Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-24T22:02:43.707Z Has data issue: false hasContentIssue false
  • English
  • Français

Corporate Investment Criteria and the Valuation of Risk Assets

Published online by Cambridge University Press:  19 October 2009

Robert H. Litzenberger  and
Alan P. Budd
Get access Rights & Permissions [Opens in a new window]

Extract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 5 , Issue 4-5 , December 1970 , pp. 395 - 419
Copyright
Copyright © School of Business Administration, University of Washington 1970

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Arditti, F. D., “Risk and the Required Return on Equity,” Journal of Finance, 22 (March 1967), pp. 19–36.CrossRefGoogle Scholar
[2]Arrow, K. J., Aspects of the Theory of Risk-Bearing (Helsinki: 1965).Google Scholar
[3]Benishay, H., “Variability in Earnings Price Ratios of Corporate Equities,” American Economic Review, 51 (March 1961), pp. 89–103.Google Scholar
[4]Ben-Shahar, H., “The Capital Structure and the Cost of Capital: A Suggested Exposition,” Journal of Finance, 23 (September 1968), pp. 639–653.Google Scholar
[5]Blume, M., “The Empirical Adequacy of Portfolio Theory,” Journal of Business (forthcoming).Google Scholar
[6]Bower, R. S., and Bower, D. H., “Risk and the Valuation of Common Stock,” Journal of Political Economy, 77 (May–June 1969), pp. 349–362.CrossRefGoogle Scholar
[7]Briscoe, G., Samuels, J. M., and Smyth, D. J., “The Treatment of Risk in the Stock Market,” Journal of Finance, 24 (September 1969), pp. 707–719.CrossRefGoogle Scholar
[8]Dearborn, D. C., “Single Hurdle Rate Capital Budgeting Models: Are they Relevant,”presented at the Southern Finance Meeting (1966).Google Scholar
[9]Douglas, G., “Risk in the Equity Markets: An Empirical Appraisal of Market Efficiency,” Yale Economic Essays, 9 (Spring 1969), pp. 3–45.Google Scholar
[10]Fama, E., “Risk, Return, and Equilibrium: Some Clarifying Comments,” Journal of Finance, 23 (March 1968), pp. 29–40.CrossRefGoogle Scholar
[11]Fisher, I., “The Nature of Capital and Income” (New York: 1906).CrossRefGoogle Scholar
[12]Fisher, I. and Blume, M., “Measurement of Portfolio Performance under Uncertainty,” American Economic Review (forthcoming).Google Scholar
[13]Haley, C. W., “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets: A Comment,” Review of Economics and Statistics, 51 (May 1969), pp. 220–221.CrossRefGoogle Scholar
[14]Hamada, R. S., “Portfolio Analysis, Market Equilibrium, and Corporation Finance,” Journal of Finance, 24 (March 1969), pp. 13–31.CrossRefGoogle Scholar
[15]Jensen, M. C., “Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios,” Journal of Business, 42 (April 1969), pp. 167–247.CrossRefGoogle Scholar
[16]Keynes, J. M., The General Theory of Employment, Interest, and Money (London: 1936).Google Scholar
[17]Latané, H. A., Rational Decision-Making in Portfolio Management (Ph.D. Diss., University of North Carolina, 1957).Google Scholar
[18]Lintner, J., and Glauber, R., “Higgledy Piggledy Growth in America”(paper prepared for the Seminar on the Analysis of Security Prices,University of Chicago, May 1967).Google Scholar
[19]Lintner, J., “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics, 47 (February 1965), pp. 13–27.CrossRefGoogle Scholar
[20]Lintner, J., “Security Prices, Risk, and Maximal Gains for Diversification,” Journal of Finance, 20 (December 1965), pp. 587–613.Google Scholar
[21]Litzenberger, R. H., “Equilibrium in the Equity Market under Uncertainty,” Journal of Finance, 24 (September 1969), pp. 663–671.Google Scholar
[22]Litzenberger, R. H., and Jones, C. P., “The Capital Structure and the Cost of Capital: A Comment,” Journal of Finance, 25 (June 1970).CrossRefGoogle Scholar
[23]Lutz, F., and Lutz, V., The Theory of Investment of the Firm (Princeton: 1951).Google Scholar
[24]Mao, J. C. T., “Models of Capital Budgeting, E-V vs E-S,” Journal of Financial and Quantitative Analysis, 4 (January 1970), pp. 657–675.CrossRefGoogle Scholar
[25]Mao, J. C. T., and Helliwell, J. F., “Investment Decision under Uncertainty: Theory and Practice,” Journal of Finance, 24 (May 1969), pp. 323–338.CrossRefGoogle Scholar
[26]Markowitz, H. M., Portfolio Selection: Efficient Diversification of Investments, Cowles Foundation Monograph No. 16 (New York: 1959).Google Scholar
[27]Modigliani, F., and Miller, M. H., “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, 48 (June 1958), pp. 261–297.Google Scholar
[28]Mossin, J., “Equilibrium in a Capital Asset Market,” Econometrica, 34 (October 1966), pp. 768–775.CrossRefGoogle Scholar
[29]Mossin, J., “Security Pricing and Investment Criteria in Competitive Markets,” American Economic Review, 59 (December 1969), pp. 749–756.Google Scholar
[30]Pratt, J. W., “Risk Aversion in the Small and in the Large,” Econometrica, 32 (January–April 1964), pp. 122–136.CrossRefGoogle Scholar
[31]Roberts, H. V., “Current Problems in the Economics of Capital Budgeting,” Journal of Business, 30 (January 1957), pp. 12–16.CrossRefGoogle Scholar
[32]Robichek, A. A., and Myers, S. C., “Valuation of the Firm: Effects of Uncertainty in a Market Context,” Journal of Finance, 21 (May 1966), pp. 215–227.CrossRefGoogle Scholar
[33]Sharpe, W. F., “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk,” Journal of Finance, 29 (September 1964), pp. 425–442.Google Scholar
[34]Sharpe, W. F., “Risk Aversion in the Stock Market: Some Empirical Evidence,” Journal of Finance, 20 (August 1965), pp. 416–422.Google Scholar
[35]Sharpe, W. F., “Mutual Fund Performance,” Journal of Business, 39, Part 2 (January 1969), pp. 119–138.CrossRefGoogle Scholar
[36]Sharpe, W. F., “Mutual Fund Performance and the Theory of Capital Asset Pricing: Reply,” Journal of Business, 41 (April 1968), pp. 235–236.CrossRefGoogle Scholar
[37]Solomon, E., “Measuring a Company's Cost of Capital,” Journal of Business, 28 (October 1955), pp. 240–252.CrossRefGoogle Scholar
[38]Solomon, E., The Theory of Financial Management (New York: 1963).Google Scholar
[39]Tuttle, D. L., and Litzenberger, R. H., “Leverage, Diversification, and Capital Market Effect on a Risk-Adjusted Capital Budgeting Framework,” Journal of Finance, 23 (June 1968), pp. 427–443.Google Scholar
[40]Von Neuman, J., and Morgenstern, O., Theory of Games and Economic Behavior, (Princeton: 1953).Google Scholar
[41]West, R. R., “Mutual Fund Performance and the Theory of Capital Asset Pricing: Some Comments,” Journal of Business, 41 (April 1968), pp. 230–234.CrossRefGoogle Scholar
[42]Wippern, R. F., “A Note on the Equivalent Risk Class Assumption,” The Engineering Economist, 11 (Spring 1966), pp. 13–22.CrossRefGoogle Scholar
[43]Young, W. E., Common Stock Ex-Post Holding Period Returns and Portfolio Selection (Ph.D. dis., University of North Carolina, 1968).Google Scholar