Capital Budgeting Theory Research Articles

CMOs의 가치평가에 관한 연구

This study empirically analyzed whether real estate policies have a significant effect on housing sales, jeonse prices, and land sales prices using MBS is not active in Korea due to difficulties in evaluation. In the appraisal of MBS, the default risk is a cost that someone has to bear even if the government agency removes it through relevant guarantees. In this study, five CMOs data are evaluated and analyzed through the financial model developed based on traditional capital budgeting theory, option pricing theory, and Cho & Jun(2019)’s model recognizing that housing price fluctuation is an important factor affecting the default risk in MBS. Finally, the results drawn from this study help provide a theoretical framework for the valuation of MBS and show relevant implications for rational decision-making to MBS-related entities.

Stakeholder-oriented corporate investment: A catering perspective

Exploring the staggered adoption of state constituency statutes as quasi-exogenous shocks, we find that enforcement of stakeholder orientation encourages corporate investment, especially for younger and more opaque firms, which is consistent with the top-down theory of capital budgeting of Almazan et al. (2017). Our evidence suggests that corporate insiders have a catering motive in investment decisions: to convey favorable information to stakeholders through increasing capital investments.

How an idiosyncratic (zero-beta) risk can greatly increase the firm’s cost of capital

The celebrated capital asset pricing model (‘CAPM’) brought numerous appealing insights and spawned a new theory of capital budgeting. One key intuition is that there is ‘no penalty for diversifiable risk’ – that is, any risky payoff that has zero-correlation with the wider economy, and hence zero-beta, is treated as ‘risk-free’. Does that mean that managers can bet the firm on a spin of the roulette wheel without attracting a higher CAPM discount rate? Our re-interpretation of CAPM reveals that potential financial losses which are conventionally regarded as firm-specific ‘unpriced’ risks can bring a large increase in the firm’s beta and CAPM cost of capital, despite having zero-beta and making only negligible difference at the aggregate market level. This mathematical result clashes with textbook expositions but is easily demonstrated and can be traced to authoritative but overlooked parts of the theoretical CAPM literature. JEL Classification: G11, G12

An Empirical Insight into the Theory and Practices of Capital Budgeting in Pakistan

The study explores the different stages of the capital investment decision process and empirically investigates these stages’ mediating role. We have used firms, managers, and economic attributes as independent variables. Likewise, ROA, ROE, and EPS are used as proxies for measuring firm performance, which is the dependent variable. A survey was conducted through a self-developed questionnaire for non-financial listed firms of the Pakistan Stock Exchange (PSX). The questionnaire comprises of two parts. The first part is related to managers and firm attributes. The second part covers the nine steps of the Capex Appraisal Model (CAM). PLS-SEM was used to investigate the objectives of the study. Moreover, the results support the applicability of CAM in the corporate sector of Pakistan. For this purpose, 27 hypotheses were empirically tested, of which 21 were found to be significant. However, 6 hypotheses were not supported. The findings suggest that the “Capex Appraisal Model” is a useful approach for the corporate sector of Pakistan. Thus, firms should properly evaluate Capex decisions to enhance performance in the long run.

Accounting Measures and Economic Measures: An Integrated Theory of Capital Budgeting

Accounting measures are traditionally matched against economic measures. For example, accounting rates of return (ARR) are usually considered poor surrogates of the “economic rate of return” and the residual income is sometimes criticized as being periodically inconsistent with the net present value (NPV). This paper shows that the opposition accounting/economic is artificial and, taking a capital budgeting perspective, illustrates the strict links between economic measures and accounting measures. In particular, the ARR is shown to be a correct economic yield of a project and the traditional IRR is only a particular case of it. Also, maximization of the simple arithmetic mean of properly modified residual incomes is equivalent to NPV maximization, owing to its periodic consistency in the sense of Egginton (1995). The conciliation of such notions as NPV, IRR, ARR, and residual income stems from (i) the fundamental law of motion of any economic entity, (ii) the notion of Chisini mean, (iii) a modified notion of residual income which takes account of a comprehensive cost of capital.

Capital Budgeting Theory and Practice: A review and agenda for future research

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. It has analyses of various approaches, such as Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE), SciVerse ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef), Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley Online Library. Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them.
 Keywords: Capital budgeting theory and practices, capital budgeting tools for incorporating risk, discount rate

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

ABSTRACTThis paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Dynamic Capital Allocation and Managerial Compensation

This paper proposes a dynamic theory of capital budgeting and managerial compensation when investment information is decentralized and the agent can obtain private benefit from inefficiently deploying capital. The firm may forgo positive NPV projects, distort pay-performance sensitivity downward, and induce lower investment. The optimal mechanism is to allocate capital and compensate the agent through a budgeting account whose balance reflects the firm's internal financial slack. The agency cost and firm policies all vary monotonically with the account balance. As the firm accumulates more financial slack, fewer projects are forgone, capital is allocated more efficiently to the selected projects, and the agent is provided steeper incentive. The model better explains the documented evidences that firm liquidity is positively correlated with incentive pay, and negatively correlated with investment hurdle rates.

Capital Budgeting Theory and Practice: A Review and Agenda for Future Research

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE) , SciVerse ScienceDirect (Elsevier) , Informa - Taylor & Francis (CrossRef) , Wiley (CrossRef) , Business (JSTOR) , Arts & Sciences (JSTOR) , Proquest , MEDLINE (NLM) , and Wiley Online Library . Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Recent studies lent credence on the use of more sophisticated capital budgeting techniques along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioral finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company.

Development appraisal in practice: some evidence from the planning system

Due to the requirement to demonstrate financial feasibility of policy proposals and scheme-specific planning obligations, development viability and development appraisal have become core themes in the English planning system. The objective of this paper is to evaluate the application of development appraisal in practice. The paper reviews the literature and the models available to assess the viability of development and analyses a sample 19 development viability appraisals to identify practice. The paper concludes that the practice of development appraisal deviates significantly from the tenets of capital budgeting theory. In particular, in addition to a propensity to oversimplify the timing of income and expenditure, the way in which debt, developer’s return and value and cost change are handled in practice illustrates a major gap between mainstream capital budgeting theory and development appraisal in practice.

Analisa investasi dengan Feasibility Study untuk meningkatkan Kecerdasan Finansial pada Budi Daya Ikan di Sidoarjo

Potential of each region in Indonesia from region to region and different. Indonesia has many islands and is surrounded by sea certainly has the potential of natural resources are not unlimited. One of the areas in Indonesia that fish is also a producer of Sidoarjo regency. Sidoarjo regency in East Java is located between two major rivers namely River Porong and Surabaya River so famous as the city of Delta. Which of the three investment potential of the aquaculture of milkfish, shrimp and Tilapia vaname who earn higher incomes?, Does investment analysis with feasibility studies to improve financial intelligence on aquaculture farmers. Whether or not a project implemented successfully in this case could provide economic benefits or provide financial benefits to the company the necessary analysis or assessment of the situation and the prospects of a project taking into account several criteria such as objectives, benefits and aspects related to the project in research project feasibility analysis. To find out more about the three types of resources are then conducted a field study. From the data collected by the theory of feasible study capital budgeting and financial analysis, data is processed to find out from the three farms that produce high profits. While the capital budgeting analysis that is used is the net present value (NPV), internal rate of return (IRR), payback period (PP), average rate of return (ARR) and Profitability Index (PI). From the calculation results can be seen that when viewed from the side of the capital vaname shrimp cultivation requires a smaller capital. in terms of earnings before interest and tax of tilapia aquaculture generate greater revenues. Pay back period of milkfish cultivation period of more rapid return of investment when compared with the cultivation of other woods. Internal rate of return calculations show that the cultivation of fish internal rate of returnnya higher than other cultivation. If you look at the results of the study fish ponds can be used as an investment option, because the investments are in need of smaller and faster payback periodnya. Another thing that underlies this selection of fish culture management easier and more powerful survival compared with other cultivation. Keywords: Investment Analysis, Fisheries, financial intelligence.

Firm Investment and Stakeholder Choices: A Top-Down Theory of Capital Budgeting

This paper considers the optimal design of capital budgeting rules when the firm’s capital budgeting process involves the interaction of top executives, with private information and stakeholders (e.g., employees) whose motivation and efforts affect the likelihood of the firm’s success. In this setting, the decisions of top executives affect stakeholders’ inferences about firms’ prospects and as a result, influence their actions. Specifically, higher levels of investment expenditures indicate that a firm has promising prospects and induce stakeholders to take actions that contribute to the firm’s success. Within this framework we examine the role of commonly observed capital budgeting rules which not only play their traditional allocative role but also affect how private information is transmitted from the top down. As we show, the optimal capital budgeting mechanism is consistent with a number of commonly observed investment distortions such as capital rationing, investment rigidities, overinvestment, and inflated discount rates.

Industrial Buying And The Divergence Of Capital Budgeting Theory And Practice: An Exploration

<span>This exploratory paper suggests that a stage-gate industrial buying model may provide an explanation for the divergence of capital budgeting theory and practice. Not surprisingly, we find that qualitative and quantitative characteristics of projects are perceived to vary in complexity. More importantly, our results indicate that these characteristics vary in importance as they proceed to each subsequent stage, and that the idea of selling projects at each subsequent stage by packaging the projects; emphasizing those aspects deemed important or of appropriate complexity and de-emphasizing others. We relate these results to current theory and practice and suggest further investigation.</span>

Odpisy a jejich význam při hodnocení efektivnosti investic v podmínkách České republiky

Odpisy vyjadřuji trvale znehodnoceni majetku a snižuji jeho zůstatkovou cenu vykazanou v rozvaze, umožňuji postupne přeneseni výdaje na jeho pořizeni do nakladů a jsou zdrojem financovani. V teorii i praxi investicniho rozhodovani v CR je třeba od sebe odlisovat odpisy ucetni, manažerske a daňove a zohlednit při tom specifika vyplývajici z ceske ucetni a daňove legislativy. Ocekavaný peněžni tok z investice ovlivňuji odpisy nejen z nově pořizovaneho majetku, ale ve specifických připadech i odpisy z již existujiciho majetku, přestože výdaje na něj jsou již z pohledu hodnoceni efektivnosti investice utopene. Za hlavni vliv odpisů na peněžni tok z investice je možne považovat přijem v podobě odpisoveho daňoveho stitu. Soucasti investicniho rozhodovani by měl být i výběr metody daňových odpisů hmotneho majetku, ktera zabezpeci maximalizaci soucasne hodnoty odpisových daňových stitů.

APPRAISAL OF COMBINED AGREEMENTS IN BOT PROJECT FINANCE: FOCUSED ON MINIMUM REVENUE GUARANTEE AND REVENUE CAP AGREEMENTS

Limited public funds for infrastructures have the government consider joining the private in a BOT project finance scheme. Generally, the BOT projects entail lots of managerial flexibilities that may induce the radical change of project's cash flows, an asymmetric payoff, when facing on the uncertainties due to the BOT project finance's unique characteristics. Among various managerial flexibilities in the BOT projects, the MRG (Minimum Revenue Guarantee) and the RCP (Revenue Cap) agreements are frequently used to protect the government and the developer from the operational risk. However, the combined effect of the MRG and RCP on the project value is not understood well because the traditional capital budgeting theory, the NPV (Net Present Value) analysis, is limited to assess the contingency of these agreements. So, the purpose of this paper is to develop the numerical model to assess the combined impact of the MRG and RCP agreements on the project value based on the option pricing theory and to suggest a theoretical framework. The approach applied in this paper is justified with the hypothetical BOT toll case and some meaningful conclusions are drawn from. The results by the option pricing concept are analyzed over those by NPV analysis and, finally, the combined value of the MRG and RCP agreements appears significant relative to the project value. Santruka Del ribotu viešojo sektoriaus lešu vyriausybe nusprende sujungti privačias lešas pagal SVP (angl. BOT) projektu finansavimo schema. Paprastai SVP projektai yra lanksčiai valdomi, todel gali sukelti radikaliu pokyčiu grynuosiuose projekto pinigu srautuose asimetrini atsipirkima del unikaliu SVP projektu finansavimo savybiu. Tarp ivairiu lanksčiu SVP projektu valdymo pavyzdžiu minetini minimalios pajamu garantijos (angl. MRG) ir pajamu kapitalizacijos (angl. RCP) susitarimai. Jie dažnai naudojami siekiant apsaugoti valdžia ir vystytoja nuo veiklos rizikos. Tačiau bendras minimaliu pajamu garantiju ir pajamu kapitalizacijos susitarimu poveikis projekto vertei nesuprantamas ir del to, kad tradicine kapitalo teorija, grynosios dabartines vertes (angl. NPV) analize yra ribotos vertinant nenumatytus šiu susitarimu atvejus. Taigi šio straipsnio tikslas ‐ pletoti skaitmenini modeli, ivertinti bendra minetu susitarimu poveiki projekto vertei, pagristai pasirinkto sandorio ikainojimo teorija, ir pasiūlyti teorini pagrindima. Šiame straipsnyje taikomas metodas pagristas hipotetiniais SVP rinkliavos atvejais ir kai kuriomis padarytomis išvadomis. Pasirinkto sandorio ikainojimo samprata analizuojama atliekant grynosios dabartines vertes analize, kol bendra minimaliu pajamu garantiju ir pajamu kapitalizacijos susitarimu verte tampa labai svarbi, palyginti su projekto verte.

Valuation in Emerging Markets: A Simulation Approach

Most of the foundations of valuation theory have been designed for use in developed markets. Because of the greater, and in some cases different, risks associated with emerging markets (although recent experience might suggest otherwise), investors and corporate managers are often uncomfortable using traditional methods. The typical way of capturing emerging‐market risks is to increase the discount rate in the standard valuation model. But, as the authors argue, such adjustments have the effect of undermining some of the basic assumptions of the CAPM‐based discounted cash flow model.The standard theory of capital budgeting suggests that estimates of unconditional expected cash flows should be discounted at CAPM discount rates (or betas) that reflect only “systematic,” or “nondiversifiable,” market‐wide risks. In practice, however, analysts tend to take what are really estimates of “conditional” expected cash flows—that is, conditional on the firm or its country avoiding a crisis—and discount them at higher rates that reflect not only systematic risks, but diversifiable risks that typically involve a higher probability of crisis‐driven costs of default. But there is almost no basis in theory for the size of the increases in discount rates.In this article, the authors propose that analysts in emerging markets avoid this discount rate problem by using simulation techniques to capture emerging‐market risks in their estimates of unconditional expected cash flows—in other words, estimates that directly incorporate the possibility of an emerging‐market crisis and its consequences. Having produced such estimates, analysts can then discount them using the standard Global CAPM.

Appraisal of Revenue Cap Agreement in BOT Project Finance

Limited public funds for infrastructures have the government consider joining the private in a BOT project finance scheme. Generally, the BOT projects entail lots of managerial flexibilities that may induce the radical change of project's cash flows, an asymmetric payoff, when facing on the uncertainties comes from the BOT project finance's unique characteristics. Among various managerial flexibilities occur in the BOT projects, the revenue cap agreement is frequently used to protect the government from the private's revenue exploitation. However, its impact on the project value is not well understood because the popular capital budgeting theory, NPV(Net Present Value) analysis, is limited to assess the contingency of this agreement. The purpose of this paper is to develop the numerical model to better assess the impact of the revenue cap agreement on the project value with the concept of the option pricing theory and to suggest a theoretical framework in quantitatively evaluating this agreement. The approach applied in this paper is justified with the hypothetical BOT toll case to show its applicability and some meaningful conclusions are drawn from. The results by the option pricing concept are scrutinized over those by NPV analysis and, finally, the revenue cap value appears significant relative to the project value.

Accounting and Economic Measures: An Integrated Theory of Capital Budgeting

Accounting measures are traditionally considered not significant from an economic point of view. In particular, accounting rates of return are often regarded economically meaningless or, at very best, poor surrogates for IRR, which is held to be the economic yield. Likewise, residual income does not enjoy, in general, periodic consistency with project NPV, so residual income maximization is not equivalent to NPV maximization. This paper shows that opposition accounting/economic is artificial and, taking a capital budgeting perspective, illustrates strong (formal and conceptual) connections existing between economic measures and accounting measures. In particular, average accounting rate of return is correct economic yield of a project; traditional IRR is (whenever it exists) only a particular case of it. The average accounting rate generates a decision rule which is logically equivalent to NPV rule for both accept/reject decisions and project ranking. The paper also shows that maximization of simple arithmetic mean of residual incomes is equivalent to NPV maximization, owing to its periodic consistency in sense of Egginton (1995). Such an index may then be used for incentive compensation as well. Moreover, asset pricing may be interpreted in accounting terms as process whereby market determines income impact on assets' value. As a result, paper harmonizes notions of accounting rate of return, internal rate of return, residual income, net present value: they are just different ways of cognizing same notion. This conciliation stems in a rather natural way from three sources: (i) a fundamental accounting identity, which links income and cash flow in a comprehensive way, (ii) definition of Chisini mean, (iii) a notion of residual income which takes account of real (comprehensive) cost of capital.

Do We Need to Think More about Small Business Capital Budgeting?

Capital budgeting is one of the most important areas of finance literature. This paper discusses whether the capital budgeting theory of large business is well applicable for the small ones or not. If it is not, further development of theory becomes necessary. This paper conducted detail analysis of the reasons why the development is necessary. Followed by the analysis of some theoretical and empirical studies, this paper suggests specific factors to consider in future researches on capital budgeting theory for small businesses.

Capital Allocation and the Pricing of Financially Intermediated Risks: An Empirical Investigation

Under perfect market conditions, standard capital budgeting theory predicts that the discount rates on projects should reflect only non-diversifiable risk and be constant across firms. However, theoretical research by Froot and Stein (1998), among others, suggests that when firms invest in non-hedgeable assets under conditions where capital is costly, project pricing should reflect the covariability of the project with the firm's existing portfolio, even if this covariability represents non-systematic risk. They argue that their theory is especially applicable to financial institutions pricing intermediated risks. Theoretical research also suggests that the prices of intermediated risks will reflect the capital strain that such risks place on the intermediary and hence reflect implicit allocations of capital to the intermediary's business lines (Myers and Read 2001, Zanjani 2002). We test these theoretical predictions by analyzing the prices of insurance risks for U.S. property-liability insurers over the period 1997-2004. Specifically, we regress insurance price variables on capital allocations by line, measures of insurer insolvency risk, and other risk and control variables. The results provide strong support for theoretical predictions that prices of intermediated risks vary across firms to reflect insolvency risk, marginal capital allocations, and non-systematic covariability.