Premium
The Theory‐Practice Gap in Capital Budgeting: Evidence from the United Kingdom
Author(s) -
Arnold Glen C.,
Hatzopoulos Panos D.
Publication year - 2000
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00327
Subject(s) - capital budgeting , economics , capital expenditure , capital (architecture) , inflation (cosmology) , audit , cost of capital , accounting , weighted average cost of capital , actuarial science , finance , financial capital , capital formation , project appraisal , microeconomics , profit (economics) , physics , archaeology , theoretical physics , history
We report the results of a survey of capital budgeting techniques used by United Kingdom firms. Where possible, the evidence is combined with data collected over a 22 year period to provide a basis for the discussion of causes of trends. We observe that there has been a substantial narrowing of the theory‐practice gap in the use of project appraisal methods. The gap has also narrowed in other areas: the analysis of risk, inflation adjustment, capital budget preparation, WACC calculation and post‐auditing. However, there are other elements of capital budgeting theory, e.g. probability and beta analysis which have been adopted by very few practising managers. We also discuss non‐economic projects, capital rationing and hurdle rates.