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Capital Allocation in Decentralized Businesses

Author

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  • Stuart M. Turnbull

    (Bauer College of Business, University of Houston, TX 77004, USA)

Abstract

This paper described a theory of capital allocation for decentralized businesses, taking into account the costs associated with risk capital. We derive an adjusted present value expression for making investment decisions, that incorporates the time varying profile of risk capital. We discuss the implications for business performance measurement.

Suggested Citation

  • Stuart M. Turnbull, 2018. "Capital Allocation in Decentralized Businesses," JRFM, MDPI, vol. 11(4), pages 1-11, November.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:82-:d:185664
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Robert C. Merton & André Perold, 1993. "Theory Of Risk Capital In Financial Firms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 16-32, September.
    3. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    4. Erel, Isil & Myers, Stewart C. & Read, James A., 2015. "A theory of risk capital," Journal of Financial Economics, Elsevier, vol. 118(3), pages 620-635.
    5. Bajaj , Rasna & Binmore, Andrew & Dasgupta, Rupak & Vo, Quynh-Anh, 2018. "Banks’ internal capital markets: how do banks allocate capital internally?," Bank of England Quarterly Bulletin, Bank of England, vol. 58(2), pages 1-10.
    6. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
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    Cited by:

    1. Bernd Engelmann & Ha Pham, 2020. "A Raroc Valuation Scheme for Loans and Its Application in Loan Origination," Risks, MDPI, vol. 8(2), pages 1-20, June.
    2. Roberto S. Santos & Lingling Qin, 2019. "Risk Capital and Emerging Technologies: Innovation and Investment Patterns Based on Artificial Intelligence Patent Data Analysis," JRFM, MDPI, vol. 12(4), pages 1-24, December.
    3. Iryna Yanenkova & Yuliia Nehoda & Svetlana Drobyazko & Andrii Zavhorodnii & Lyudmyla Berezovska, 2021. "Modeling of Bank Credit Risk Management Using the Cost Risk Model," JRFM, MDPI, vol. 14(5), pages 1-15, May.
    4. David Edmund Allen & Elisa Luciano, 2019. "Risk Analysis and Portfolio Modelling," JRFM, MDPI, vol. 12(4), pages 1-4, September.

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