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Equilibrium in the Pricing of Capital Assets, Risk-bearing Debt Instruments, and the Question of Optimal Capital Structure: A Reply

Published online by Cambridge University Press:  19 October 2009

Robert A. Haugen  and
James L. Pappas
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Extract

Although Imai and Rubenstein are correct that our proof — that the Miller- Modiglianl (M-M) and Sharpe-Lintner-Mossin (S-L-M) capital asset pricing models are mutually consistent — is incomplete, their comments indicate some confusion about the relationships involved in the equilibrium pricing of assets in these models. Further, they seem to imply that Stiglitz's proof in terms of dollar returns is in some sense superior to a proof in terms of rates of return. This is erroneous. Accordingly, we shall further clarify the relationships inherent in the models and correct our presentation of the proof of the invariance of capital costs in the context of the S-L-M model.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 7 , Issue 4 , September 1972 , pp. 2005 - 2008
Copyright
Copyright © School of Business Administration, University of Washington 1972

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References

[1]Haugen, Robert A., and Pappas, James L.. “Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital Structure.” Social Systems Research Institute Working Papers in Fiscal and Financial Research, QME 6951, University of Wisconsin, 1969.Google Scholar
[2]Haugen, Robert A. “A Comment on the Capital Structure and the Cost of Capital: A Suggested Exposition.” The Journal of Finance, June 1970.CrossRefGoogle Scholar
[3]Haugen, Robert A. “Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital Structure.” Journal of Financial and Quantitative Analysis, June 1971.CrossRefGoogle Scholar
[4]Mossin, Jan. “Equilibrium in a Capital Asset Market.” Econometrica, October 1966.CrossRefGoogle Scholar
[5]Sharpe, William F. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” The Journal of Finance, XVIII, September 1964.Google Scholar
[6]Stiglitz, J. E. “A Re-Examination of the Modigliani-Miller Theorem.” The American Economic Review, December 1969.Google Scholar