The document summarizes the findings of a longitudinal survey on capital budgeting practices conducted between 1975 and 1992 with 100 large UK firms. The key findings are: 1. Discounted cash flow methods like IRR and NPV have become well established, growing from around 30-40% usage in 1975 to over 70% in 1992. NPV saw the largest growth over the period. 2. Combining multiple evaluation techniques has become more common, with over a third of firms now using all four main techniques (payback, IRR, NPV, AARR) compared to just 11% in 1980. 3. Post-decision controls like cost overrun monitoring and post-completion audits have significantly

1. Joumalof Business Finance & Accounting, 23(1),January 1996,0306-686X
A LONGITUDINAL SURVEY ON CAPITAL BUDGETING
PRACTICES
RICHARD PIKE*
INTRODUCTION
Capital budgeting surveys have in recent years become fairly commonplace.
For the most part they are state-of-the-art surveys, seeking to portray the cur-
rent position rather than to study relationships between investment practices
and organisational variables such asfirmsize, capital intensity, environmen-
tal uncertainty and performance.' 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 suchfindingsto a wider po-
pulation and to identify discernible capital budgeting trends by means ofcom-
parison with earlier empirical studies.
Numerous authors have attempted such a task, for example, Boersema
(1978), Rosenblatt and Jucker (1979), Aggarwal (1980) in America, and
Sangster (1993) in the UK. Such attempts, however,flounderin muddy meth-
odological waters. Survey comparison must be severely questioned; in the first
place, the data are drawn from samples that are usually so dissimilar that they
do not permit comparison. Secondly, mail surveys may well overstate the true
position due to the problem where users of sophisticated techniques are more
likely to respond than those with less sophisticated practices (Rappaport,
1979; and Wallace and Mellor, 1988).
This is best demonstrated by examining the main UK capital budgeting
surveys conducted since 1966, concentrating upon one finding: adoption of
discounted cash flow (DCF) methods. Inspection of the DCF usage percen-
tage in the final column ofTable 1 for the twelve UK mail surveys presented
may leave the casual observer bewildered. In their 1976 survey, Carsberg and
Hope found that 85 per cent of respondents used DCF techniques, and West-
wick and Shohet (1976) obtained a similarly high usage rate of 80 per cent.
Yet the majority ofsubsequent surveys obtained far lower usage rates, for ex-
ample, 45 per cent by Mclntyre and Coulthurst (1985) and 61 per cent by
Sangster (1993). Are we to interpret from this that DCF usage rates have ac-
tually fallen over the last twenty years?
While it is tempting to draw conclusions from Table 1 that DCF usage has
declined in recent years, the differences in the population from which samples
* The author is Professor of Finance and Accounting at the University of Bradford. He wishes to ex-
press thanks to Iain Bowie for assisting in data collection and analysis and to the anonyn:ious referee
for the comments received. (Paper receivedJuly 1993, revised and accepted October 1994)
Address for correspondence: Richard Pike, Professor of Finance and Accounting, Department of
Finance and Accounting, University of Bradford Management Centre, Emm Lane, Bradford, West
Yorkshire BD94JL, UK.
© Blackwell Publishers Ltd. 1996,108 Cowlcy Road, Oxford OX4 lJF, UK
and 238 Main Street, Cambridge, MA 02142, USA. 79

2. 80 PIKE
Table 1
Capital Budgeting Surveys in the UK
Tear
Studied
1966
1973
1974-5
1975
1980
1980
1981
1985
1985
1986
1986
1989
Tear
Resutts
Pubtished
1973
1976
1976
1980
1981
1982
1986
1985
1986
1987
1988
1993
Author(s)
Rockley
Carsberg & Hope
Westwick & Shohet
Jones
Scapens & Sale
Pike
Jones
Mclntyre &
Coulthurst
Lapsley
Mills & Herbert
Pike
Sangster
JVo.
of
Firms
69
103
81
522
211
150
242
141
97
131
100
94
Response
Rate
29
32
n.a.
32
45
76
52
19
58
51
72
22
Sample
Used
BOT Returns
TIMES 1000
undefined
Large firms
TIMES 1000
Largest firms
Large firms
Medium firms
Public organ.
Largest firms
Largest firms
Scotland's top 500
DCF
Usage %
59
85
80
50
52
69
47
45
69
52
84
61
are drawn, the wording of the question, the sample sizes and the response rates
(which range from 19 per cent to 72 per cent) all make such comparison a pre-
carious exercise. In truth, a history of capital budgeting surveys, plagued by
design deficiencies and disappointingly low response rates, have all too often
rendered generalisations, statistical inferences and comparisons at best sus-
pect, and at worst misleading.
A recent article in thisjournal by Sangster (1993) compared the findings from
his recent capital budgeting survey with those ofearlier studies (principally. Pike,
1982; Mclntyre and Coulthurst, 1985, and Mills and Herbert, 1987). While the
results are ofinterest, Sangster recognises its limitations and concludes that 'until
one of the studies is repeated using similar survey populations, questions and
analysis methods, conclusions cannot be drawn regarding changing attitudes
and practices ofcompanies outwith the size covered in the current study.'^
This paper reports the findings of a longitudinal capital budgeting study
based on surveys conducted between 1975 and 1992 compiled by conducting
cross-sectional surveys on the same firms at approximately five yearly inter-
vals. Such a study meets Sangster's (1993) call for survey replications over
time using similar populations, questions and analysis methods. One further
stipulation should be added: nonresponse bias within such surveys should be
minimised by ensuring consistently high response rates. Three basic questions
are addressed in the paper.
1. What overall picture emerges from such a longitudinal survey? Here, the
detail is less important than the longer term trends, thus providing a con-
text in which prior and subsequent capital budgeting research can be
viewed.
2. To what extent is the level of capital budgeting sophistication associated
© BlackweU Publishers Ltd 1996

3. CAPITAL BUDGETING PRAGTIGES 81
with firm size and use of information technology?
3. How useful is the longitudinal survey approach as an empirical research
instrument?
The remainder of the paper is structured as follows. The next section describes
the sample and conduct of the surveys since 1975. This is followed by an ana-
lysis of the results and the main trends that can be observed. Findings are then
discussed within a wider context and the impacts of firm size and computer
usage explored. Finally, the usefulness of the longitudinal approach and the
paper's conclusions are presented.
SURVEY DESIGN AND SAMPLE
The original postal survey conducted in 1980 was designed to address two im-
portant issues. First, as a state-of-the-art survey, it sought to provide insights
into the developments in the formal capital investment processes of large firms
(Pike, 1982). Secondly, it sought to explain corporate investment practices in
terms of capital constraints, principal-agent conflict and organisation context
(Pike, 1983, 1985, and 1986).
The two subsequent surveys, while introducing other elements of research
interest, retained the original questions on capital budgeting practices. All
three surveys asked respondents to report current capital budgeting practices
for larger projects but the 1980 survey also asked for practices in 1975.^ Pike's
(1983) survey on capital budgeting practices in 1975 and 1980 drew a sample
of 208 firms from the largest 300 UK quoted companies as measured by mar-
ket capitalisation. From that sample 150 usable responses (72%) were ob-
tained. By 1986, the year of the next survey, ten of the 150 firms had ceased
trading. One hundred usable responses were obtained from the remaining
140 firms (71 %).
In 1992, it was decided to revisit the same 140 firms responding in 1980 and
trading in 1986. A further eleven had either ceased trading or been acquired,
leaving a sample of 129 firms. Questionnaires were distributed to finance di-
rectors, or equivalent, in these companies in May 1992. Reminders were sent
four weeks later, followed up by telephone calls where necessary. A total of 99
usable responses were received, giving a response rate of 78.1 per cent. Analy-
sis of non-respondents (by comparing late against early responders and estab-
lishing the reason for non-response) suggested that non-response bias is
unlikely to be a significant problem. To restore the number of respondents to
100 firms it was decided to replace a non-respondent in 1992 with a company
surveyed in 1980 and 1986, hitherto excluded from the analysis. This left 100
firmswhich were common to the 1975,1980 and 1992 data samples. However,
22 of these firms were not in the 100 respondents from the 1986 survey, A sim-
ple validity test was conducted which suggested that, despite minor differences
in the respondents, the 1986 results could reasonably be compared with all
e Rlackwcll Publishers Ltd 1996

4. 82 PIKE
other years.* For purpose of analysis firms were classified into size groups ac-
cording to size of annual capital expenditure.
SURVEY RESULTS
Rather than examine separately the 1992 survey findings, the results are pre-
sented as part of a longitudinal study over a 17-year period in an attempt to
observe the long-term trends not easily observable from comparison of other
capital budgeting surveys.
Evaluation Procedures and Techniques
Table 2 reveals that, throughout the review period, formal financial evalua-
tion has been virtually standard procedure for all firms. We also observe that
the requirement by larger firms to adopt a specific search for, and screening of,
project alternatives has moved from being commonplace (76%) in 1975 to
being totally accepted by all firms in 1992. Arguably, the requirement to gen-
erate feasible alternative proposals to that under review is the most important
element of the whole process, corporate prosperity depending more on the
ability to create projects than to evaluate them (Adelson, 1970). What has be-
come increasingly important is the strategic context within which proposals
are generated and assessed. Corporate fit is frequently viewed as ofgreater im-
portance than financial return (Butler et al., 1993).
Turning to the use of investment evaluation techniques we find that, with
only one exception, steady progress in adoption has been achieved. Dis-
counted cash flow methods, such as internal rate of return (IRR) and net pre-
sent value (NPV) are well established among these large firms with 81 per cent
and 74 per cent usage respectively. In particular, we may observe that the
greatest growth over the review period of all the evaluation techniques is to
Table 2
Investment Evaluation Procedures and Techniques (100 large firms)
Tear of Survey
Evaluation Techniques:
A specific search and screening of
alternatives
A formal financial evaluation
Payback
Average accounting rate of return
Internal rate of return
Net present value
1975
%
76
93
73
51
44*
32
1980
%
84
95
81
49
57*
39
1986
%
98
100
92
56
75*
68*
1992
%
100
100
94
50
81*
74*
Note:
* Size a significant factor in degree of use at the 5% level.
© Blackwell Publishers Ltd 1996

5. CAPITAL BUDGETING PRACTICES 83
Table 3
Combined Evaluation Techniques (Response: 100 Companies)
Year ofSurvey
Firms using:
No Methods
A Single Method
PB
AARR
IRR
NPV
Two Methods
PB/AARR
PB/IRR
PB/NPV
AARR/IRR
AARR/NPV
IRR/NPV
Three Methods
PB/AARR/IRR
PB/AARR/NPV
PB/IRR/NPV
AARR/IRR/NPV
Four Methods
PB/AARR/IRR/NPV
Total:
1975
%
2
14
12
5
0
31
14
14
4
0
1
1
34
7
4
10
1
22
ii
100
1980
%
0
12
7
4
1
24
13
15
6
2
1
4
40
10
4
9
1
24
12
100
1986
%
6
0
2
0
8
10
8
5
2
1
3
29
5
3
21
0
29
34
100
1992
%
0
4
0
0
0
4
8
9
6
0
0
5
28
5
1
26
0
32
36
100
Key: PB: Payback period. IRR: Internal rate of return.
AARR: Average accounting rate ofreturn. NPV: Net present value.
be found in NPV adoption, with 42 per cent of the survey sample introducing
NPV since 1975. While an increased awareness of the time-value of money in
decision making may have assisted in its rapid growth, a more likely explana-
tion lies in the increasing use of computer spreadsheets, making NPV calcula-
tions as straightforward a calculation to the user as simple payback method.
The popular view that academics prefer NPV while practitioners have a
predilection for IRR is rapidly becoming part of financial folklore, as is the
oft cited 'theory-practice' gap problem (e.g. Northcott, 1991). One is tempted
to ask 'What Gap?' Less sophisticated methods, such as payback and average
accounting rate of return (AARR) clearly have practical merit and even a de-
gree or two of academic blessing as numerous authors have previously advo-
O Blackwell Publishers Ltd 1996

6. 84 PIKE
cated (e.g., Weingartner, 1969;Sundem, 1974; Longbottom and Wiper, 1977;
and Boardman et al., 1982). Northcott rightly emphasises that while the the-
ory-practice gap may be narrowing, we know very little about how managers
use DCF information in the decision making process.
It is clear that few companies operate a single investment method to the ex-
clusion ofall others. Of particular interest, therefore, is to assess how the mix
has changed over the review period and what implications can be drawn from
such. Table 3 shows that whereas in 1975 most firms adopted either one or two
methods (typically PB and AARR), by 1992 a combination ofall four methods
(PB, AARR, IRR and NPV) was most common (36%), a threefold increase
since 1980. This movement towards a 'more the merrier' approach to evalua-
tion may be due to the ease of calculation with the aid of computers, but,
equally, it may reflect the need to explore the many faceted aspects of invest-
ment performance.
One relatively new dimension relates to non-financial considerations, par-
ticularly for new technology projects (Kaplan, 1986; and Finnie, 1988). Tra-
ditional capital budgeting methods are most appropriate in assessing non-
strategic investment alternatives where the intangible elements and risks are
low. Respondents were invited to discuss the role of non-financial criteria in
investment appraisal. Emphasis was placed by many upon the impact of in-
vestment on improvements in quality, reduced cycle time, reduced waste,
and improved delivery performance.
Planning and Control Procedures
Table 4 summarises the capital budgeting procedures employed by respond-
ing firms. Regarding planning, or pre-decision, procedures, only modest in-
creases are observed in the operation of longer-term capital budgets, use of
manuals and use ofa screening/review body for assessing proposals. The trend
away from viewing capital budgeting as a specialist activity continues, with
only 23 per cent of responding firms having staff engaged full time in capital
budgeting.
While pre-decision controls are little changed, post-decision controls have
significantly improved in two respects: first, greater controls are employed
where cost over-runs are considered likely; and second, post-completion
audits are now more commonplace.^ It is interesting to observe how such
audits have steadily increased in usage over the 17 years with 72 per cent of
respondent firms now adopting this procedure. Post audits have two main
aims. First, they may encourage more thorough and realistic appraisals of fu-
ture investment projects and secondly, they may facilitate major overhauls of
ongoing projects. While not without its problems, the growth in the use of
audits suggests that it confers very real benefits on the firm.
Risk Appraisal Methods
Perhaps the sharpest trend in capital budgeting practices is to be found in the
formal analysis of risk; usage rates have moved from 26 per cent in 1975 to 92
& Blackwcll Publishers Ltd 1996

7. CAPITAL BUDGETING PRACTICES 85
Table 4
Investment Planning and Control Procedures (100 large firms)
Year of Survey 1975 1980 1986 1992
Pre-Decision Controls % % % %
Firms with:
A capital budget which looks
beyond two years
An up-to-date capital budgeting
manual or procedures
A formal screening and review
body for proposals
At least one full-time person
engaged in capital budgeting
A regular review ofminimum
rates ofreturn required
Evaluate approved projects if
cost over-runs likely
Monitor project performance
once operational
Require post-completion audits
on most major projects
Note:
* Size a significant factor in degree of use at the 5% level.
per cent in 1992 (see Table 5). In this regard, the emphasis on risk assessment,
so dominant over the past two decades in the research literature, is matched by
an equal concern for its effects in practice. Bierman's (1986) US survey found
that handling uncertainty in capital projects was one of the finance officer's
major challenges.
Table 5 shows that the previous strong increase in shortening the payback
period to counter project risk appears to have reached a plateau at around 60
per cent usage. Easily the most prevalent approach is to apply sensitivity ana-
lysis (88%), along with its close relative, best/worst case analysis (95%). In
this respect, it would seem thatfirmsrequire risk-sensitive variables to be iden-
tified, but do not normally require project risk to be measured.
Use of probability analysis has gained increasing support over the survey
period with 48 per cent offirmsclaiming recent experience in analysing invest-
ment projects. This experience, however, is still very limited with only 7 per
cent of firms using probability analysis regularly. Recently, Ho and Pike
(1992) found no evidence that the adoption ofprobability analysis led to a sig-
nificant change in capital expenditure or corporate performance. However,
@ Blackwell Publishers Ltd 1996
57*
65*
78
31*
43
72
69
33
64*
76*
84
33*
61
82
76
46
64*
84
83
26*
71
85
84
64
68*
86*
85
23*
69*
92
84
72*

8. 86 PIKE
Table 5
Risk Appraisal Techniques — Trend (Responses: 98 Companies)
Year of Survey
Firms which:
Shorten payback period
Raise required rate of return
Use probability analysis
Use sensitivity analysis
Use Beta analysis
1975
%
25
37*
9*
28*
0
1980
%
30
41*
10*
42*
0
1986
%
61
61
40*
71
16
1992
%
60
65
48
88*
20*
Note:
* Size a significant factor in degree of use at the 5% level.
managers tended to view the information required for such analysis as offering
valuable insights and increasing the level of confidence in the final decision.
In contrast with the theoretical literature, beta analysis based on a capital as-
set pricing (CAPM) framework, has made little impression on capital budgeting
practices. Even for the 20 per cent of respondents claiming some use, the most
common category is 'rarely'. The wisdom of those managers who have analysed
capital budgeting decisions within a CAPM framework has recently been ques-
tioned by Lowenstein (1991) at a practical level and Fama and French (1992) at a
theoretical level. Lowenstein argues that the CAPM has hindered competitive-
ness, while Fama and French conclude that, over the past 30 years at least, tests do
not support the asset-pricing model's central prediction that the market expected
stock returns are positively related to market betas.
Inflation Treatment
Fifty per cent of the firms surveyed in 1992 'always' incorporate inflationary
effects within the financial analysis, while virtually all firms (96%) do so reg-
ularly. Table 6 summarises the methods most commonly employed in this re-
gard. It is interesting to note that there is a predilection for using constant
prices to specify cash flows and applying a real (i.e. inflation reduced) rate of
return (see Coulthurst, 1986).
DISCUSSION OF RESULTS
Attention has already been drawn to the dangers of attempting to compare
results with earlier surveys based on different samples, using different ques-
tions and with very different response rates. While the results broadly support
the recent findings by Sangster (1993) based on a survey of the largest Scottish
companies, clear differences are also apparent. One example of such is Sang-
ster's observation that 'the use of IRR is no longer related to company size'
(p. 316). Based on the present study. Tables 2 to 6 indicate those investment
© Blackwell Publishers Ltd 1996

9. CAPITAL BUDGETING PRACTICES 87
Table 6
Inflation Techniques — Trend (Response: 99 Companies)
Year of Survey
Firms which:
Consider at risk analysis or
sensitivity stage
Specify cash flows in constant prices
and apply a real rate of return
Adjust for estimated changes
in general inflation
Specify different rates for
all costs and revenues
1975
%
14
33
30
23*
1980
%
16
39
39
33*
1986
%
44
69
58
53*
1992
%
39
70
58
56*
Note:
* Size a significant factor in degree of use at the 5% level.
practices where regularity of use (i.e. rarely, often, mostly, always) is asso-
ciated with size offirm(using chi-square tests). Use ofIRR and NPV continue
to be highly associated withfirmsize. In fact, there is a remarkable consistency
in size and investment sophistication association over the 17 years under re-
view.
Ifanything, the sophistication disparity between investment practices with-
in smaller and larger firms' surveys has increased. Respondents were asked to
assess how, over the lastfiveyears, their firm's capital budgeting process and
techniques had changed. Table 7 reveals that while 63 per cent thought there
had been a clear movement towards greater sophistication, the increase was
significantly greater (at the 5% level) for larger firms (74%) than for smaller
ones (39%).
This does not necessarily mean that it is company size that determines the
degree of capital budgeting sophistication in firms. It was found by Pike
(1988) that the use of computers in capital budgeting was a powerful moder-
ating variable in explaining sophistication levels. Nearly three-quarters ofthe
respondents are now using computer packages/systems, half of them on a reg-
ular basis (Table 7). However, size offirmis strongly associated with compu-
ter usage. It is therefore suggested that it is size of firm which determines
degree ofcomputer usage which, in combination, influence capital budgeting
sophistication.
Pike and Sharp (1989) examined the trend in the use of sophisticated ap-
praisal techniques based on Pike's earlier surveys. A technology forecasting
model (the logistic model) was fitted to the observations between 1975 and
1986. Factor analysis suggested that the techniques should be divided into
two groups: Financial Techniques (IRR, NPV, Sensitivity Analysis) and
Management Science Techniques (Probability Analysis, Beta Analysis,
Mathematical Programming, Computer Simulation, Decision Theory and
e Blackwell Publishers Ltd 1996

10. aa PIKE
Table 7
Computer Usage, Sophistication and Effectiveness in Capital Budgeting by
Size (Response: 98
Capital Budget Size — ^ m :
Firms using computers in
capital budgeting:
Companies becoming:
More Sophisticated
More Effective
Total
%
73
63
58
Companies)
<5
0/0
37
39
44
5-49
%
74
66
58
50+
%
91
74
67
x'Sig.
%
0.000
0.048
0.191
Critical Path Analysis). Those results, summarised in Table 8, forecast that
although all techniques (except critical path analysis) were forecast to in-
crease in usage, the rate of growth would he much more modest than in the
previous five years.
The accuracy of the forecasting model can he seen by comparing the 1992
survey results (where applicable) with the 1991 forecast usage, as given in Ta-
ble 8. The model was a good predictor for IRR and NPV, a reasonable predic-
tor for use of Beta Analysis and Probability Analysis, but significantly
underestimated the strong growth in Sensitivity Analysis (SA). With hind-
sight, the upsurge in SA is not so surprising. The high association between use
Table 8
Sophisticated Techniques
1992 Usage Compared with Logistic Model Predictions for 1991
Financial Techniques
Internal Rate of Return
Net Present Value
Sensitivity Analysis
Management Science Techniques
Probability Analysis
Beta Analysis
Computer Simulation
Decision Theory
Mathematical Programming
Critical Path Analysis
1991
Prediction
79
75
77
44
23
44
40
29
49
1992
Actual
81
74
88
48
20
n.a.
n.a.
n.a.
n.a.
NoU:
n.a. Information not available from the 1992 study.
© Blackwell Publishers Ltd 1996

11. CAPITAL BUDGETING PRACTICES 89
of computer-based investment packages and financial appraisal techniques
(Pike, 1988) suggests that SA (88% usage) tends to be used as part of a stan-
dard approach with DCF techniques (NPV or IRR), which also had an 88 per
cent usage rate.
CONCLUSIONS
This paper has sought to present the findings from a longitudinal study based
on surveys conducted at approximately five-year intervals between 1975 and
1992. In so doing it answers the call by Sangster (1993) fora time series study
based on replicated surveys at regular intervals 'using similar survey popula-
tions, questions and analysis' to enable more valid conclusions to be drawn
from observed changes in practice. In addition, the high response rates for all
three postal surveys (in excess of 70 per cent) suggest that researchers and re-
viewers need not accept the oft-cited argument that low response rates are in-
evitable in postal surveys, thus making the value of such work questionable.
This paper has sought to remind readers of the pervasiveness of the problem
of bias in capital budgeting surveys and to caution against drawing trends
based on survey comparison conducted by different authors obtaining varied
response rates.
Over the 17-year review period we have witnessed the greatest changes in
the areas of risk analysis, NPV analysis and post-completion audits. This re-
fiects the fact that firms have become increasingly aware (1) of the need to
assess the possibility of project failure and (2) ofthe importance of assessing
the quality ofthe capital budgeting and forecasting process through post-com-
pletion audits.
Many of the findings here are consistent with those found by Sangster
(1993). For example, the usage of discounted cash flow techniques have in-
creased with each survey, as has the tendency to employ a combination of ap-
praisal methods rather than rely upon a single technique. Other findings,
however, are not consistent with those of Sangster who, based on survey com-
parison, argued that use of DCF methods is no longer related to company size,
the popularity of ARR has markedly declined, and size is a factor in the pay-
back usage (pp. 316-319). The comparison of broadly the same respondents
over a 17-year review period suggests that firm size is still significantly asso-
ciated with degree of use for DCF methods but not for payback, and the use
of average accounting rate of return is unchanged.
It is suggested that firm size perse may not be the direct causal factor in deter-
mining use of sophisticated methods; size of firm infiuences the use of computer-
based capital budgeting packages which, in turn, influence the use of discounting
methods, sensitivity analysis, and risk analysis techniques. Once size ceases to be
associated with use of computers in capital budgeting, it is envisaged that it will
also have far less impact on capital budgeting technique usage rates.
We have reported the general increase in so-called sophisticated capital
budgeting techniques to a point where the gap between theory and practice
e Blackwdl Publishers Ltd 1996

12. 90 PIKE
is trivial, at least for large firms, particularly regarding standard textbook
methods. What then are seen as the main factors which have influenced the
increase over the 17 year period? The three main causal factors are viewed as
technical, educational and economic in nature.
1. Throughout the 1980s the advent of relatively inexpensive computer soft-
ware has revolutionalised the practices of many areas of finance, but none
more so than capital budgeting, particularly DCF type appraisals and sen-
sitivity analysis. The impact of computing advances has been analysed in
earlier sections of the paper.
2. This could have created a rather different problem where a new generation
of computer literate managers could produce investment performance in-
dicators but not interpret them. This leads us to the second major change in
the review period: the mzyor expansion in management education, with
investment appraisal a key element in the curriculum. Perhaps it is now
time to ask whether the benefits of DCF techniques have been 'oversold'
and whether greater attention should be paid to viewing investment within
a wider strategic framework.
3. The review period experienced contrasting economic conditions. When,
for example, inflation, capital rationing and economic uncertainty were
most acutely experienced we saw a significant change in the use of certain
investment practices in an attempt to handle the adverse effects of such eco-
nomic factors.
What implications for further research emanate from the review? First,
there is an important role for longitudinal research studies to play. Given that
over a 17 year period the sample suffered a mortality rate of only 15 per cent,
such studies, whilst time consuming, are entirely feasible. Secondly, with the
ever reducing gap between theory and practice, researchers need to concen-
trate their efforts on key areas. It is suggested that two such areas are the ana-
lysis of project risk and the valuation of capital investment options.
We are left with the question: is there still a role for capital budgeting status
postal surveys? It is the author's view that while the occasional replication sur-
vey, such as that described in this paper, has some utility, offering insights into
capital budgeting trends and the practical problems with theoretically pre-
ferred approaches, further general capital budgeting status surveys would
contribute little to the existing body of empirical knowledge. Indeed, poorly
designed and conducted surveys may prove counterproductive.
This paper has sought to provide a more reliable and comprehensive analy-
sis of how capital budgeting practices in large UK companies have evolved in
recent years and, in so doing, provide a clearer backdrop against which earlier
studies can be interpreted and future studies enacted. It is suggested that the
more promising research exploration is likely to be found in the in-depth prob-
ings afforded through the case study method (e.g. Bower 1971; Marsh et al.,
1988; and Butler et al., 1993) and specifically targeted event studies observing
capital budgeting responses to organisational change (e.g. Larcker, 1983) or
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13. CAPITAL BUDGETING PRAGTICES 91
investment performance reaction to significant capital budgeting change (e.g.
Haka et al., 1985; and Ho and Pike, 1992).
NOTES
Examples of capital budgeting relationship studies are found in Klammer (1972), Moore and
Reichart (1983), Pike (1986) and Ho and Pike (1993). Status surveys include Mclntyre and
Coulthurst (1985) and Mills and Herbert (1987).
Two such replication studies are already in existence, Klammer and Walker (1984) in the United
States and Rke (1988) in the UK. However, no such work has been conducted since the mid-eigh-
ties.
It is recognised that asking respondents to provide information on earlier practices may give rise
to errors of recall and additional care should therefore be given in interpreting 1975 results.
The test involved assessing whether responses to key questions in the survey for the 22 firms were
significantly different to the remainder ofthe sample in 1975,1980 and 1992. No systematic differ-
ences were observed. The 22 firms were, of course, part ofthe 150 respondents to the 1980 survey.
As the definitions for monitoring performance and post-completion audits were not given, respon-
dents may well have interpreted the questions rather differently.
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