Rational Capital Budgeting in an Irrational World

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Rational Capital Budgeting in an Irrational World

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Title: Rational Capital Budgeting in an Irrational World
Author: Stein, Jeremy C.
Citation: Stein, Jeremy C. 1996. Rational capital budgeting in an irrational world. Journal of Business 69(4): 429-455.
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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.
Published Version: http://www.jstor.org/stable/2353403
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3708373
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