Costly Information, Informed Investors and the Use of Sophisticated Capital Budgeting Techniques
|Author(s):||Mark Freeman and Garry Hobbes|
|Date of publication:||May 1991|
|Working paper number:||1|
This paper aims to explain why firms do not use NPV for all capital budgeting decisions. Differential usage is attributed to the cost of information and the incomplete dissemination of knowledge of evaluation techniques. Analysis of Australian survey data indicates that 34% of informed managers switch to naive techniques for smaller dollar projects - a cost of information effect. We find 40% of organisations with large capital expenditures do not use NPV, suggesting a lack of knowledge of the NPV technique. Thus significant proportions of large Australian organisations lack detailed knowledge of DCF techniques while others fail to use those techniques for reasons of excessive cost. We also find, after controlling for cost and mandatory considerations, that many large firms with sophisticated capital budgeting procedures actually accept projects that do not meet threshold criteria. The explanation appears to lie in the recognition that projects have strategic and growth options, but an apparent inability amongst managers to factor these values into their project evaluation criteria such as NPV.
|Paper:||Download (Format: PDF, Size: 1.4 Mb)|
Published as: Freeman, M. and Hobbes, G. 1991, "Costly Information, Informed Investors and the Use of Sophisticated Capital Budgeting Techniques", Proceedings of AAANZ 1991 Conference, Brisbane, Australia, 68-74.
Chou, T., Dyson, R. G. and Powell, P. L. 2002, "Managing Strategic IT Investment Decisions from IT Investment Intensity to Effectiveness", in M. Khosrowpour (ed), Advanced Topics in Information Resources Management, Idea Group Publishing, UK, pp. 141-157.
Chou, T., Dyson, R. G. and Powell, P. L. 2002, "Managing Strategic IT Investment Decisions from IT Investment Intensity to Effectiveness", Information Resources Management Journal, 13(4), pp. 34-43.
Chou, T., Robert, R. G. and Powell, P. L., 1998, "An Empirical Study of the Impact of Information Technology Intensity in Strategic Investment Decisions", Technology Analysis and Strategic Management, 10(3), 325-340.
Powell, P., 1993, "Causality in the Alignment of Information Technology and Business Strategy", The Journal of Strategic Information Systems, 2(4), 320-334.