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Investment Decisions on Long-term Assets: Integrating Strategic and Financial Perspectives

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  • Fábio Frezatti
  • Diógenes de Souza Bido
  • Ana Paula Capuano Da Cruz
  • Marcelo Francini Girão Barroso
  • Maria José de Camargo Machado

Abstract

This paper aimed to verify how companies formalise the decisions and control on long-term investments. In particular, an analysis of the published literature reveals a relevant gap between the strategic and financial perspectives in addressing this issue, and Agency Theory was proposed as a linking construct to bridge this gap. A survey was conducted among 82 companies, and the data were treated using the structural equation modelling technique. The results of this survey indicate that firms with intensive external funding use sophisticated capital budgeting methods more frequently when evaluating the profitability of their long-term investment proposals. As these methods require detailed information, these firms use additional appraisal mechanisms to conduct their investment analysis more frequently. Additional mechanisms are also used if the long-term investment is funded by external sources and perceived as a riskier investment. These deeply analysed long-term investment proposals often appear and are decided as a part of the strategic planning process instead of being strongly associated with the budgeting process. Finally, these long-term investments, which are funded externally, analysed using sophisticated methods and mechanisms and decided as a part of the strategic planning cycle, are more tightly controlled than other investments. These findings help to reduce the heuristics within the related literature.

Suggested Citation

  • Fábio Frezatti & Diógenes de Souza Bido & Ana Paula Capuano Da Cruz & Marcelo Francini Girão Barroso & Maria José de Camargo Machado, 2013. "Investment Decisions on Long-term Assets: Integrating Strategic and Financial Perspectives," European Accounting Review, Taylor & Francis Journals, vol. 22(2), pages 297-336, June.
    • Handle: RePEc:taf:euract:v:22:y:2013:i:2:p:297-336
    DOI: 10.1080/09638180.2012.718672
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    Cited by:

    1. Carlo Alberto Magni, 2016. "An Average-Based Accounting Approach to Capital Asset Investments: The Case of Project Finance," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 275-286, June.
    2. Carlo Alberto Magni, 2016. "An Average-Based Accounting Approach to Capital Asset Investments: The Case of Project Finance," European Accounting Review, Taylor & Francis Journals, vol. 25(2), pages 275-286, June.
    3. Cathérine Grisar & Matthias Meyer, 2015. "Use of Monte Carlo simulation: an empirical study of German, Austrian and Swiss controlling departments," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(2), pages 249-273, August.

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