Capital Rationing and Market Discount Rates: Some Common Fallacies

Frank J. Finn
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Frank J. Finn: University of Queensland. This paper has benefitted from discussions with Ray Ball, Robert Officer, and participants in the Research Workshop in Commerce, University of Queensland.

Australian Journal of Management, 1976, vol. 1, issue 2, 37-49

Abstract: Arguments proposing the use of market discount rates for optimal investment criteria under conditions of “capital rationing†are examined. Several recent analyses assume one side of the capital market, either firms or individual investors, is subject to capital rationing while the other side is not. It is argued here that all market participants face perfect market opportunities or that none do. Several recent “solutions†are shown either to be consistent with the perfectly competitive market solution in which the familiar present value criterion is appropriate, or else to be fallacious.

Keywords: CAPITAL RATIONING; PERFECT CAPITAL MARKET; PRESENT VALUE RULE (search for similar items in EconPapers)
Date: 1976
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:1:y:1976:i:2:p:37-49

DOI: 10.1177/031289627600100203

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