A positive analysis of corporate capital budgeting practices

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

“…When estimating Equation (1), we expect size to be related to the use of recommended capital budgeting methods (Pike, 1988 We expect high leverage to be related to the use of the non-recommended pay-back method, which has been found to be positively associated with economic uncertainty (Schall and Sundem, 1980;Binder and Chaput, 1996). Simpler rules (such as pay-back) can be more attractive in an uncertain setting, since the costs of accurately estimating the inputs for more complicated discounting-based calculations are higher (Binder and Chaput, 1996).…”

“…Simpler rules (such as pay-back) can be more attractive in an uncertain setting, since the costs of accurately estimating the inputs for more complicated discounting-based calculations are higher (Binder and Chaput, 1996). An alternative explanation as to why high leverage companies might be expected to use pay-back more often is that they are under more financial pressure and might therefore feel a need to find investments that quickly "pay back" the initial investment.…”

“…[2] Most studies thus explore only use or non-use, or the frequency of use, of capital budgeting methods, and not the association between use and independent variables. When relationships between use and independent variables have been studied (e.g., Hartwig, 2012), only descriptive statistical methods such as correlation analysis and independent-samples t-tests are utilised, so the results cannot be interpreted causally [3].…”

Sensitivity analysis for the determinants of investment appraisal

“…The descriptive summary of overall data set is given in 4 represents the results of sensitivity analysis or pre and post windows created on the overall data set of sugar and textile sector. The results are reported on the basis of OLS and fixed affects model to check the influences of different factors on investment in different economic conditions.…”

“…Our research provides evidence that high leverage companies tend to use more the PB and NPV but they have insignificant or negative relationships with other techniques. We expect high leverage to be related to the use of the nonrecommended pay-back method, which has been found to be positively associated with economic uncertainty (Binder and Chaput, 1996;Schall and Sundem, 1980). Growth opportunities are proxied by the price-earnings (P/E) ratio because high P/E-ratios are thought to mean that the capital market expects the company to have high future growth, and leverage is measured by the debt-to-asset ratio.…”