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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
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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

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