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Capital Rationing and Market Discount Rates: Some Common Fallacies

Author

Listed:
  • Frank J. Finn

    (University of Queensland. This paper has benefitted from discussions with Ray Ball, Robert Officer, and participants in the Research Workshop in Commerce, University of Queensland.)

Abstract

Arguments proposing the use of market discount rates for optimal investment criteria under conditions of “capital rationing†are examined. Several recent analyses assume one side of the capital market, either firms or individual investors, is subject to capital rationing while the other side is not. It is argued here that all market participants face perfect market opportunities or that none do. Several recent “solutions†are shown either to be consistent with the perfectly competitive market solution in which the familiar present value criterion is appropriate, or else to be fallacious.

Suggested Citation

  • Frank J. Finn, 1976. "Capital Rationing and Market Discount Rates: Some Common Fallacies," Australian Journal of Management, Australian School of Business, vol. 1(2), pages 37-49, October.
    • Handle: RePEc:sae:ausman:v:1:y:1976:i:2:p:37-49
    DOI: 10.1177/031289627600100203
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    References listed on IDEAS

    as
    1. Carleton, Willard T, 1969. "Linear Programming and Capital Budgeting Models: A New Interpretation," Journal of Finance, American Finance Association, vol. 24(5), pages 825-833, December.
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