Capital Budgeting Sophistication and Performance

Abstract

This thesis investigates the relationship between capital budgeting sophistication and firm performance. Initially, the theoretical relationship is analysed. The traditional financial view, predicting a positive relationship, is presented as a starting point for the analysis. Other aspects, based on contingency and behavioural theories, are then brought into the discussion. These aspects shed light on the complexity of the relationship and question the positive relationship advocated by traditional financial theory. In a second step, a model is constructed in order to measure the relationship between capital budgeting sophistication and performance empirically. The statistical model used is the regression analysis. Based on theory, variables for capital budgeting sophistication, and performance are constructed. Moreover, relevant explanatory variables are defined. Three different definitions of capital budgeting sophistication, ranging from simple to more complex, are used in order to be able to measure whether the choice of variable affects the findings. For the same reason three different performance measures are used. The final step of this thesis is to test the model constructed empirically on the Swedish market. Due to insufficient data the model is only partially tested. The results obtained are mostly negative and insignificant. These findings do not support traditional financial theory.