Abstract

۱- Introduction

۲- Literature review

۳- Development of the propositions

۴- Data and methods

۵- Results

۶- Discussion

۷- Conclusions

References

Abstract

In this study we examine the dynamism of pre-decision controls in the appraisal of strategic investments, an area largely overlooked by the literature, even though it is of the utmost importance to understand the mechanisms companies use to ensure their optimal capital investments. More specifically, we investigate how changes in companies’ economic, strategic, and organisational conditions relate to an increased emphasis on pre-decision controls such as policies, procedures, and routines. The empirical data is based on 108 interviews from among the 150 largest Finnish manufacturing companies. The paper contributes to the scarce capital budgeting literature by extending the discussion of the adaptations of pre-decision controls to external and internal environmental changes. We add to the literature by showing that changes in management may play a decisive role in control adaptations. Furthermore, we provide strong support to maintain that increased financial pressure can be related to the tightened use of controls.

Introduction

Success in strategic investment decision-making greatly affects the extent to which a company can achieve its strategic objectives. To facilitate optimal capital investment, companies use various types of pre-decision controls before their investment decisions take place, and these controls play a major role in ensuring that a company selects its investments appropriately (Simons, 2000). These control mechanisms typically include policies, procedures, and formal routines related to expenditure authorisation levels, profitability requirements, managerial involvement, and pre-determined financial, strategic, and risk analyses (Alkaraan and Northcott, 2007). Several studies describe the different aspects and uses of pre-decision controls in companies (e.g., Alkaraan and Northcott, 2007; Arnold and Hatzopoulos, 2000; Carr et al., 2010; Emmanuel et al., 2010). Nevertheless, these studies adopt a static point of view and hence do not cover aspects related to changes in these controls. Additionally, there are studies reporting the changes in capital budgeting trends (Alkaraan and Northcott, 2006; Pike, 1996), but they do not reveal anything about the changes in a particular company. A few prior management control system (MCS) studies have, to a minor extent, included capital budgeting when they have examined how changes in MCSs are associated with external and intra-organisational aspects such as competition, organisational capacity to change (learn), decentralisation, and firm size (e.g., Chanegrih, 2008; Libby and Waterhouse, 1996; Williams and Seaman, 2001). In these studies, however, various pre-decision controls have been considered as one control, hence providing us with results only on an aggregate level.