Analyzing the capital budgeting and real options in different countries

Résumé du document

Our case study will focus on the comparison between the Capital Budgeting techniques that is being employed across different countries. We also aim to explore the differences (if they are prevalent) in the existence of the so-called theory-practice gap of capital budgeting. In order to conduct a complete study, we begin the research by exploring the academic articles of countries all around the world. To begin with, we have found and researched articles covering countries like America, Europe, Asia and Oceania. Our goal is to compare the theory-practice gap between the continents and countries, and firstly summarize the traditional methods. The methods we have focused on in order to map the theory-practice gap are the ones that are most commonly emphasized in textbooks. These include methods based on discounted cash flows such as the Net Present Value method (NPV) and the Internal Rate of Return (IRR). Additionally we include the rather traditional payback period method and the relatively modern Real Options technique. Across western countries one can observe the similarities in the choice of trends and the extent to which capital budgeting methods are implemented. In doing so, a few minor differences in the theory-practice gap between these countries are also visible. Thus, our study will cover these differences as well.

Extraits

[...] However, the comparison is somewhat imperfect due to differences in the way the surveys were conducted. Factors that may impact our conclusion are differences in the way questions were formulated and what year the surveys were carried out. When comparing countries to one another, it is easily observed that the payback method is still the most commonly used, even though it is not the method recommended by theory Graham and Harvey, The theory and practice of corporate finance: evidence from the field p.197- Moore and Reichert, An Analysis of the Financial Management Techniques Currently Used by Large U.S. [...]

[...] However Pike's studies focus on large companies10 and show that the gap between the payback method and DCF methods has been decreasing. The percentages of companies that use IRR and NPV have increased from 28% in 1975 to 84% in 2000 for the former and from 36% to 97%. Technological developments have 7 Sandahl Gert and Sjögren Stefan, Capital Budgeting Methods Among Sweden's Largest Groups of Companies. The State of the Art and a Comparison with Earlier Studies p.67- Ibid p Holmén Martin and Pramborg Bengt Capital Budgeting and Political Risk: Empirical Evidence Glen C. Arnold and Panos D. [...]

[...] Unfortunately our chosen articles provided no data about the use of real options in Asia. It would have been interesting to see how eastern countries are adopting a rather new technique. Obviously, DCF techniques play a comparatively important role for managers in Asia, but nevertheless they still consider the payback method as an adequate tool for evaluation. Similarly to the English speaking countries Australia, USA and UK, Asian countries prefer the use of several capital budgeting techniques. Comparing Western countries to Eastern countries would lead to the conclusion that Asian countries are as developed as western countries concerning capital budgeting. [...]

[...] Still, the use of capital budgeting techniques in Europe can generally be explained as very similar. The only exception is Cyprus, a country we included in this report due to its emerging and underdeveloped status. In Cyprus the figures totally differ to the rest of Europe, for example the NPV method is only used by 11% of their managers. The payback reaches its highest value at 36,71%. Somehow the use of rather unsophisticated methods seems to have spread wider. Additionally, they might lack experience and capacity of qualified personnel, which would clearly refer to their education system. [...]

[...] The State of the Art and a Comparison with Earlier Studies p Ibid p.52. sophisticated evaluation techniques compared to listed companies. Sandahl and Sjögren have limited their conclusion to differences between the following industries: engineering, basic, construction, real estate and the service industry. In the engineering industry the almost solely used method with its 90% is payback and NPV is used in less than 30% of the companies. In the basic, construction and real estate more than 60% of the companies use the NPV method, making these industries the most frequent users of the technique. [...]