TY  - JOUR
AU  - Stein,Jeremy C.
TI  - Rational Capital Budgeting in an Irrational World
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5496
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5496
L1  - http://www.nber.org/papers/w5496.pdf
N1  - Author contact info:
Jeremy C. Stein
Department of Economics
Harvard University
Littauer 209
Cambridge, MA  02138
Tel: 617/496-6455
Fax: 617/496-7352
E-Mail: jeremy_stein@harvard.edu
AB  - 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.
ER  -