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H. Kent Baker and Leigh A. Riddick

Print publication date: 2012

Print ISBN-13: 9780199754656

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199754656.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 14 April 2021

Multinational Capital Budgeting: Valuing Cross-Border Investments

Multinational Capital Budgeting: Valuing Cross-Border Investments

(p.409) 19 Multinational Capital Budgeting: Valuing Cross-Border Investments
International Finance



Oxford University Press

The rational expectations framework relies on the assumption that atomistic investors who share a common information set make decisions about assets' expected payoffs. Under these conditions, market clearing prices can be derived from an agent's expectation of these payoffs and the comovement of these payoffs with those of other assets in the economy. The individual investor is thus endowed with an ability to optimally allocate resources in a value-maximizing way and consequently represents the sole actor in the economy. Therefore, discussions over how a particular project is financed, the identity of the steward of the project, and whether the returns to the investment are received in domestic or foreign currency are rendered moot. Each of these simplifying assumptions is routinely violated in real-world settings and nowhere more so than in cross-border investments where they have important consequences for project valuation. This chapter begins with a model of investment in perfect markets and then progressively relaxes the assumptions therein in order to demonstrate the impact of real-world deviations from theory on cross-border capital budgeting and project valuation.

Keywords:   cross-border investment, capital budgeting, international parity conditions, covered interest parity, uncovered interest parity, forward premium puzzle, informational asymmetry, real options

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