Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques

Klammer, Thomas P.

doi:10.1086/295467

Cited by 157 publications

(73 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…6 Since other possible comparison studies were on different populations with different methods (e.g. Klammer, 1972;Gitman and Forrester, 1977;Gitman and Mercurio, 1982;Gitman and Maxwell, 1985;Trahan and Gitman, 1995;Liljeblom and Vaihekoski, 2004;Silvola, 2006;Trong et al, 2008), the author chose to mainly focus the comparisons to Graham and Harvey (2001) and Brounen et al (2004), or as Pike (1996) puts it, "Every survey has some merit, telling us something of the practices at the date of survey for those responding firms. The problem arises when attempting to generalise such findings to a wider population and to identify discernible capital budgeting trends by means of comparison with earlier empirical studies".…”

Section: Delivery and Responsementioning

confidence: 99%

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

Hartwig

2012

JABR

View full text Add to dashboard Cite

In this paper Swedish listed companies' use of capital budgeting and cost of capital estimation methods in 2005 and 2008 are examined. The relation between company characteristics and choice of methods is investigated and both within-country longitudinal and cross-country comparisons are made. Larger companies seem to have used capital budgeting methods more frequently than smaller companies. When compared to U.S. and continental European companies, Swedish listed companies employed capital budgeting methods less frequently. In 2005 the most common method for establishing the cost of equity was by asking the investors what return they required. By 2008 CAPM was instead the most utilised method, which could indicate greater sophistication. The use of project risk when evaluating investments also seems to have gained in popularity, while the use of company risk declined. Overall, the use of sophisticated capital budgeting and cost of capital estimation methods seem to be rising and the use of less sophisticated methods declining.Keywords: Capital Budgeting Method; Cost of Equity; Project Risk; Swedish-listed Companies INTRODUCTIONophisticated capital budgeting methods are often "highly recommended" by financial management textbooks, e.g. net present value (NPV), whereas others that are simpler are not, e.g. undiscounted payback (e.g. Brealey and Myers, 2003;Lumby and Jones, 2003;Ross et al., 2005;Smart et al., 2007). Theoretical advice is also given on how to estimate the cost of capital. Estimation models like the capital asset pricing model (CAPM) are frequently referred to and instructions how to calculate project discounts rates, contingent on the underlying risk of the project, instead of using a single company discount rate, are presented (e.g. Brealey and Myers, 2003;Lumby and Jones, 2003;Ross et al., 2005;Smart et al., 2007). Furthermore, multinationals are advised to consider risk factors such as political and foreign exchange risk (Shapiro, 2002;Eiteman et al., 2006). Still, the practical use of economic models can, as earlier research has shown (Graham and Harvey, 2001;Sandahl and Sjögren, 2003;Brounen et al., 2004;Danielson and Scott, 2006), deviate from what is prescribed by normative theory. Management, possibly with other goals than the principal (Jensen and Meckling, 1976), decides whether the recommended methods should be employed or not. The goal incongruence together with the information asymmetry between management and the shareholders, might lead to different practical behaviour than what is recommended by textbooks (Narayanan, 1985). And moreover, also in an ideal world where the principalagent problem does not exist or is limited, there might be a discrepancy between theory and practice. Methods that from a theoretical perspective at first sight have flaws can in practice namely be efficient and lead to shareholder wealth maximisation. Guthrie (1997, 2006) showed, for example, that the employment of the payback method could be rational since the payback time approximates the optio...

show abstract

Section: Delivery and Responsementioning

confidence: 99%

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

Hartwig

2012

JABR

View full text Add to dashboard Cite

show abstract

“…However, the continuing importance of payback (see also, Klammer, 1970;Woods et al, 1985;Schall et al, 1987;Pike, 1982Pike, , 1988Pike, and 1996Drury et al, 1993;and Lefley, 1994) and ROI should not be taken out of context. The survey results lead to the rejection of hypothesis 2-that less reliance is placed on economic/financial analysis in justification of AMT investments than for non-AMT investments.…”

Section: Financial Return Measuresmentioning

confidence: 99%

Investment in advanced manufacturing technology: a study of practice in large U.K. companies

Abdel-Kader

Dugdale

1998

Management Accounting Research

View full text Add to dashboard Cite

This paper reports the results of a survey investigation into the investment decision making practices of large UK manufacturing companies, especially in relation to investments in advanced manufacturing technologies. A 24% response rate was received in a survey of the finance directors of 466 large UK manufacturing companies. Responses were classified into three groups ranging from non-users of AMT to sophisticated users and analysis revealed that more sophisticated users do emphasise certain intangible benefits in combination with measures relating to the traditional dimensions of return and risk.

show abstract

“…The literature has documented a wide range of motives that determine the choice of capital budgeting practices. According to Klammer (1972), in the late 1950s, less than 20% of North American companies used DCF techniques as the primary method for selecting projects. In the early 1970s, this percentage was already 57%.…”

Section: Determinants Of the Capital Budgeting Practicesmentioning

confidence: 99%

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Mendes‐Da‐Silva

Saito

2014

Rev. adm. empres.

View full text Add to dashboard Cite

This article compares capital budgeting techniques employed in listed and unlisted companies in Brazil. We surveyed the Chief Financial Officers (CFOs) of 398 listed companies and 300 large unlisted companies, and based on 91 respondents, the results suggest that the CFOs of listed companies tend to use less simplistic methods more often, for example: NPV and CAPM, and that CFOs of unlisted companies are less likely to estimate the cost of equity, despite being large companies. These findings indicate that stock exchange listing may require greater sophistication of the capital budgeting process. KEYWORDS | Capital budgeting, finance survey, financial decisions, corporate finance, financial innovation. RESUMO Este artigo compara técnicas de orçamento de capital empregadas nas empresas listadas e não-listadas no Brasil. Emprega-se um survey dirigido aos Chief Financial Officers (CFOs) de 398 empresas listadas e 300 grandes empresas não-listadas e, com base em 91 respondentes, os resultados sugerem que os CFOs das empresas listadas tendem a usar mais intensamente métodos menos simplistas, e.g. VPL e CAPM, e que CFOs de empresas não-listadas menos provavelmente estimam o custo de capital próprio, mesmo se tratando de empresas de grande porte. Esses achados indicam que a listagem em bolsa pode requerer maior sofisticação do processo de orçamento de capital. PALAVRAS-CLAVE | Orçamento de Capital, survey em finanças, decisões financeiras, finanças corporativas, inovação financeira. RESUMEN El presente artículo compara las técnicas de presupuestación empleadas por las empresas brasileñas cotizadas y no cotizadas. Encuestamos a los Gerentes de Finanzas Corporativos (Chief

show abstract

Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques

Cited by 157 publications

References 0 publications

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

Investment in advanced manufacturing technology: a study of practice in large U.K. companies

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Contact Info

Product

Resources

About