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Capital Budgeting and Political Risk: Empirical Evidence
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2009 (English)In: Journal of International Financial Management & Accounting, ISSN 0954-1314, E-ISSN 1467-646X, Vol. 20, no 2, 105-134 p.Article in journal (Refereed) Published
Abstract [en]

This paper surveys and investigates Swedish firms' use of capital budgeting techniques for foreign direct investments. We document that the use of the theoretically correct net present value method decreases with the political risk in the host country, and that the use of the Payback method increases with the political risk. We conclude that in the presence of capital market imperfections, unsystematic and country-specific political risks are important. Because these risks are difficult to estimate (rendering high deliberation costs) managers are inclined to use simple rules of thumb for their capital budgeting decisions. Our results can partly explain why surveys find that alternative methods such as the Payback method are frequently used despite their theoretical drawbacks.

Place, publisher, year, edition, pages
2009. Vol. 20, no 2, 105-134 p.
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:uu:diva-152006ISI: 000207835400001OAI: oai:DiVA.org:uu-152006DiVA: diva2:412024
Available from: 2011-04-20 Created: 2011-04-20 Last updated: 2017-12-11Bibliographically approved

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