This paper uses direct evidence from reported hurdle rates and discount rates to assess theories of corporate investment appraisal. We find first that hurdle rates are frequently below discount rates, suggesting strategic or managerial behaviour. To test this we use probit analysis to discriminate between this group and an alternative group, where hurdle rates are higher than discount rates. We find that variables representing the opportunity for managerial or strategic investment (e.g. free cash flow) or the motivation (e.g. low growth) increase the probability of firms having hurdle rates below discount rates. In a second stage of the analysis we analyse the relationship between hurdle rates and discount rates for both sets of firms separately. For example, we find that for the strategist firms, product R&D tends to be associated with a lower hurdle rate relative to the discount rate, while for the profit maximising group of firms, the opposite is the case. For the second sample, we also find that risk variables raise the hurdle and that there is some evidence for an irreversibility effect. Responses of the hurdle rate to entry also differ between the two groups.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.