Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques

TLDR

Capital budgeting research shows that while sophisticated methods are advocated and used by a minority of large, high‑investment firms, most companies still rely on simpler, less theoretically sound techniques. The study seeks to determine whether business firms have adopted more sophisticated capital budgeting practices. The authors conducted a 1970 survey of large manufacturing firms to assess their capital budgeting practices.

Abstract

Previous research into capital budgeting procedures has usually shown the following picture. At any one time, at least some theorists and scholars are advocating relatively sophisticated capital budgeting methods. These methods are being used or seriously considered by a small number of firms, mostly large and in industries with high investment rates and rapid changes. Most remaining firms are relying on methods which are simpler and theoretically less satisfactory, although there may be considerable sophistication in the way in which individual practitioners apply formally simple capital budgeting methods.' For example, in the late 1950s theorists were advocating rate of return as a measure of an investment's worth, but this method tended to be in actual use only in some of the larger oil, chemical, and automotive products companies, while the majority of firms used relatively simple and formally unsatisfactory methods, such as payback. In recent years, leading theorists have gone beyond rate of return, have attempted to deal more explicitly with the existence of risk, and have suggested a variety of applications of management science or operations research techniques to capital budgeting problems. Have there been similar changes in the practices of business firms? This paper reports on a survey aimed at answering this and related questions for large manufacturing firms in 1970.