Sophisticated capital budgeting selection techniques and firm performance

  • Susan F. Haka
  • Lawrence A. Gordon
  • George E. Pinches


Firms using sophisticated capital budgeting techniques (i. e., those that employ present value analysis and account for risk) should theoretically perform better than firms using naive models such as the payback period or accounting rate of return. However, previous empirical work examining this question has produced mixed results. To correct for limitations in these studies, several tests were conducted on firms that adopted sophisticated selection techniques versus a control group of firms that employed naive techniques. After controlling for differences in systematic risk, industry effects, and size, interrupted time-series tests of relative market returns were performed. Based on the results of this study we conclude that the adoption of sophisticated capital budgeting selection techniques will not, per se, result in superior firm performance. It is possible that the adoption of sophisticated selection techniques is one of many policies the firm pursues in the face of economic stress, and this, in combination with other policies, may help to bring about economic recovery for the firm.


Firm Performance Selection Technique Control Firm Capital Budget Adjusted Return 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Biddle, G.C., ‘Accounting Methods and Management Decisions: The Case of Inventory Costing and Inventory Policy,’ Journal of Accounting Research (Supplement, 1980), pp. 235-280.Google Scholar
  2. Brown, S.J. and J.B. Warner, ‘Measuring Security Price Performance,’ Journal of Financial Economics (September 1980), pp. 205-258.Google Scholar
  3. Christy, G.A., Capital Budgeting — Current Practices and Their Efficiency (Bureau of Business and Economic Research, University of Oregon, 1966).Google Scholar
  4. Dukes, R.E., T.R. Dyckman and J.A. Elliott, ‘Accounting for Research and Development Costs: The Impact on Research and Development Expenditures,’ Journal of Accounting Research (Supplement 1980), pp. 1-26.Google Scholar
  5. Fama, E.R., ‘Risk-Adjusted Discount Rates and Capital Budgeting under Uncertainty,’ Journal of Financial Economics (August 1977), pp. 3-24.Google Scholar
  6. Gordon, L.A., D. Larcker and F.D. Tuggle, ‘Informational Impediments to the Use of Capital Budgeting Models,’ Omega (No. 1, 1979), pp. 67–74.CrossRefGoogle Scholar
  7. — and G.E. Pinches, Improving Capital Budgeting: A Decision Support System Approach (Addison-Wesley, Inc., 1984).Google Scholar
  8. Harrison, W.T., L.A. Tomassini and J.R. Dietrich, ‘The Use of Control Groups in Capital Market Research,’ Journal of Accounting Research (Spring 1983), pp. 65-77.Google Scholar
  9. Kaplan, R.S., ‘Measuring Manufacturing Performance: A New Challenge for Managerial Accounting Research,’ The Accounting Review (October 1983), pp. 686-705.Google Scholar
  10. —, ‘The Evolution of Management Accounting,’ The Accounting Review (July 1984), pp. 390-418.Google Scholar
  11. Kim, S.H., Capital Budgeting by the Machinery Industry and Its Impact on Overall Profitability, Unpublished dissertation (St. Louis University, 1975).Google Scholar
  12. —, ‘An Empirical Study on the Relationship Between Capital Budgeting Practices and Earnings Performance,’ Engineering Economist (Spring 1982), pp. 185-196.Google Scholar
  13. Klammer, T.P., ‘Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques,’ Journal of Business (July 1972), pp. 387-397.Google Scholar
  14. —, ‘The Association of Capital Budgeting Techniques with Firm Performance,’ The Accounting Review (April 1973), pp. 353-364.Google Scholar
  15. Larcker, D.L., ‘The Association Between Performance Plan Adoption and Corporate Capital Investment,’ Journal of Accounting Economics (April 1983), pp. 3-30.Google Scholar
  16. Moore, J.S. and A.K. Reichert, ‘An analysis of the Financial Management Techniques Currently Employed by Large U.S. Corporations,’ Journal of Business, Finance and Accounting (Winter 1983), pp. 623-645.Google Scholar
  17. Myers, S.C. and S.M. Turnbull, ‘Capital Budgeting and the Capital Asset Pricing Model: Good News and Bad News,’ Journal of Finance (May 1977), pp. 321-333.Google Scholar
  18. Pettit, R.R. and J.U. Miller, ‘Capital Investment, Returns to Investments, and Security Price Performance,’ Working Paper #62 (College of Business Administration, University of Houston, 1980).Google Scholar
  19. Pfeffer, J. and G.R. Salancik, ‘Organizational Decision Making as a Political Process: The Case of a University Budget,’ Administrative Science Quarterly (June 1974), pp. 135-151.Google Scholar
  20. Pike, R.H., ‘The Capital Budgeting Behavior and Corporate Characteristics of Capital-Constrained Firms,’ Journal of Business, Finance and Accounting (Winter 1983), pp. 663-671.Google Scholar
  21. Scapens, R.W. and J.T. Sale, ‘Performance Measurement and Formal Capital Expenditure Controls in Divisionalized Companies,’ Journal of Business, Finance and Accounting (Fall 1981), pp. 389-419.Google Scholar
  22. Schall, L.D. and G.L. Sundem, ‘Capital Budgeting Methods and Risk: A Further Analysis,’ Financial Management (Spring 1980), pp. 7-11.Google Scholar
  23. —, —, and W.R. Geijsbeek, Jr.,’ survey and Analysis of Capital Budgeting Methods,’ Journal of Finance (March 1978), pp. 281-287.Google Scholar
  24. Sundem, G.L., ‘Evaluating Simplified Capital Budgeting Models Using a Time-State Preference Metric,’ The Accounting Review (April 1974), pp. 306-320.Google Scholar
  25. —, ‘Evaluating Capital Budgeting Models in Simulated Environments,’ Journal of Finance (September 1975), pp. 977-992.Google Scholar
  26. Toyoda, T., ‘Use of the Chow Test Under Heteroscedasticity,’ Econometrica (May 1974), pp. 601-608.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 1985

Authors and Affiliations

  • Susan F. Haka
    • 1
  • Lawrence A. Gordon
    • 2
  • George E. Pinches
    • 3
  1. 1.Michigan State UniversityUSA
  2. 2.University of MarylandUSA
  3. 3.University of KansasUSA

Personalised recommendations