Determinants of Capital Budgeting Methods and Hurdle Rates in Nordic Firms

37 Pages Posted: 19 Jan 2011

See all articles by Tor Brunzell

Tor Brunzell

Stockholm University - School of Business

Eva Liljeblom

Swedish School of Economics and Business Administration

Mika Vaihekoski

University of Turku, Turku School of Economics; University of Turku - Turku School of Economics

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

Brunzell, Tor and Liljeblom, Eva and Vaihekoski, Mika and Vaihekoski, Mika, Determinants of Capital Budgeting Methods and Hurdle Rates in Nordic Firms (January 18, 2011). Available at SSRN: https://ssrn.com/abstract=1742882 or http://dx.doi.org/10.2139/ssrn.1742882

Tor Brunzell

Stockholm University - School of Business ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden
+46 8 16 12 31 (Phone)

Eva Liljeblom (Contact Author)

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+358-9-431 33 291 (Phone)
+358-9-431 33 393 (Fax)

Mika Vaihekoski

University of Turku, Turku School of Economics ( email )

Turku School of Economics
Dep. of Accounting and Finance
University of Turku, 20014
Finland
+358 2 33351 (Phone)

HOME PAGE: http://users.utu.fi/moovai/

University of Turku - Turku School of Economics ( email )

Turku, 20014
Finland

HOME PAGE: http://users.utu.fi/moovai/

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