Determinants of Capital Budgeting Methods and Hurdle Rates in Nordic Firms
37 Pages Posted: 19 Jan 2011
Date Written: January 18, 2011
Abstract
Using survey data for 157 Nordic firms, we study the determinants for the choice of capital budgeting methods and the setting of hurdle rates (WACCs) in five Nordic countries. We combine survey data with a rich set of determinants, including ownership data, CFO characteristics, as well as financial data (firm characteristics). We find that the use of the NPV method as a primary method, and the sophistication of the capital budgeting, is related both to firm characteristics, variables proxying for real option features in investments, as well as to CFO characteristics (age and education). We also find support for a significant positive hurdle rate premium (i.e. a hurdle rate higher than motivated by economic theory). The premium is weakly related to managerial short-term pressure, and strongly negatively to the sophistication level of the firm's capital budgeting. This relationship goes in line with the predictions from real options and agency theory, since explanations from both categories combine the use of higher hurdle rates with a higher use of multiple methods and "rules of thumb".
Keywords: capital budgeting methods, hurdle rate, WACC, NPV, IRR, Nordic countries
JEL Classification: G31, M21, O16
Suggested Citation: Suggested Citation
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