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Corporate Investment Criteria and the Valuation of Risk Assets

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  • Litzenberger, Robert H.
  • Budd, Alan P.

Abstract

A normative theory of capital budgeting requires determination of the correct cost of capital for the evaluation and selection of risky investment projects. Since different uses of funds within the firm may involve different degrees of uncertainty, the normative theory should take into account the effects of changes in the composition of the firm's portfolio of productive assets on its market valuation. The normative theory must therefore be based on a positive theory of market valuation. The objective of this paper is to develop and test an empirical specification of the positive theory.

Suggested Citation

  • Litzenberger, Robert H. & Budd, Alan P., 1970. "Corporate Investment Criteria and the Valuation of Risk Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(4-5), pages 395-419, December.
    • Handle: RePEc:cup:jfinqa:v:5:y:1970:i:4-5:p:395-419_02
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    Cited by:

    1. Dumitrescu, Ariadna & Zakriya, Mohammed, 2021. "Stakeholders and the stock price crash risk: What matters in corporate social performance?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. Magni, Carlo Alberto, 2009. "Correct or incorrect application of CAPM? Correct or incorrect decisions with CAPM?," European Journal of Operational Research, Elsevier, vol. 192(2), pages 549-560, January.
    3. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    4. Carlo Alberto Magni, 2007. "Project selection and equivalent CAPM-based investment criteria," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 3(3), pages 165-168.
    5. Magni, Carlo Alberto, 2007. "CAPM and capital budgeting: present versus future, equilibrium versus disequilibrium, decision versus valuation," MPRA Paper 5468, University Library of Munich, Germany.

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