. For example, an estimate for cost of capital is required for capital budgeting and cost of equity estimates are needed for performance evaluation based on measures such as EVA. Estimates for expected return are often based on the Capital Asset Pricing Model (CAPM), which states that expected excess return (expected return minus the risk-free rate) is equal to the asset's sensitivity to the world market portfolio (β) times the risk premium on the “world market portfolio” (the market risk premium). Since the world market portfolio, by definition, contains all assets in the world, it is not observable. As a result, an estimate for expected return is commonly obtained by taking an estimate for β based on some index (as a proxy for the world market portfolio) and an estimate for the market risk premium based on a potentially different index and multiplying them together. In this paper, it is shown that this results in a biased estimate for expected return. This is undesirable since biased estimates lead to misallocation of funds and biased performance measures. It is also shown in this paper that the straightforward procedure suggested by Fama and MacBeth [J. Financ. Econ. 1 (1974) 43] results in an unbiased estimate for expected return. Further from the analysis done, it follows that, for an unbiased estimate, it does not matter what proxy is used, as long as it is used correctly an unbiased estimate for expected return results.     

Temporal Aggregation and the Continuous-Time Capital Asset Pricing Model

We examine how the empirical implications of the Capital Asset Pricing Model (CAPM) are affected by the length of the period over which returns are measured. We show that the continuous-time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. We use Hansen's Generalized Method of Moments (GMM) approach to test the continuous-time CAPM at an unconditional level using size portfolio returns. The results indicate that the continuous-time CAPM cannot be rejected. In contrast, the discrete-time CAPM is easily rejected by the tests. These results have a number of important implications for the interpretation of tests of the CAPM which have appeared in the literature.     

The Discount Rate of IAS 36 – A Comment

Discussing the guidance in IAS 36 on how to determine the discount rate for present value measurements of impairment reviews, Husmann and Schmidt (Accounting in Europe, 5, pp. 49–62, 2008) conclude that the standard's option to use ‘the entity's incremental borrowing rate’ should be removed. I argue that their conclusion is based on a misconception about what is meant by incremental borrowing, and that the incremental borrowing rate may be a useful approximation to the cost of capital within a Capital Asset Pricing Model (CAPM) framework. The reference to it is even more useful if CAPM is deemed not to hold. An important objection to the IAS 36 rules on the discount rate is that they are so different from the US GAAP rules: the former are detailed and adhere closely to the CAPM ideal, whereas the latter are general in nature, superficial and lack theoretical underpinnings. Any modification of the accounting standards' rules on the discount rate should first seek to remove that gap.     

Monotonicity in asset returns: New tests with applications to the term structure,the CAPM,and portfolio sorts

Many theories in finance imply monotonic patterns in expected returns and other financial variables. The liquidity preference hypothesis predicts higher expected returns for bonds with longer times to maturity; the Capital Asset Pricing Model (CAPM) implies higher expected returns for stocks with higher betas; and standard asset pricing models imply that the pricing kernel is declining in market returns. The full set of implications of monotonicity is generally not exploited in empirical work, however. This paper proposes new and simple ways to test for monotonicity in financial variables and compares the proposed tests with extant alternatives such as t-tests, Bonferroni bounds, and multivariate inequality tests through empirical applications and simulations.     

THE COST OF EQUITY UNDER THE AUSTRALIAN DIVIDEND IMPUTATION TAX SYSTEM

This paper derives a Capital Asset Pricing Model (“CAPM”) in the context of the Australian dividend imputation tax system. The effect of dividend imputation on the estimated risk premium is discussed. The structure and implications of the derived CAPM are also examined.     

The future of the self-image of the human being in the Age of Transhumanism, Neurotechnology and Global Transition

In the present moment of cultural and political transition, one question seems to become the center of most other societal and civilizational questions: will the basic self-perception of the human being change under the influence of the new “neurotechnologies” and its accompanying ideologies like “Human enhancement” and “Transhumanism”? And if yes, how? Applied consciousness research is currently one-sidedly understood as brain research, and it is carried out mainly by the Natural Sciences under the influence of the “Economic–Technological Complex” and its relatively narrow interests. With its paradigmatic materialism determining the cultural spread of its temporary findings, it is already modifying our imaginary about what a human being is, what its rational self-determination can be, and how a “good society” can work. What is at stake with the change related to the findings of the new “consciousness technologies” is not only the principal socio-philosophical status of the human “self” or “I”, but also the related concepts of humanism, open societies, individualism and rationality. Thus, the new neurotechnologies and their “neurophilosophies” are currently in the process of profoundly influencing the very basics of our cultural self-understanding, grown over centuries. This article discusses some of the implications of this development within the greater picture of the current “global mindset change”.     

On multivariate tests of the CAPM

This paper evaluates the power of multivariate tests of the Capital Asset Pricing Model. The results indicate that when employing an unspecified alternative hypothesis, the ability of the tests to distinguish between the CAPM and other pricing models is poor. An upper bound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the CAPM are due to missing factors. This upper bound explains the low power of the tests.     

What Cost of Capital Should You Use? The Market Has an Answer

The most widely used means of estimating a company's cost of equity capital is the Capital Asset Pricing Model (CAPM). But as a growing number of academics and practitioners have suggested, use of the CAPM produces estimates that often fail to reflect the risks of the companies as perceived by current and potential investors. The authors' work, together with other research, also suggests that the cost of equity produced by the CAPM is often too high. To the extent this is so, companies are discounting investment projects at rates of return that may be leading them to pass up value‐adding opportunities. The authors advocate the use of a simple and practical alternative to the CAPM that does not use either an assumed market risk premium or a beta. It uses instead an equity premium that is implied by the current market price of a company's stock and, as such, is implicitly derived from investors' assessments of the firm's risk that are reflected in that price. More specifically, the alternative approach solves for the internal rate of return that equates the present value of expected future cash flows to the current market price. In support of this approach, studies have shown that such market‐implied measures are better predictors than CAPM‐based estimates of future stock returns, both at the individual‐firm and aggregate market levels.     

Arbitrage Pricing Theory and Utility Stock Returns

This paper presents some new evidence that Arbitrage Pricing Theory may lead to different and better estimates of expected return than the Capital Asset Pricing Model, particularly in the case of utility stock returns. Results for monthly portfolio returns for 1971–1979 lead to the conclusion that regulators should not adopt the single-factor risk approach of the CAPM as the principal measure of risk, but give greater weight to APT, whose multiple factors provide a better indication of asset risk and a better estimate of expected return.     

Accountability and human rights: A tentative exploration and a commentary

There continues to be many attempts to articulate what is meant by Human Rights but Griseri and Sepella's (2010, p. 176) adaptation of Leighton et al. (2002) as “entitlements that one holds by virtue of being a human being” takes us to the heart of the matter. What is it to be human and what does humanity demand of us? But the notion is far from settled; it is far from uncontentious; despite its domination by lawyers it is far from simply legalistic; and the matter has only relatively recently been taken up as a matter of focus amongst business and management academics. Human rights have, as yet, almost no presence in accounting and finance. This short essay seeks to provide an introduction to the practitioner papers presented in this issue of CPA and in doing so to provide some context within which the papers might be better appreciated. As happens too often for comfort, practice (at least regulatory and NGO practice) is still leading research and theory in the field of Human Rights. Providing that context offers us the opportunity to speculate on how – notwithstanding the potentially seminal papers that also appear in this issue – we might see accounting academe recognising and responding more widely to Human Rights.     

Some Empirical Tests of the Theory of Arbitrage Pricing

We estimate the parameters of Ross's Arbitrage Pricing Theory (APT). Using daily return data during the 1963–78 period, we compare the evidence on the APT and the Capital Asset Pricing Model (CAPM) as implemented by market indices and find that the APT performs well. The theory is further supported in that estimated expected returns depend on estimated factor loadings, and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings.     

交叉上市的资本成本效应之实证研究

交叉上市的资本成本效应是从公司理财角度研究交叉上市的核心领域。本文以截止2008年6月30日在内地、纽约与香港交叉上市的11家中国公司为样本,分别采用CAPM和Gordon模型估算分析公司在内地、纽约和香港三个市场的资本成本,结果表明:(1)在A股市场CAPM模型下的资本成本要高于Gordon模型下的资本成本,而在N股市场和H股市场,结果相反;(2)采用CAPM模型与Gordon模型均证明公司在A股市场的资本成本(β系数)低于其在N股和H股市场的资本成本。A股市场较低的资本成本反映出我国股票市场对投资者利益保护不足,我国股票市场亟需加强对投资者利益的保护。     

Capital Asset Pricing Model and Stochastic Volatility: A Case Study of India

The existing literature demonstrates that under a general equilibrium model, the performance of the Capital Asset Pricing Model (CAPM) can be improved significantly by using conditional consumption and market return volatilities as factors. This article tests the validity of these factors explaining stock return differences using a less developed country (India) as a case study. While the earlier studies used panel data to test CAPM, we use portfolios sorted by size and book-to-market equity (BE/ME) ratio. We found that conditional volatility has a limited effect on firms with large capitalization but a significant impact on small-growth and small-value firms.     

Alternative Models for Estimating the Cost of Equity Capital for Property/Casualty Insurers

This paper estimates the cost of equity capital for Property/Casualty insurers by applying three alternative asset pricing models: the Capital Asset Pricing Model (CAPM), the Arbitrage Pricing Theory (APT), and a unified CAPM/APT model (Wei (1988). The in-sample forecast ability of the models is evaluated by applying the mean squared error method, the Theil U2 (1966) statistic, and the Granger and Newbold (1978) conditional efficiency evaluation. Based on forecast evaluation procedures, the APT and Wei's unified CAPM/APT models perform better than the CAPM in estimating the cost of equity capital for the PC insurers and a combined forecast may outperform the individual forecasts.     

A Test of the Conditional CAPM with Simultaneous Estimation of the First and Second Conditional Moments

Recent studies of the conditional Capital Asset Pricing Model (CAPM) are extended by modeling the first and second conditional moments separately, but estimating them jointly, allowing the isolation of time-varying influences in the different moments. Results support evidence that both conditional moments and conditional risk parameters are time varying, and help shed light on previous rejections of the conditional CAPM. The GMM test of the over-identifying restrictions fails to reject the null that the CAPM holds through time when a non-linear specification is used, and only weakly rejects the null with a linear specification.