IDEAS home Printed from https://ideas.repec.org/a/sae/emffin/v22y2023i2p135-163.html
   My bibliography  Save this article

Is the Beta Anomaly Real? A Correction in Existing Theories of Cost of Capital and Asset Pricing

Author

Listed:
  • Vinod Kumar

Abstract

Researchers argue about the beta anomaly and related anomalies in the capital market based on existing theories of asset pricing. This article shows that the observed beta anomaly is added due to the mathematical errors, inconsistencies, and limitations in existing theories. We propose a general theory for central concepts in asset pricing, including beta and cost of capital, that holds for growth, taxes, and risky debt. Our theory addresses observed beta-related anomalies and other phenomena, and provides a clearer taxonomy for ongoing research and a step toward resolving several issues. The findings are highly significant for researchers and firms. JEL Codes: G32, G12, G11, G35

Suggested Citation

  • Vinod Kumar, 2023. "Is the Beta Anomaly Real? A Correction in Existing Theories of Cost of Capital and Asset Pricing," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(2), pages 135-163, June.
    • Handle: RePEc:sae:emffin:v:22:y:2023:i:2:p:135-163
    DOI: 10.1177/09726527231160863
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/09726527231160863
    Download Restriction: no
    File URL: https://libkey.io/10.1177/09726527231160863?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
    2. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    3. Baker, Malcolm & Hoeyer, Mathias F. & Wurgler, Jeffrey, 2020. "Leverage and the Beta Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(5), pages 1491-1514, August.
    4. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    5. Bali, Turan G. & Brown, Stephen J. & Murray, Scott & Tang, Yi, 2017. "A Lottery-Demand-Based Explanation of the Beta Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2369-2397, December.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bradrania, Reza & Veron, Jose Francisco, 2023. "The beta anomaly in the Australian stock market and the lottery demand," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    2. Bradrania, Reza & Veron, Jose Francisco & Wu, Winston, 2023. "The beta anomaly and the quality effect in international stock markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    3. Carmich[ae]l, Benoit & Samson, Lucie, 2005. "Consumption growth as a risk factor? Evidence from Canadian financial markets," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 83-101, February.
    4. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    5. Shiyang Huang & Xin Liu & Dong Lou & Christopher Polk, 2024. "The Booms and Busts of Beta Arbitrage," Management Science, INFORMS, vol. 70(8), pages 5367-5385, August.
    6. Selçuk, Faruk & Gençay, Ramazan, 2006. "Intraday dynamics of stock market returns and volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 367(C), pages 375-387.
    7. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
    8. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    9. Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers E2008/30, Cardiff University, Cardiff Business School, Economics Section.
    10. A. D. Castagna & Z. P. Matolcsy, 1978. "The Relationship Between Accounting Variables and Systematic Risk and the Prediction of Systematic Risk," Australian Journal of Management, Australian School of Business, vol. 3(2), pages 113-126, October.
    11. Cynthia M. Gong & Di Luo & Huainan Zhao, 2021. "Liquidity risk and the beta premium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(4), pages 789-814, December.
    12. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    13. Henry Collier & Timothy Grai & Steve Haslitt & Carl McGowan, 2007. "Computing the divisional cost of capital using the pure-play method," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1227-1231.
    14. Mabekebeke Segojane & Godfrey Ndlovu, 2022. "An Investigation of the Beta Anomaly in Emerging Markets: A South African Case," JRFM, MDPI, vol. 15(5), pages 1-18, May.
    15. Huang, Ho-Chuan (River), 2003. "Tests of regime-switching CAPM under price limits," International Review of Economics & Finance, Elsevier, vol. 12(3), pages 305-326.
    16. Elmhjellen, Magne & Osmundsen, Petter, 2016. "Oil project selection by metrics," UiS Working Papers in Economics and Finance 2016/5, University of Stavanger.
    17. Michael E. Drew & Madhu Veeraraghavan, 2000. "Multifactor Models are Alive and Well," School of Economics and Finance Discussion Papers and Working Papers Series 083, School of Economics and Finance, Queensland University of Technology.
    18. Michael E. Drew & Mirela Mallin & Tony Naughton & Madhu Veeraraghavan, 2004. "Equity Premium: - Does it exist? Evidence from Germany and United Kingdom," School of Economics and Finance Discussion Papers and Working Papers Series 170, School of Economics and Finance, Queensland University of Technology.
    19. Insana, Alessandra, 2023. "Betting against beta with intraday and overnight signals," International Review of Financial Analysis, Elsevier, vol. 86(C).
    20. Schuhmacher, Frank & Auer, Benjamin R., 2014. "Sufficient conditions under which SSD- and MR-efficient sets are identical," European Journal of Operational Research, Elsevier, vol. 239(3), pages 756-763.

    More about this item

    Keywords

    Beta anomaly; capital asset pricing model; capital structure; cost of capital; risky debt; tax shield;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:emffin:v:22:y:2023:i:2:p:135-163. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.ifmr.ac.in .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.