Untitled-29

(Frankie) #1

102 Financial Management


(2) plant managers to (3) the vice-president for operations to (4) a capital expenditures
committee under the financial manager to (5) the president to (6) the board of directors.
How high a proposal must go before it is finally approved usually depends upon its size.
The greater the capital outlay, the greater the number of screens usually required. Plant
managers may be able to approve moderate-sized projects on their own, but only higher
levels of authority approve larger ones. Because the administrative procedures for
screening investment proposals vary greatly from firm to firm, it is not possible to
generalize. The best procedure will depend upon the circumstances.
The level and type of capital expenditure appear to be important to investors, as they
convey information about the expected future growth of earnings. John J. McConnell
and Chris J. Muscarelia test this notion with respect to the level of expenditures of a
company. They find that an increase in capital-expenditure intentions, relative to prior
expectations, results in increased stock returns around the time of the announcement,
and vice versa for an unexpected decrease.
Investment Ideas: Who Generates?
Investment opportunities have to be identified or created; they do not occur
automatically? Investment proposals of various types may originate at different levels
within a firm. Most proposals, in the nature of cost reduction or replacement or process
or product improvement take place at plant level. The contribution of top management
in generating investment ideas is generally confined to expansion or diversification
projects. The proposals may originate systematically or haphazardly in a firm. The
proposal for adding a new product may emanate from the marketing department or
from the plant manager who thinks of a better way of utilizing idle capacity. Suggestions
for replacing an old machine or improving the production techniques may arise at the
factory level. In view of the fact that enough investment proposals should be generated
to employ the firmís funds fully well and efficiently, a systematic procedure for generating
proposals may be evolved by a firm.
In a number of Indian ëcompanies, more than 50 per cent of the investment ideas are
generated at the plant level. The contribution of the board in idea generation is relatively
insignificant. However, some companies depend on the board for certain investment
ideas. Other companies depend on research centers for investment ideas.
Is the investment idea generation primarily a bottom-up process in India? In UK, both
bottom up as well as top-down processes exist.4 The Indian practice is more like that
in USA. Petty and Scottís study (1981) showed that project initiation was a bottom-
up process in USA, with about 82 per cent of investment proposals coming from
divisional management and plant personnel. 5 However, it is to be noted that the small
number of ideas generated at the top may represent a high percentage in terms of
investment value, so that what looks to be an entirely bottom-up process may not be
really so.
Free download pdf