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Rational Capital Budgeting In An Irrational World
Abstract
This paper addresses the following basic capital budgeting question: Suppose that crosssectional 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 tune 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.
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Citations
Cites
Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have
Myers, S., & Majluf, N. (1984) · doi:10.3386/w1396 · Cited by 6,745
Cited by
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Blockholder Trading, Market Efficiency, and Managerial Myopia
EDMANS, A. (2009) · The Journal of Finance · doi:10.1111/j.1540-6261.2009.01508.x · Cited by 1,258
Do stock market liberalizations cause investment booms?
Henry, P. B. (2000) · Journal of Financial Economics · doi:10.1016/s0304-405x(00)00073-8 · Cited by 864
Does Climate Change Affect Real Estate Prices? Only If You Believe In It
Baldauf, M., Garlappi, L., & Yannelis, C. (2020) · The Review of Financial Studies · doi:10.1093/rfs/hhz073 · Cited by 713
Hirshleifer, D. (2015) · Annual Review of Financial Economics · doi:10.1146/annurev-financial-092214-043752 · Cited by 497
Metadata
- Authors
- Stein, J. C.
- Venue
- The Journal of Business
- Publisher
- University of Chicago Press
- Published
- 1996-01
- Volume
- 69
- Issue
- 4
- Pages
- 429
- ISSN
- 0021-9398 (ISSN-L)
- 1537-5374
- OpenAlex
- W2103838917
- Cited by
- 583
- References
- 1
- FWCI
- 6.21
- Type
- journal article
- Language
- en
- Open access
- closed
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