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January 1, 1996The Journal of Business

Rational Capital Budgeting In An Irrational World

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Authors

JSJeremy C. Stein

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Overview

This article explores how companies can determine hurdle rates amid unpredictable stock returns, suggesting implications for financial strategy.

Key Points

  • The aim is to explore how irrational market behaviors affect capital budgeting decisions, specifically hurdle rates.
  • Analyzes cross-sectional differences in stock returns based on variables other than beta.
  • Examines the impact of managerial time horizons on hurdle rate determination.
  • Discusses the role of financial constraints in establishing optimal hurdle rates.
  • Identifies that market irrationality, rather than fundamental risk, influences stock return predictability.
  • Demonstrates scenarios where beta can still serve as a capital budgeting tool despite its limitations in predicting returns.
  • Suggests that varying financial constraints lead to different obstacle rates for firms.

Cite This Study

Jeremy C. Stein (1996) studied this question.

synapsesocial.com/papers/6a0f27fc9cac01975e426a6chttps://doi.org/10.1086/209699
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