The Use of Capital Budgeting and Cost of Capital Estimation Methods in Swedish Listed Companies

Abstract: In this paper Swedish listed companies’ use of capital budgeting and cost of capital estimation methods in 2005 and 2008 are examined. The relation between company characteristics and choice of methods is investigated and both within-country longitudinal and cross country comparisons are made. No particular independent variable is found to have driven a majority of the results. In 2005 size and industry seem to have been most important, but in 2008 there were fewer associations between those two independent variables and the practical employment of methods. The results suggest that, between the 1960s and 2008, use of NPV increased while payback and the internal rate of return declined. Moreover, between 2005 and 2008 the use of a single companywide discount rate for foreign investments declined. In 2005 the most common method for establishing the cost of equity was by asking the investors what return they required. By 2008 CAPM was instead the most utilised method, which could indicate greater sophistication. Overall, the use of sophisticated capital budgeting and cost of capital estimation methods seem to be rising and the use of less sophisticated methods declining. The use of methods was generally less extensive in Sweden than in the U.S. and continental Europe