A Financial Contracting-Based Capital Asset Pricing Model

71 Pages Posted: 19 Jun 2018 Last revised: 11 Aug 2023

Date Written: August 6, 2023

Abstract

I show that an asset pricing model for the equity claims of a value-maximizing firm can be constructed from its optimal financial contracting behavior. Deals between firms and financiers reveal the importance of contractible states for firm's equity value, namely the stochastic discount factor the firm responds to. I empirically evaluate the model in the cross section of expected equity returns. I find that the financial contracting approach goes a long way in rationalizing observed cross-sectional differences in average returns, also in comparison to leading asset pricing models.

Keywords: Dynamic Contracting, Cross Section of Returns, Capital Asset Pricing Model, Stochastic Discount Factor.

JEL Classification: C61, C63, D21, D24, G10, G12, G31, G32, G35

Suggested Citation

Steri, Roberto, A Financial Contracting-Based Capital Asset Pricing Model (August 6, 2023). Swiss Finance Institute Research Paper No. 18-46, Available at SSRN: https://ssrn.com/abstract=3197380 or http://dx.doi.org/10.2139/ssrn.3197380

Roberto Steri (Contact Author)

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi
Luxembourg
Luxembourg

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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