This research is motivated by two major factors: (1) the over twenty year hiatus since the last thorough review ofthe capital budgeting survey literature, and (2) past appeals to the finance academic community by researchers to explore neglected areas ofthe 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 ofthe neglected areas have infact been directly addressed. Unfortunately, the most prevalent focus of capital budgeting surveys continues to be that ofthe selection stage. As a result, many areas ofthe capital budgeting process still remain relatively unexplored, providing numerous survey research opportunities.
This research effort is motivated by two tnajor 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.
Richard M. Burns is a Professor of Finance at the University of Alabama at Birmingham, AL Joe Walker is an Associate Professor of Finance at the University of Alabama at Birmingham, AL.
The authors wish to thank the Editor and the anonymous referee for their many helpful comments and suggestions.
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 ofthe 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
BURNS & WALKER – CAPITAL BUDGETING SURVEYS: THE FUTURE IS NOW
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
appears on an executive’s desk and all that is
needed is for the manager to choose the project(s)
with the highest expected payoff. However, as
most managers quickly learn, this is not the case.
Further, once projects are chosen, the evaluation of an individual project’s subsequent performance is usually either ignored or often inappropriately handled. Our contention is that the capitalbudgeting process must be viewed in its entirety, and the informational needs to support effective decisions must be built into the firm’s decision comprehensive reviews support system.
In the corporate finance capital budgeting survey literature the capital The last
budgeting process has been were made by researchers Scott described in terms of four
The two most significant
stages: 1) identification,
attempts to assess the
and Petty (1984) and Mukherjee
development, 3) balance of research among (1987) over twenty years ago. selection, and 4) control.’ these four stages were those The identification stage of Scott and Petty (1984) comprises the overall process of project idea generation and Mukherjee (1987), both of which occurred well over including sources and submission procedures and the twenty years ago.^ Scott and Petty provided a synthesis of earlier surveys of incentives/reward system, if any.
The development stage
involves the initial screening process relying primarily large American firms and organized their analysis based on a upon cash flow estimation and early screening criteria. The three stage classification: 1) project definition and cash flow selection stage includes the detailed project analysis that estimation 2) financial analysis and project selection, and results in acceptance or rejection of the project for funding. 3) project implementation and review. Citing Gitman and Finally, the control stage involves the evaluation of project Forrester (1977), they noted that: … project definition and cash flow estimation is
performance for both control purposes and continuous
considered the “most difficult” aspect ofthe capital
improvement for future decisions. All four stages have
budgeting process. The financial analysis and
common areas of interest including personnel, procedures,
project selection stage, which receives the most
and methods involved, along with the rationale for each.
attention in the literature, is considered the least
All four stages are critical to the overall process, but
difBcult ofthe three stages … the selection stage is arguably the most involved since it
includes the choices of analytical methods/techniques used,
Also covering surveys of large American corporations,
how the cost of capital is determined, how adjustments for Mukherjee (1987) agreed that there had been too much projects risks are assessed and reflected, and how, if relevant, survey focus on the selection stage and not enough on the capital rationing affects project choice.
The selection stage other stages as well as the overall capital budgeting process. has also been the most investigated by survey researchers, Paraphrasing that paper’s recommendations, it called for particularly in the area of selection techniques, resulting in more research into specific questions relevant for each stage. a relative neglect ofthe other stages.
This in turn has led to For example, in stage 1, future surveyors were urged to appeals to future researchers to consider the other stages in investigate the reward systems, procedural aspects, and the their survey research efforts. As Gordon and Pinches (1984) organizational structure ofthe firm. In stage 2, more research note:
was suggested on the topics of divisional vs. corporate
Most of the literature on the subject of capital
biases, strategic considerations, cash flow estimation
budgeting has emphasized the selection phase,
details, data details, cannibalization, risk, and inflation. giving little coverage to the other phases. Instead,
Even within the more widely-studied Stage 3, neglected
it is usually assumed that a set of well-defined
capital investment opportunities, with all of the
informational needs clearly specified, suddenly
^ o t e that these two reviews are only three years apart based on publication ‘See Gordon and Pinches (1984) and Mukherjee (1987). Scott and Petty (1984) use a similar 3-stage process. It is interesting to note, however, that an even earlier survey by Gitman and Forrester (1977) had used a 4-stage analysis.
date, and that the latter does not cite the former, likely due to publication lags. As noted in the procedures section, this paper uses the Mukherjee format. Furthermore, the title of this paper derives from Mukherjee’s title.
areas were identified such as the rationale for the various
methods used, how firms compute their cost of capital, the
low rate of risk recognition, the associated low rates of risk adjustment and assessment sophistication, capital rationing
(and the low usage of linear programming), and the details
of authorization levels. Finally, with regard to Stage 4, more research was encouraged into the details of performance
evaluation, how the company follows up on such evaluation,
the details of expenditure control procedures, and the reward system for performance.’
How well these appeals have been answered with
subsequent survey research is the primary focus of this
paper. In the next section the authors describe the procedures employed to assess the effectiveness of these appeals made
over twenty years ago.
Consistent with the reviews by Scott and Petty (1984)
and Mukherjee (1987), the following criteria were used to
choose capital budgeting survey articles for inclusion in this review: the surveys had to involve large US firms, they had
to be broad-based (not focused on one particular industry),
and they had to be published in mainline academic journals
post-1984. Using these criteria resulted in the selection of the nineteen capital budgeting surveys included in Figure
1.” The Figure provides, in chronological order, the survey year (which in all cases differs from the publication year), authors, research method, usable responses and the audience
Each of these 19 survey articles was then thoroughly
examined in an effort to identify the stages and areas
within each stage that the survey covered. The results of
this process are reported in Figure 2 and consistent with
Mukherjee’s (1987) chronological ordering in a tabular form
indicating areas of investigation within the four stages ofthe
‘These more specific questions are largely paraphrased from Mukherjee (1987) and are not fully exhaustive. The interested reader is, of course, encouraged to read this very thorough article in its entirety. ••The initial search using Proquest (ABI Inform) specifying “capital budgeting surveys” in scholarly journals after January 1, 1984, yielded over two hundred results.
However, the great majority were published in the non-mainline journals, including many strictly practitioner (trade journal) outlets and /or were focused on a particular country or industry and thus eliminated by the screening criteria. To insure against missing articles due to any limitations ofthe ABl database, the authors checked the references ofthe surviving articles, and in addition, conducted a manual search ofthe most cited finance journals tables of contents and the reference sections of the various survey articles found.
JOURNAL OF APPLIED FINANCE – ISSUES 1 & 2, 2009
capital budgeting process.’
It should be noted that the Figures herein were slightly
altered from Mukherjee’s original format to better focus
on selected issues that were identified specifically as areas of neglect. For example, the category of “techniques” was
divided into “techniques used” and “reasons for techniques
used”. Similarly, the risk category was divided into “risk
recognition”, “risk assessment”, and “risk adjustment”.
III. Findings by Stage
A quick perusal of Figure 2 reveals an obvious
concentration of “checks” in Stage 3 (selection) similar to
the previous findings of Mukherjee. Although a careful
look at some of the stage categories individually indicates
that several neglected areas have been researched over the
period, there is still an obvious and relative lack of research into Stages 1, 2, and 4.
To further assess the effectiveness ofthe research appeals,
the analysis and reported results in this section will be ordered by the four stages. Summary comments are provided only on those surveys which provide a significant contribution
to a previously neglected area of capital budgeting survey
research. As a result, the findings of Bierman ( 1993), Gilbert and Reichert (1995), Payne, Heath, and Gale (1999), and
Ryan and Ryan (2002) are not summarized.
A. Stage 1 : Identification
Suggested areas of study within this stage include how
project proposals are initiated, whether the proposal process is on-going or on an “only-when-needed” basis, at what level projects are generated, whether there is a formal process for submitting ideas, how that process works when present, and
if there is an incentive system for rewarding good ideas.*
Unfortunately, there has never been an in-depth survey
focused on this stage, leaving no question that it remains
strongly neglected. The only contribution of a minor nature
to this topic is the incidental finding by Stanley and Block (1984). They found that in over 80% of the responding
firms that capital budgeting proposals originated bottom up
‘In the 1987 article, note that on Figure 4, the stages are described somewhat differently from the discussion in the paper itself Specifically, in the body of the paper, the four stages are: (1) identification, (2) development, (3) selection, and (4) the post-audit. But in the table, the 4 stages are idea generation, proposal development, selection of projects, and control or performance evaluation.
‘As in footnote 3, the following suggested areas of study for all four stages are largely paraphrased from Mukherjee (1987)..
BURNS & WALKER – CAPITAL BUDGETING SURVEYS: THE FUTURE IS NOW
Figure 1. Surveys of Capital Budgeting of Large US Firms
Stanley & Block
Pruitt & Gitman
Gordon & Myers
Myers, Gordon, &
Gilbert & Reichert
Trahan & Gitman
CFO’s of Fortune 1000
VP Finance or Treasurer of
largest industrials in Fortune
CFO’s of Fortune 500
Executives and capital
budgeting directors of large US
industrials except utilities and
Large public firms from FASB
100 largest of Fortune 500
CEO’s of Fortune 1000
Fortune Magazine Directory
CFO’s of Fortune 500 + Forbes
Managers of foreign
manufacturing subsidiaries of
Shao & Shao
Burns & Walker
7 best-sellling texts, 27
prestigious CFO’s, 10 leading
1996-97 Bruneretal(1998) telephone survey
Fortune 500 CFO’s
Payne, Heath, &
USA and Canadian based
companies from S&P
CFO’s from Fortune 1000
CFO’s from FEI corporations
executives of large companies
CFO’s of Fortune 1000
top-ranking officers of Fortune
Graham & Harvey
Triantis & Borison
Ryan & Ryan
(2002) ueAy “? uBAy
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|L Idea Generation
|A. Source of Origination
|B. Reasons for Idea Origination
|C. Process of Origination & Submission
|D. Time Pattern of Origination
|A. Level at Which screening Takes Place
|B. Screening Process
¡C. Cashflow Estimates (and forecasting)
|D. Responsibility for Budget Preparation (personnel)
|lll. Selection of Projects
|A. Classification of Projects for Economic Analysis
B. Personnel (Department) Responsible for Analysis
C1. Listing Techniques Used
|C2. Reasons for Techniques Used
Dl. Risk recognition
D2. Risk assessment
D3. Risk adjustment
El. Capital Rationing: How Extensive?
E2. Capital Rationing Rationale
E3. Capital Rationing Methods Used
F. Cost of Capital
G. Project Approval
|IV. Control (or Perfonnance Evaluation)
A. Extent of Use of Post Audit
B. Personnel Involved/Procedure
C. Performance Measurement
D. Use of Evaluation (Punishment/Reward/Etc.)
1* Surveys in this exhibit appear in chronological order of their publication.
JOURNAL OF APPLIED FINANCE – ISSUES 1 & 2, 2009
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