Stein, Jeremy C. <br/><br/>
Rational Capital Budgeting in an Irrational World / 
Jeremy C. Stein. 
 - Cambridge, Mass.  National Bureau of Economic Research  1996. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w5496 .
 - Working Paper Series (National Bureau of Economic Research)  no. w5496. .
<br/><br/> March 1996. 
<br/><br/> 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. 
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