An Analysis of the Investment Appraisal Practices of Irish Companies

Introduction The objective of this paper is to analyse, on two levels, the investment appraisal practices of the top 1,000 Irish companies. The first level is a standard extent of usage analysis, deriving some basic structural data on investment appraisal practices. The deeper level and the unique contribution of this paper, is an examination of why discounted cash flow (DCF) techniques are not used in investment appraisal. This paper falls into a long tradition of investment appraisal survey papers. Our particular concern has been with recent studies examining practices in Britain, Scotland and Ireland Pike (1983a) Pike (1988), Ho & Pike (1991, 1992), McIntyre and Coulthurst (1986), (Sangster 1993) . So far as we are aware, the only significant reported research on the investment appraisal practices of Irish companies was undertaken by Green and McIlkenny (1991). While producing some interesting results to which we return later, the study was hampered both by a small sample size (89 companies). This limitation was acknowledged by the authors, as was the probable presence of non-response bias. Table 1 (over) summarises the investment appraisal practices reported in the present survey and three other large scale surveys conducted in the United Kingdom during the 1980's and early 1990's. (All tables omitted) Table 1 suggests that there might be significant differences between the investment appraisal practices of Irish and UK companies. While Irish companies in this study tend to be more likely than UK companies to adopt a formal procedure (in the sense of having a uniformly applied mechanism for assessing expenditure), that procedure is less likely either to be 'DCF' based or to include a post-expenditure audit. The Dataset The motivation for the present survey was a desire to take a snapshot of the investment appraisal techniques in use within the top companies operating in Ireland and to ascertain the managerial and behavioural issues that prompted their implementation. Utilising the 'Business and Finance' Top 1000 database (a database of the top 1137 companies ranked by turnover), a questionnaire was mailed to the financial controllers in May 1993. A total of 424 usable responses representing a response rate of 37% were received. It should also be noted that the sample represents a high proportion of the total employment and profitability of the Irish economy. Table 2 summarises statistics on the population and the respondents. It indicates that there is a large firm bias which we have not attempted to correct. In formulating the twenty questions contained in the questionnaire an attempt was made to deal with Rappaport's (1979) criticisms of previously reported research. Thus, the survey instrument was designed to facilitate statistically meaningful inferences about investment appraisal practices across different industries. Table 3 presents the response rates by industry. The Findings The remainder of this paper contains analyses of some of the main results of an initial data analysis. We concentrate on three aspects of the survey in this initial presentation of results. * Irish and international investment appraisal practice * Non-cash influences in the investment appraisal process * Views of respondents not using discounting methods of financial appraisal Irish Investment Appraisal Practice A total of 266 usable responses was received to the questions regarding the techniques used. To put this into perspective: this is a sample ten times larger than the previous Irish study by Green & McIlkenny. Table 4 shows the distribution of technique usage by industry. Such a detailed breakdown of investment appraisal practices technique by industrial sector has not been reported prior to this survey. Taking THE EXPANSION DECISION ONLY, the study reveals that 93% of respondents use a formal method of investment appraisal. …