Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: http://www.sciepub.com/journal/jfe Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Go
Journal of Finance and Economics. 2014, 2(4), 101-112
DOI: 10.12691/jfe-2-4-1
Open AccessArticle

What Determines the Use of Capital Budgeting Methods? Evidence from Swedish Listed Companies

Sven-Olov Daunfeldt1, and Fredrik Hartwig2

1Department of Trade, Industry and Business, HUI Research and Dalarna University, Stockholm and Borlänge, Sweden

2Department of Trade, Industry and Business, Dalarna University, Borlänge, Sweden

Pub. Date: March 27, 2014

Cite this paper:
Sven-Olov Daunfeldt and Fredrik Hartwig. What Determines the Use of Capital Budgeting Methods? Evidence from Swedish Listed Companies. Journal of Finance and Economics. 2014; 2(4):101-112. doi: 10.12691/jfe-2-4-1

Abstract

Purpose: This paper aims to extend and contribute to prior research on the association between company characteristics and choice of capital budgeting methods (CBMs). Design/methodology/approach: A multivariate regression analysis on questionnaire data from 2005 and 2008 is used to study which factors determine the choice of CBMs in Swedish listed companies. Findings: Our results supported hypotheses that Swedish listed companies have become more sophisticated over the years (or at least less unsophisticated) which indicates a closing of the theory-practice gap; that companies with greater leverage used payback more often; and that companies with stricter debt targets and less management ownership employed accounting rate of return more frequent. Moreover, larger companies used CBMs more often. Originality/value: The paper contributes to prior research within this field by being the first Swedish study to examine the association between use of CBMs and as many as twelve independent variables, including changes over time, by using multivariate regression analysis. The results are compared to a US and a continental European study.

Keywords:
investment decisions capital budgeting methods project valuation Swedish listed companies CFO sophisticated use

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Andersson, B. (1994), Investeringar och Energianvändning, Ph.D. Dissertation, University of Gothenburg, Gothenburg.
 
[2]  Bennouna, K., Meredith, G.G. and Marchant, T. (2010), “Improved capital budgeting decision making: Evidence from Canada”, Management Decision, Vol. 48 No. 2, pp. 225-247.
 
[3]  Binder, J.J. and Chaput, J.S. (1996), “A positive analysis of corporate capital budgeting practices”, Review of Quantitative Finance and Accounting, Vol. 6 No. 3, pp. 245-257.
 
[4]  Block, S. (2007), “Are real options actually used in the real world?”, The Engineering Economist, Vol. 52 No. 3, pp. 255-267.
 
[5]  Brealey, R.A. and Myers, S.C. (2003), Principles of Corporate Finance, International Edition, 7th ed, McGraw-Hill, New York.
 
[6]  Brounen, D., De Jong, A. and Koedijk, K. (2004),“Corporate finance in Europe: Confronting theory with practice”, Financial Management, Vol. 33 No. 4, pp. 71-101.
 
[7]  Collison, D.J., Grinyer, J.R. and Russel, A. (1996), “U.K. managers’ decisions and their perceptions of capital markets”, Journal of International Accounting, Auditing and Taxation, Vol. 5 No. 1, pp. 39-52.
 
[8]  Dechow, P.M. and Skinner, D.J. (2000), “Earnings management: Reconciling the views of accounting academics, practitioners, and regulators”, Accounting Horizons, Vol. 14 No. 2, pp. 235-250.
 
[9]  Donker, H., Santen, B. and Zahir, S. (2009), “Ownership structure and the likelihood of financial distress in the Netherlands”, Applied Financial Economics, Vol. 19 No. 21, pp. 1687-1696.
 
[10]  Dowling J. and Pfeffer, J. (1975), “Organizational legitimacy: Social values and organizational behaviour”, Pacific Social Review, Vol. 18 No. 1 pp. 122-136.
 
[11]  Eng, L.L. and Mak, Y.T. (2003), “Corporate governance and voluntary disclosure”, Journal of Accounting and Public Policy, Vol. 22 No. 4, pp. 325-345.
 
[12]  Graham, J.R. and Harvey, C.R. (2001), “The theory and practice of corporate finance: Evidence from the field”, Journal of Financial Economics, Vol. 60 Nos. 2-3, pp. 187-243.
 
[13]  Graham, J.R., Harvey, C.R. and Rajgopal, S. (2005), “The economic implications of corporate financial reporting”, Journal of Accounting and Economics, Vol. 40 Nos. 1-3, pp. 3-73.
 
[14]  Gray, R., Owen, D. and Adams, C. (1996), Accounting and Accountability. Changes and Challenges to Corporate and Environmental Reporting, Prentice-Hall, London.
 
[15]  Gul, F.A., Lynn, S.G. and Tsui, J.S.L. (2002), “Audit quality, management ownership, and the informativeness of accounting earnings”, Journal of Accounting, Auditing and Finance, Vol. 17 No. 1, pp. 25-49.
 
[16]  Hartwig, F. (2012), “The use of capital budgeting and cost of capital estimation methods in Swedish-Listed Companies”, Journal of Applied Business Research, Vol. 28 No. 6, pp. 1451-1476.
 
[17]  Healy, P.M. (1985), “The effect of bonus schemes on accounting decisions”, Journal of Accounting and Economics, Vol. 7 Nos. 1-3, pp. 85-107.
 
[18]  Hermes, N., Smid, P. and Yao, L. (2007), “Capital budgeting practices: A comparative study of the Netherlands and China”, International Business Review, Vol. 16 No. 5, pp. 630-654.
 
[19]  Holmén, M. and Pramborg, B. (2009), “Capital budgeting and political risk: Empirical evidence”, Journal of International Financial Management and Accounting, Vol. 20 No. 2, pp. 105-134.
 
[20]  Hutchinson, M. and Leung, S. (2007), “An investigation of factors influencing the association between top management ownership and earnings management”, Journal of Contemporary Accounting and Economics, Vol. 3 No. 2, pp. 130-153.
 
[21]  Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: Managerial behaviour, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
 
[22]  Jorion, P. (2006), Value at Risk – The New Benchmark for Managing Financial Risk, 3rd ed, McGraw-Hill, New York.
 
[23]  Kester, G.W., Chang, R.P., Echanis, E.S., Haikal, S., Isa, M.M., Skully, M.T., Tsui, K.S. and Wang, C.J.(1999), “Capital budgeting practices in the Asia-Pacific region: Australia, Hong Kong, Indonesia, Malaysia, Philippines, and Singapore”, Financial Practice and Education, Vol. 9 No. 1, pp. 25-33.
 
[24]  Klammer, T.P. and Walker, M.C. (1984), “The continuing increase in the use of sophisticated capital budgeting techniques”, California Management Review, Vol. 27 No. 1, pp. 137-148.
 
[25]  Klassen, K.J. (1997), “The impact of inside ownership concentration on the trade-off between financial and tax reporting”, The Accounting Review, Vol. 72 No. 3, pp. 455-474.
 
[26]  Kwong, H.C.(1986), “The sophistication of capital budgeting in Malaysian companies”, Omega, Vol. 14 No. 2, pp. 175-181.
 
[27]  Lumby, S. and Jones, C. (2003), Corporate Finance: Theory and Practice, 7th ed, Thomson Learning, London.
 
[28]  Pike, R. (1988),“An empirical study of the adoption of sophisticated capital budgeting practices and decision-making effectiveness”, Accounting and Business Research, Vol. 18 No. 72, pp. 341-351.
 
[29]  Pike, R.(1989), “Do sophisticated capital budgeting approaches improve investment decision-making effectiveness?”, The Engineering Economist, Vol. 34 No. 2, pp. 149-161.
 
[30]  Pike, R. and Sharp, J. (1989), “Trends in the use of management science techniques in capital budgeting”, Managerial and Decision Economics, Vol. 10 No. 2, pp. 135-140.
 
[31]  Pike,R. (1996),“A longitudinal survey on capital budgeting practices”, Journal of Business Finance and Accounting, Vol. 23 No. 1, pp. 79-92.
 
[32]  Renck, O. (1966), Investeringsbedömning i Några Svenska Företag, P.A. Nordstedt & Söners förlag, Stockholm.
 
[33]  Ross, S.A., Westerfield, R.W. and Jaffe, J. (2005), Corporate Finance, International Edition, 7th ed, McGraw-Hill, New York.
 
[34]  Ryan, P.A. and Ryan, G.P. (2002), “Capital budgeting practices of fortune 1000: How have things changed?”, Journal of Business and Management, Vol. 8 No. 4, pp. 355-364.
 
[35]  Sandahl, G. and Sjögren, S. (2003), “Capital budgeting methods among Sweden’s largest groups of companies. The state of the art and a comparison with earlier studies”, International Journal of Production Economics, Vol. 84 No 1, pp. 51-69.
 
[36]  Sangster,A. (1993), “Capital investment appraisal techniques: A survey of current usage”, Journal of Business Finance and Accounting, Vol. 20 No. 3, pp. 307-332.
 
[37]  Schall, L.D. and Sundem, G.L. (1980), “Capital budgeting methods and risk: A further analysis”, Financial Management, Vol. 9 No. 1, pp. 7-11.
 
[38]  Segelod, E. (1995), Resource Allocation in Divisionalized Groups, Aveburty, Aldershot.
 
[39]  Silvola, H. (2006), “Low-intensity R&D and capital budgeting decisions in IT firms”, Advances in Management Accounting, Vol. 15, pp. 21-49.
 
[40]  Singh, S., Jain, P.K. and Yadav, S.S. (2012), "Capital budgeting decisions: evidence from India", Journal of Advances in Management Research, Vol. 9 No. 1, pp.96-112
 
[41]  Siregar, S.V. and Utama, S. (2008), “Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia”, International Journal of Accounting, Vol. 43 No. 1, pp. 1-27.
 
[42]  Smart, S.B., Megginson, W.L. and Gitman, L.J. (2004), Corporate Finance, Thomson South-Western, Mason.
 
[43]  Stanley, M. and Block, S. (1984), "A survey of multinational capital budgeting", FinancialReview, Vol. 19 No. 1, pp. 36-54.
 
[44]  Tell, B. (1978), Investeringsbedömning i Praktiken, Studentlitteratur, Lund.
 
[45]  Truong, G., Partington, G. and Peat, M. (2008), “Cost-of-capital estimation and capital-budgeting practice in Australia”, Australian Journal of Management, Vol. 33 No. 1, pp. 95-122.
 
[46]  Tzovas,C. (2006), “Factors influencing a firm’s accounting policy decisions when tax accounting and financial accounting coincide”, Managerial Auditing Journal, Vol. 21 No. 4, pp. 372-386.
 
[47]  Verbeeten, F.H.M.(2006), “Do organizations adopt sophisticated capital budgeting practices to deal with uncertainty in the investment decision? A research note”, Management Accounting Research, Vol. 17 No. 1, pp. 106-120.
 
[48]  Warfield, T.D., Wild, J.J. and Wild, K.L. (1995), “Managerial ownership, accounting choices, and informativeness of earnings”, Journal of Accounting and Economics, Vol. 20 No. 1, pp. 61-91.
 
[49]  Watts, R.L. and Zimmerman, J.L. (1990), “Positive accounting theory: A ten year perspective”, The Accounting Review, Vol. 65 No. 1, pp. 131-156.
 
[50]  Yard, S. (1987), Kalkyllogik och Kalkylkrav, Ph.D. Dissertation, Lund University Press, Lund.