Rational Capital Budgeting in an Irrational World / Jeremy C. Stein.

Format:

Book

Author/Creator:

Stein, Jeremy C.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5496.

NBER working paper series no. w5496

Language:

English

Subjects (All):

Capital budget.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Cambridge, Mass. : National Bureau of Economic Research, 1996.

Summary:

This paper addresses the following basic capital budgeting question: Suppose that cross-sectional differences in stock returns can be predicted based on variables other than beta (e.g., book-to- market), and that this predictability reflects market irrationality rather than compensation for fundamental risk. In this setting, how should companies determine hurdle rates? I show how factors such as managerial time horizons and financial constraints affect the optimal hurdle rate. Under some circumstances, beta can be useful as a capital budgeting tool, even if it is of no use in predicting stock returns.

Notes:

Print version record

March 1996.