Banking

How Firms' Capital Budgeting Methods Differ As Knightian Uncertainty And Controversy Vary: Bower And Brealey & Myers Are Both Right, Sometimes

Date Added: Jul 2009
Format: PDF

Capital budgeting is a contentious subject in both research and managerial practice. Financial economists such as Brealy & Myers advocate using NPV and related quantitative approaches that comprise what the authors refer to as the Standard Capital Budgetting Model (SCBM); by contrast, strategy scholars such as Bower have argued that socio-political conflicts interfere with such financially-oriented capital budgeting methods and often render them ineffective. They reconcile these competing views by extending the Behavioral Theory of the Firm (BTF) - particularly the notions of Knightian uncertainty and controversy that are central to the BTF - to encompass capital budgeting methodologies.