01516cam a22002297 4500001000600000003000500006005001700011008004100028100002100069245009700090260006600187490004100253500001600294520061600310530006100926538007200987538003601059710004201095830007601137856003701213856003601250w5496NBER20141228202745.0141228s1996 mau||||fs|||| 000 0 eng d1 aStein, Jeremy C.10aRational Capital Budgeting in an Irrational Worldh[electronic resource] /cJeremy C. Stein. aCambridge, Mass.bNational Bureau of Economic Researchc1996.1 aNBER working paper seriesvno. w5496 aMarch 1996.3 aThis 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. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w5496.4 uhttp://www.nber.org/papers/w549641uhttp://dx.doi.org/10.3386/w5496