Capital Budgeting Surveys: The Future Is Now

By Burns, Richard M.; Walker, Joe | Journal of Applied Finance, January 1, 2009 | Go to article overview
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Capital Budgeting Surveys: The Future Is Now


Burns, Richard M., Walker, Joe, Journal of Applied Finance


This research is motivated by two major factors: (1) the over twenty year hiatus since the last thorough review of the capital budgeting survey literature, and (2) past appeals to the finance academic community by researchers to explore neglected areas of the capital budgeting process. In response, and using a four-stage capital budgeting process as a guide, the authors review the capital budgeting survey literature from 1984 through 2008 and find that some of the neglected areas have in fact been directly addressed. Unfortunately, the most prevalent focus of capital budgeting surveys continues to be that of the selection stage. As a result, many areas of the capital budgeting process still remain relatively unexplored, providing numerous survey research opportunities.

This research effort is motivated by two major factors: 1) the twenty year hiatus since the last thorough review of the capital budgeting survey literature, and 2) past observations and appeals made to the finance academic community by fellow researchers to explore neglected areas of the capital budgeting process through more focused and directed survey research.

The first factor stands on its own as justification for an update of the capital budgeting survey literature. The last comprehensive reviews were made by researchers Scott and Petty (1984) and Mukherjee (1987) over twenty years ago.

Regarding the second factor, almost three decades ago, Kim (1979) noted that too much emphasis was being placed on methods of ranking and selecting capital budgeting proposals. Scott and Petty (1984) also noted the "... disproportionate (unjustified) amount of time [spent] on a particular stage (financial analysis and project selection) ..." Further, Gordon and Pinches (1984) generalized this complaint by arguing that "...the capital budgeting process must be viewed in its entirety." Mukherjee (1987) agreed that "... further survey efforts need to be devoted to understanding the entire process."

To address these two factors, the authors have provided a current review of the capital budgeting survey studies over the past twenty-four years. The results are reported in a four-stage capital budgeting framework that allows a more detailed and clear assessment of the appeals by past researchers. As a result, fertile areas for future applied research in the area of capital budgeting survey work are more easily identified and summarized.

The organization of this paper is as follows. In Section I a four-stage capital budgeting process will be identified and used throughout the balance of the paper. It provides a useful framework to evaluate in more detail the most prominent capital budgeting survey literature reviews of the past, to highlight neglected areas of capital budgeting research, and to organize past appeals for future research in this area. In Section II this four-stage process will also be used to describe the procedures used in performing the capital budgeting survey literature update over the 1984-2008 period. Section III will continue to use this framework to present the detailed findings while Section IV will provide an overall summary. Finally, Section V will present conclusions, comments, and insights for future survey research.

I. Past Reviews and Appeals

In the corporate finance capital budgeting survey literature the capital budgeting process has been described in terms of four stages: 1) identification, 2) development, 3) selection, and 4) control.1 The identification stage comprises the overall process of project idea generation including sources and submission procedures and the incentives/reward system, if any. The development stage involves the initial screening process relying primarily upon cash flow estimation and early screening criteria. The selection stage includes the detailed project analysis that results in acceptance or rejection of the project for funding. Finally, the control stage involves the evaluation of project performance for both control purposes and continuous improvement for future decisions.

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