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• W72156670 abstract "The shape of the demand curve for stocks and the marginal cost of capital are two related issues .The CAPM and APT imply that demand curves for equity are virtually flat. In Modigliani and Miller's firm valuation model the demand curve for a financial asset is also perfectly elastic, implying that the asset’s price is independent of its supply. Hence, for similar projects the marginal cost of capital is equal to the firm’s average cost of capital (Modigliani and Miller’s proposition III). Flat demand curves for stocks are in sharp contradiction to the empirical evidence, revealing downward sloping demand curves. In this paper we reconcile the empirical evidence with portfolio theory. We derive a formula for the demand curve in a portfolio context, first in the CAPM framework and then in the segmented market framework. We explicitly show that in the CAPM setting demand curves are indeed virtually flat. However, in the more realistic case of a segmented market, where investors typically hold only a few risky assets in their portfolios (Barber and Odean 2000), the demand function has a steep negative slope, conforming to the empirical evidence. We analyze the implication of the results to the firm’s cost of capital and contrast them with M&M's proposition III." @default.
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• W72156670 date "2012-01-01" @default.
• W72156670 modified "2023-09-23" @default.
• W72156670 title "The Demand Curves for Financial Assets and the Implied Cost of Capital in Segmented Markets" @default.
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• W72156670 doi "https://doi.org/10.2139/ssrn.2146043" @default.
• W72156670 hasPublicationYear "2012" @default.
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