What's Wrong with Modern Capital Budgeting?
Dice Center Working Paper No. 99-8
12 Pages Posted: 1 Jul 1999
Date Written: June 8, 1999
Abstract
I argue that the mainstream approach to capital budgeting focuses excessively on the special case where diversifiable risks do not affect the contribution of a project to the value of the firm. This approach ignores the impact of a new project on a firm's total risk and therefore often leads to an inappropriate assessment of the value of the project. I present arguments for why total risk is often costly and discuss how taking total risk into account in capital budgeting is necessary to make capital budgeting and capital structure decisions consistent.
JEL Classification: G31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Risk Management: Coordinating Corporate Investment and Financing Policies
By Kenneth Froot, David S. Scharfstein, ...
-
Why Firms Use Currency Derivatives
By Christopher Geczy, Bernadette A. Minton, ...
-
The Use of Foreign Currency Derivatives and Firm Market Value
-
Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives
-
Do Firms Hedge in Response to Tax Incentives?
By John R. Graham and Daniel A. Rogers
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
By John M. Griffin and René M. Stulz