One of the debates in the capital budgeting model selection is between the free cash flow and DCF methods. In this paper an attempt is made to compare SVA against NPV model based on Monte Carlo simulations. Accordingly, NPV is found less sensitive to value driver variations and has got higher...

The survey findings indicate the existence of gap between theory and practice of capital budgeting. Standard appraisal methods have shown a wider project value discrepancy, which is beyond and above the contingency limit. In addition, the research has found the growing trend in the use of value...

We survey a large sample of Canadian firms to first learn whether they use real options, the types of real options used, and why firms do not use them. Only 36 of the 214 respondents (16.8%) report using real options, which ranks last among nine capital budgeting techniques. The main reason for...

This paper studies how division managers' access to venture capital (VC) markets affects the internal capital allocation decision of a multi-division firm. Division managers may leave firms and seek venture financing if their project ideas are not funded by headquarters. A successful new venture...

Using an NPV-based revealed-preference strategy, I find that idiosyncratic risk materially affects the discount rate that firms use in their capital budgeting decisions. I exploit quasi-exogenous within-region variation in project-specific idiosyncratic risk and find that, on average, firms...

I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a...

We characterize the optimal dynamic mechanism for capital budgeting and managerial compensation. The division manager privately observes the project productivity at each point in time as well as an initial signal that governs the productivity evolution. We show that the optimal allocation can be...

As presented in leading corporate finance textbooks the predominant method for making capital budgeting decision is discounted cash flow analysis. The primary benefit of this approach is that it allows for different discount rates to be used for different projects. In this paper, I argue that...