Critical Finance Review > Vol 13 > Issue 1-2

Does Macro-Asset Pricing Matter for Corporate Finance?

Yongjin Kim, City University of Hong Kong, Hong Kong, , Bryan R. Routledge, Tepper School of Business, Carnegie Mellon University, USA,
Suggested Citation
Yongjin Kim and Bryan R. Routledge (2024), "Does Macro-Asset Pricing Matter for Corporate Finance?", Critical Finance Review: Vol. 13: No. 1-2, pp 45-82.

Publication Date: 14 Feb 2024
© 2024 Yongjin Kim and Bryan R. Routledge
InvestmentCost of capitalEquity risk premiumDynamicsCorporate investment policy


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In this article:
1. Introduction 
2. Empirical Relation Between Corporate Investments and Discount Rates 
3. Model 
4. Valuation 
5. Dynamic Equity Premium and Value 
6. Conclusion 


In an asset-pricing model calibrated to match the standard asset pricing empirical properties—in particular, the time-variation in the equity premium—we calculate the value implications of sub-optimal capital budgeting decisions. Specifically, we calculate that an investment policy that ignores the time variation in the equity premium, such as would occur with a cost of capital using a static CAPM-like model, incurs a 11.7% value loss. We also document the implications for a firm’s asset returns in this context.