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

Fábio Frezatti Department of Accounting and Actuarial Sciences, School of Economics, Business and Accounting, University of São Paulo, São Paulo, BrazilCorrespondence[email protected]
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Diógenes de Souza Bido Center for Social and Applied Sciences, Mackenzie Presbyterian University, São Paulo, BrazilView further author information

Ana Paula Capuano Da Cruz Institute of Economic, Business and Accounting Sciences, Federal University of Rio Grande, Rio Grande, BrazilView further author information

Marcelo Francini Girão Barroso Department of Accounting and Actuarial Sciences, School of Economics, Business and Accounting, University of São Paulo, São Paulo, BrazilView further author information

Maria José de Camargo Machado Department of Accounting and Actuarial Sciences, School of Economics, Business and Accounting, University of São Paulo, São Paulo, BrazilView further author information

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.

Acknowledgements

We must recognise the professionalism and competence of the two anonymous reviewers, Markus Granlund and Salvador Carmona (the editors) with their contributive suggestions. It was a very rich learning process. The research project that produced the paper was supported by CNPq and FAPESP, Brazilian Government agencies. Additionally we must thank Ariovaldo dos Santos, FIPECAFI's researcher, for the data base used.