Rational Capital Budgeting in an Irrational World

Jeremy Stein

Scholarly Articles from Harvard University Department of Economics

Abstract: This article addresses the following basic capital budgeting problem: suppose that cross-sectional differences in stock returns can be predicted based on variables other than P(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 tool, even budgeting if it is of no use in predicting stock returns.

Date: 1996
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Published in Journal of Business -Chicago-

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Related works:
Journal Article: Rational Capital Budgeting in an Irrational World (1996)
Working Paper: Rational Capital Budgeting in an Irrational World (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3708373

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