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The Theory‐Practice Gap in Capital Budgeting: Evidence from the United Kingdom

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  • Glen C. Arnold
  • Panos D. Hatzopoulos

Abstract

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.

Suggested Citation

  • Glen C. Arnold & Panos D. Hatzopoulos, 2000. "The Theory‐Practice Gap in Capital Budgeting: Evidence from the United Kingdom," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(5‐6), pages 603-626, June.
    • Handle: RePEc:bla:jbfnac:v:27:y:2000:i:5-6:p:603-626
    DOI: 10.1111/1468-5957.00327
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