CAPITAL STRUCTURE AND ASSET PRICING: AN EMPIRICAL ANALYSIS USING THE CAPM FRAMEWORK

Abstract

Structural, institutional, and behavioral anomalies have prompted much discussion of the applicability of the Capital Asset Pricing Model (CAPM) to emerging markets. The current paper determines the applicability of CAPM to the Indian equity market based on 20 years of NIFTY 50 (2005-2025) data at a daily, weekly, and monthly frequency. Excess returns are also calculated against the Treasury Bill yield of 91 days and are estimated using heteroskedasticity- and autocorrelation-consistent models. The results show that the frequency-scaled mean returns are negatively skewed, fat-tailed, and have clustered volatility during crisis periods, such as the 2008 global financial crisis and the 2020 COVID-19 shock. Robustness checks ensure that aggregation works to remove noise and serial correlation but not pricing errors, highlighting the weaknesses of a one-factor model. Most importantly, these exceptions are associated with capital structure attributes of Indian companies, such as ownership concentration, leverage practices, and governance frictions, which exacerbate the systematic risks beyond CAPM. India is thus a global case study of a transitional economy in which modernization, institutional immaturity, and behavioral interaction meet to undermine traditional asset pricing. The results indicate that more sophisticated methods, including mean-Gini preferences, alpha-neutral CAPM and multi-factor or behaviorally informed models, are more explanatory. These findings have important implications on cost-of-capital estimation, policy in emerging markets and the development of future asset pricing models.