What's Wrong with Modern Capital Budgeting?

Dice Center Working Paper No. 99-8

12 Pages Posted: 1 Jul 1999

See all articles by René M. Stulz

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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

Stulz, Rene M., What's Wrong with Modern Capital Budgeting? (June 8, 1999). Dice Center Working Paper No. 99-8, Available at SSRN: https://ssrn.com/abstract=168068 or http://dx.doi.org/10.2139/ssrn.168068

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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1000 Brussels
Belgium

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