Title: Capital budgeting methods, management control systems and the R&D intensity of the firm

Authors: Hanna Silvola

Addresses: Department of Accounting and Finance, University of Oulu, P.O. Box 4600, FIN-90014, Finland

Abstract: This paper investigates the effect of the Research and Development (R&D) intensity of the firm on the use of management control systems, capital budgeting methods and the methods to determine the cost of capital. Based on earlier literature, we develop several hypotheses that we test empirically, using survey data of the 101 Finnish firms operating in the capital area. The results indicate that the use of management control systems such as control and bonus systems, budgeting and strategic alliances increases with the degree of the R&D intensity of the firm. The results also indicate that high-R&D-intensity firms use formal capital budgeting methods within large and strategic projects. Finally, our results show that the use of sophisticated capital budgeting methods such as Net Present Value (NPV) and Internal Rate of Return (IRR) methods increases with the R&D intensity of the firm. Our results remain materially the same after controlling for several firm characteristics.

Keywords: research and development; R&D intensity; management control; capital budgeting; cost of capital; equity investors; Finland; bonus systems; strategic alliances; net present value; NPV; internal rate of return; IRR.

DOI: 10.1504/IJAF.2008.020302

International Journal of Accounting and Finance, 2008 Vol.1 No.2, pp.168 - 192

Published online: 15 Sep 2008 *

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