MORAL HAZARD AND CAPITAL BUDGETING

In this paper, the effect of moral hazard on capital budgeting is examined. It is shown that moral hazard may change project rankings based on net present value under perfect information. It is also shown that in certain agency relationships moral hazard increases managerial contracting costs more for projects with slower paybacks, thus producing a bias in favor of projects with faster paybacks. This effect manifests itself only under specific conditions.     

THE USER COST AND CAPITAL BUDGETING

This study describes the relationship between the user cost of capital and capital budgeting processes and presents a formula for computing the user cost of an investment, accommodating the existence of taxes, inflation, and a nonconstant level of production. A project acceptability criterion assigning positive net present value when cash operating income exceeds user cost is discussed and applied to several examples. The test is shown to be useful and easy to apply.     

THE CAPITAL BUDGETING BEHAVIOUR AND CORPORATE CHARACTERISTICS OF CAPITAL-CONSTRAINED FIRMS

This paper addresses (1) the nature and pervasiveness of organisational constraints, frnancial and otherwise, on investment, and (2) the corporate characteristics and capital budgeting behaviour of capital-constrained firms for a sample of 126 UK companies. The results indicate that corporate size, risk and profitability are important corporate characteristics in this regard, and that financially-constrained firms tend to adopt naive capital budgeting methods in resolving the capital rationing problem.