Management Accounting Research
Management Accounting Research
journal homepage: www.elsevier.com/locate/mar
留學生會計畢業dissertationStrategic investment decision making practices: A contextual approach
Chris Carra,∗, Katja Kolehmainenb, Falconer Mitchella
a The University of Edinburgh Management School, William Robertson Building, 50 George Square, Edinburgh EH8 9 JY, United Kingdom
b Aalto University School of Economics, P.O. Box 1210, 00101 Helsinki, Finland
a r t i c l e i n f o
Keywords:
Strategic investment decisions Strategic management accounting Contingency approach Vehicle components
Telecommunications
a b s t r a c t
This paper proposes a contextual approach to explaining differences in strategic investmentdecision (SID) making practices. First, a systematic contextual framework is developed fromthe existing research literature. Then this framework’s potential for explaining differencesin SID making practices is explored through 14 case studies of U.K., U.S. and Japanese companiesfrom both stable and dynamic business sectors. Our findings suggest substantialSID differences across our four contextual categories of market creators, value creators, refocusersnd restructurers. The differences relate to the emphasis on strategic versus financial
considerations, the thoroughness and rigidity of financial analysis, the attitudes towardincorporating less easily quantifiable factors and the level of hurdle rates.
© 2010 Elsevier Ltd. All rights reserved.
1. Introduction
The literature on strategic investment decision (SID)
making practices1 has provided ample evidence of the generaluse of capital budgeting techniques, such as DCF (e.g.Alkaraan and Northcott, 2006; Arnold and Hatzopoulos,
2000; Farragher et al., 1999; Graham and Harvey, 2001;Pike, 1996). Indeed, most research in the field has aimedat presenting an overview of prevailing corporate practicewith regard to which techniques are being used (e.g.
Arnold and Hatzopoulos, 2000; Farragher et al., 1999; Pike,∗ Corresponding author.
1 The term strategic investment decision (SID) refers to a decision on a
substantial investment which has a significant effect on long-term performance
and the organisation as a whole (Carr and Tomkins, 1996, 1998).
Capital budgeting literature has not always distinguished more strategic
types of investment (e.g. Graham and Harvey, 2001; King, 1975; Klammer,
1972; Klammer and Walker, 1984; Pike, 1983; Sihler, 1964); but a substantial
body of research now attests to the importance of this distinction
(Alkaraan and Northcott, 2006; Butler et al., 1993; Marsh et al., 1988;
Oldcorn and Parker, 1996).
1983, 1996; Sandahl and Sjögren, 2003). However, there#p#分頁標題#e#
is still a need to know more about how these techniques
are being used (Alkaraan and Northcott, 2006; Butler et
al., 1991) and how these practices may vary across various
contextual settings (Haka, 1987; Slagmulder et al., 1995;
Verbeeten, 2006). Furthermore, sociologists would argue
for yet deeper investigation of the organisational processes
entailed (Miller and O’Leary, 2005, 2007).
Field study evidence also further indicates that SIDs
are not always primarily based on financial considerations
and there may be considerable differences in the
extent to which strategic versus financial considerations
are emphasised in their evaluation (Butler et al., 1991;
Carr and Tomkins, 1996, 1998; Jones and Dugdale, 1994).
Cross-country research suggests that these differencesmay
be associated with the national context (Carr and Harris,
2004; Carr and Tomkins, 1996, 1998; Jones et al., 1993;
Shields et al., 1991). Additionally, documented differences
in the emphasis on strategic versus financial considerations
among companies from the same country contexts suggest
that these differencesmaybe associated with other contextual
variables, as well (e.g. Alkaraan and Northcott, 2006 cf.
Butler et al., 1991; Sandahl and Sjögren, 2003). Hitherto, the
SID literature has provided only scant evidence on which
contextual variables, besides the country context, could be
1044-5005/$ – see front matter © 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.mar.2010.03.004
168 C. Carr et al. / Management Accounting Research 21 (2010) 167–184
associated with these differences (Chen, 2008; Verbeeten,
2006).
This paper aims to address this void by proposing a
systematic contextual framework for explaining differences
in SID making practices. The framework developed
encompasses important, but neglected contingencies that
are derived from the broader strategic management and
strategic management accounting (SMA) literatures. These
contingencies are integrated to construct a general contextual
framework that explains SID making practices in terms
of a company’s ‘market orientation’ and its ‘performance in
relation to shareholder expectations’.2 The framework developed
gives rise to a fourfold categorization of companies
comprising market creators, value creators, refocusers and
restructurers.
The framework’s potential for explaining differences
in SID making practices is subsequently tested on an
exploratory basis through 14 case studies of U.K., U.S. and
Japanese companies operating in vehicle component (10)
and telecommunications (4) sectors. Potential differences
in SID making practices are explored initially, in regard to
the use of capital budgeting techniques, and then in regard#p#分頁標題#e#
to companies’ overall SID approaches.3
The results of the 14 case studies indicate substantial
differences in SID approaches across the 4 contextual categories.
These are evident from the extent to which decisions
are made based on strategic versus financial considerations,
the thoroughness and rigidity of financial analysis,
and attitudes towards incorporating less easily quantifiable
factors such as synergies into calculations.Anexpected tendency
for hurdle rates to rise as we move from the most
strategically orientated market creator category towards
the most financially orientated restructurer category is also
clearly observed.
The remainder of the paper is organised as follows.
An overview of research related to SID making practices
is presented. Then the explanatory contextual framework
for SID making practices is constructed and followed by a
description of the research method. The research findings
are presented, first in respect of potential contextual differences
in the use of capital budgeting techniques, and
second in respect of the companies’ overall approaches to
SIDs. The conclusion comprises a summary of the findings,
a discussion of their broader implications, and a suggestion
of areas for further research.
2. Literature overview on SID making practices
2.1. Capital budgeting techniques
The corporate use of capital budgeting techniques has
been examined extensively (e.g. Alkaraan and Northcott,
2006; Arnold and Hatzopoulos, 2000; Carr and Tomkins,
1996, 1998; Farragher et al., 1999; Graham and Harvey,
2 The terms in italics will be explained in more detail when we build
our framework in Section 3.3.
3 The term approach refers to broader attitudes and orientations, and
encompasses tendencies to emphasise strategic versus financial considerations
in the evaluation.
2001; Haka, 1987; King, 1975; Klammer and Walker, 1984;
Klammer et al., 1991; Pike, 1983, 1988, 1996; Sandahl
and Sjögren, 2003; Sangster, 1993; see Haka, 2007 for a
review). Most research, in the field, has focused on the
use of capital budgeting techniques in particular country
contexts, addressing the use of techniques inter alia in
the U.K. (e.g. Alkaraan and Northcott, 2006; Arnold and
Hatzopoulos, 2000; Pike, 1996), the U.S. (e.g. Farragher
et al., 1999; Graham and Harvey, 2001; Klammer et al.,
1991), Continental Europe (e.g. Carr and Tomkins, 1996,
1998; Carr et al., 1994), and Japan (e.g. Carr, 2005; Carr
and Tomkins, 1998; Jones et al., 1993; Kim and Song, 1990;
Shields et al., 1991; Yoshikawa et al., 1989). Research findings
demonstrate cross-country differences in the use of
capital budgeting techniques. For example, the use of DCF
techniques is more extensive among Anglo-Saxon companies#p#分頁標題#e#
(e.g. Arnold and Hatzopoulos, 2000; Graham and
Harvey, 2001; Pike, 1996). Japanese, Continental European
and Scandinavian companies may, on the other hand,
sometimes rely more on less sophisticated techniques,
such as the payback period when making decisions on SIDs
(Carr and Tomkins, 1996, 1998; Sandahl and Sjögren, 2003;
Shields et al., 1991; Yoshikawa et al., 1989).
A limited amount of research has been conducted on
the potential association between the use of capital budgeting
techniques and contextual variables, other than the
country context (Chen, 1995, 2008; Haka, 1987; Verbeeten,
2006). The relationship between corporate size and the
use of techniques has been the most extensively covered
topic. There is consistent evidence that large companies
are more likely to use sophisticated techniques, such as
DCF (Farragher et al., 1999; Graham and Harvey, 2001; Pike,
1996).4 Available empirical evidence also suggests that the
use of sophisticated techniques is more common among
companies that operate in predictable as opposed to unpredictable
business environments (Chen, 1995; Ho and Pike,
1998), among highly leveraged companies (Graham and
Harvey, 2001; Klammer et al., 1991) and among companies
that face financial uncertainty (Verbeeten, 2006). Companies
facing a challenging financial situation have also been
found to set tighter financial targets (Van Cauwenbergh et
al., 1996).
2.2. Broader approaches to SIDs
Field study based research on SID making practices indicates
that there are cross-country differences also in the
extent to which SIDs are based on strategic versus financial
considerations. Research findings suggest that U.K.
companies may have a tendency to overlook strategic considerations
and focus strongly on financial analyses, while
Japanese and German companies may downplay financial
evaluation and emphasise strategic considerations. U.S.
companies may, on the other hand, have a more balanced
approach, paying attention to both strategic and financial
4 We draw on Haka et al. (1985) to use the term ‘sophisticated techniques’
to refer to capital budgeting techniques such as Net Present Value
(NPV) and Internal Rate of Return (IRR) that consider the risk-adjusted
discounted net cash flows expected from a project.