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THE „UNANIMITY” LITERATURE AND THE SECURITY MARKET LINE CRITERION: THE ADDITIVE RISK CASE
Author(s) -
Aivazian Varouj A.,
Callen Jeffrey L.
Publication year - 1981
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1981.tb00812.x
Subject(s) - unanimity , wish , carr , management , library science , political science , sociology , law , economics , computer science , ecology , anthropology , biology
The burgeoning literature on shareholder unanimity (e.g. Stiglitz (1970), Long (1972), Ekern and Wilson (1974), Leland (1974), Nielsen (1977), Krouse (1978), Grossman and Stiglitz (1977), and Baron (1979)) jeopardizes much of the received doctrine on capital budgeting rules.’ Most, if not all, textbooks, for example, advocate value maximization as the premier objective for financial managers (e.g. Weston and Brigham (1978), and Van Horne (1977)). The immediate result is that these textbooks also advocate utilizing the security market line criterion for resolving capital budgeting decisions under uncertainty. The “unanimity” literature, on the other hand, has demonstrated that the value maximization objective will be acceptable to all shareholders only under very restrictive conditions. In fact, it is now known that only in specific cases will there be any objective function at all which is unanimously supported by all shareholders. One of the most important ramifications of this literature is to severely circumscribe the potential usefulness of the security market line criterion for resolving capital budgeting decisions under uncertainty. This note will demonstrate that, at least when the return on industry investment has an additive risk structure, even a firm with some monopoly power in the real asset market should use the security market line criterion to evaluate potential investment projects. Not only is the security market line the optimal and unanimously acceptable criterion for project evaluation in the additive risk case, but this criterion is independent of the industry structure in which the firm finds itself. The remainder of the paper is devoted to proving these contentions.