Investment Decision Criteria In Small New Zealand Businesses

Transcription

1 Adam Vos and E Vos, Small Enterprise Research Vol 8 No 1, 2000, pp Investment Decision Criteria in Small New Zealand Businesses Investment Decision Criteria In Small New Zealand Businesses Adam Vos and Ed Vos University of Waikato, New Zealand Abstract The investment decision making process for small business is expected by the literature to focus on alternative objectives to shareholder wealth maximisation. This empirical study of 238 small businesses in New Zealand closely examines the investment decision making criteria used by small businesses. 'Gut feel' and accounting based methods are most used, even when adjusting for size and for external sources of capital. This supports the notion that utility is not just maximised wealth. Yet, most firms do discriminate in their investing on the basis of risk, usually by using non NPV criteria. While 69% indicate that they encounter limits to their investing due to availability of capital, they consider availability of capital as their least important constraint. This paper provides empirical support for the assertion that "there is a difference between what they ought to do and what they actually end up doing" (Ang (1992)). Introduction Over the last half century a general consensus has developed in the academic finance literature that the investment decisions of firms should be guided by now commonly accepted criteria. The objective of investment decisions is to maximise the value of the existing shareholders equity investment. The most appropriate criteria for evaluating investment opportunities is net present value (NPV) analysis, where the NPV is calculated by discounting expected future cash flows at an appropriate opportunity cost of capital. Related discounted cash flow (DCF) techniques such as internal rate of return (IRR), profitability index (PI), and certain equivalents are also theoretically acceptable although in some instances are subject to practical implementation problems. The proper discount rate for calculating the NPV for a project of comparable risk to the firm is the marginal weighted average cost of capital (WACC). This is calculated by weighting estimates of the marginal opportunity costs of debt and equity capital by appropriate long-run target capital structure proportions. Appropriate methods for estimating the opportunity cost of ordinary equity capital are those such as the capital asset pricing model (CAPM) or the Gordon discounted cash flow model which rely on observed market price data. Material differences in project risks should be recognised by estimating the NPV using a discount rate that is adjusted for those inherent risks. Capital rationing (not accepting all projects with positive NPV) is inconsistent with maximising shareholder wealth. Capital constrains, if they exist, should be recognised in the level of the marginal discount rate (Patterson 1989). Despite these formulations, over the past decade findings in small business research and theory have challenged some of these criteria. Small businesses in this paper will be defined as a firm that is not listed on a publicly traded stock exchange. McMahon et al (1993) has shown that; Owner managers of small enterprises are unlikely to have a single overriding aim in establishing and running their own business. Their intentions are numerous and complex. Many of the motives owner-managers have for being in small enterprise, and also the satisfaction they derive from 1

2 Small Enterprise Research this occupation, are unequivocally nonfinancial. Owner-managers of small enterprises have considerable freedom to indulge their many and varied objectives, be they financially or otherwise. This variation from shareholder wealth maximisation has implications for the rest of the above criteria including the methods used to evaluate investment decisions. If the objective is not to maximise shareholder wealth, do small businesses use the same investment evaluation techniques, and does the conclusion that Patterson (1989) found in his survey of New Zealand publicly listed companies, that the degree of conformity with normative financial analysis techniques is a positive function of firm size, apply to small businesses? There have been a number of surveys of the financial objectives and techniques employed by large, publicly listed companies including McMahon (1981), Scott and Petty (1984), Bierman (1986), Jones (1986), Patterson (1989), Sangster (1993) Pike (1996) and Reid (1999), covering countries including Australia, New Zealand, England, Ireland, Scotland, Wales and the USA. Their results, while somewhat varied, do not provide any insight into small businesses and their investment decision making processes. Others such as Ang (1992) and McMahon (1993) have provided theoretical frameworks for understanding small businesses, as different from larger publicly listed firms but have lacked empirical evidence. Vos (1992a) concludes that if the two groups were clones of each other, then it would be unnecessary to study unlisted businesses as distinct from larger businesses, but research by the above authors indicates that they are not. This paper attempts to provide a contrast between New Zealand listed and unlisted firms by investigating firstly whether as small businesses increase in size their level of financial sophistication increases. Secondly, we provide empirical findings on small business investment decision making techniques in order to enhance the existing small business theoretical frameworks. Sample Description Three thousand four hundred and forty six (3446), five-page questionnaires were randomly mailed to small businesses in the Auckland region, New Zealand, May This was done by employing a bulk mail firm to place the questionnaires into postal boxes on the assumption that most postal box holders were small businesses. The questionnaire was broken into three sections, thus enabling data to be utilised if the questionnaire was returned with questions unanswered. Responses were received from 238 companies, a 6.8% response rate. Since the recipients were anonymous, no attempt to follow up could be made to assess the non-response bias. A breakdown of their size by number of employees and industry types are shown in Table 1. Table 1 Characteristics of Sample No Of Employees % 0 to 5 58% 5 to 10 17% 10 to 20 10% 20 to 50 7% 50 to 100 4% 100 to 500 4% % Industry % Retail 13% Manufacturing 8% Wholesale 12% Financial Service 10% Service 39% Not-For-Profit 3% Other 15% 2

3 Investment Decision Criteria in Small New Zealand Businesses The sample is well spread across industries and has clearly focused on small businesses in terms of the number of employees according to the New Zealand Department of Commerce definition of a small business. Objectives Of Investment Decisions The method for evaluating investment opportunities employed by a firm should be a direct reflection of the goals of the decision-maker. As noted above, the normative financial literature assumes that this goal is maximisation of the wealth of existing shareholders in publicly listed companies and the maximisation of utility for current owners of small unlisted companies. When asked the extent of importance of six different objectives that may guide the investment decisions of the firm, the responding companies indicated the goals shown in Table 2. As predicted by small business writings from Ang (1992) and McMahon (1993), it can be seen that financial objectives of New Zealand small businesses are somewhat different from the theoretically correct' objective of shareholder wealth maximisation adopted by large firms. The importance of maximisation of firm value ranks third, behind the maximisation of growth in sales and stability of earnings respectively. In contrasting these findings with Patterson s (1989) results of New Zealand listed companies (Table 3), it can be seen that although the most important objectives differ in nature, firm value maximisation is not, on the whole, at the forefront of these manager's minds when evaluating their investment decisions. Table 2 Investment Decisions of Small Unlisted New Zealand Companies Most Important Very Important Important Minor Not a Consideration Weighted % % % % % Maximise Growth in Sales 40% 28% 15% 3% 14% 2.22 Maximise Stability of Earnings 27% 38% 18% 6% 11% 2.36 Maximise Value of Company 26% 30% 15% 11% 19% 2.67 Maximise ROE 28% 24% 16% 12% 20% 2.73 Maximise ROA 24% 25% 15% 12% 24% 2.87 Capital Availability 11% 20% 20% 19% 31% 3.39 Table 3 Comparison of New Zealand Listed and Unlisted Firm s Investment Objectives Currnent Study Weighted Patterson Weighted Maximise Growth in Sales 2.22 Maximise ROA 2.27 Maximise Stability of Earnings 2.36 Maximise ROE 2.41 Maximise Value of Company 2.67 Capital Availability 2.63 Maximise ROE 2.73 Maximise Stability of Earnings 2.80 Maximise ROA 2.87 Maximise Value of Equity 2.99 Capital Availability 3.39 Maximise Growth in Sales

4 Small Enterprise Research When the sample was broken into size septiles and the importance of each objective ranked according to weighted importance, maximisation of firm value did not increase in importance as firms increased in size. Vos and Forlong (1998) do not differentiate between sizes of small businesses, but observe that as a business moves through its life-cycle from a small unlisted firm to a publicly listed firm, its objective moves more towards shareholder wealth maximisation. Furthermore, Patterson s evaluation that there is a positive correlation between size and the use of normative financial techniques for investment decision making also implies that as the business grows it focuses more on shareholder wealth maximisation. Therefore, by further breaking the small business segment into septiles as shown in Table 4, it is seen that the importance of shareholder wealth maximisation does not increase with size if the business is not publicly listed on a stock exchange. As observed from Table 4, the companies place less importance on maximising the stability of earnings as they increase in size. This trend is consistent with Ang s (1992) assertion that small businesses cannot sustain substantial losses for a period of time, therefore as the size of the business increases the less important the stability of earnings becomes. It is also interesting to note that capital availability is of least importance to all sizes of business. This will be discussed in more detail later. Table 4 Weighted of the Objectives of Investment Decisions of Small Unlisted New Zealand Businesses Based on Size 0 to 5 Weighted 5 to 10 Weighted 10 to 20 Weighted Maximise Growth in 2.24 Maximise Stability of 2.51 Maximise ROA 2.35 Sales Earnings Maximise Stability of 2.28 Maximise Growth in 2.51 Maximise ROE 2.44 Earnings Sales Maximise Value of 2.81 Maximise ROE 2.68 Maximise Stability of 2.45 Company Earnings Maximise ROE 2.86 Maximise Value of 2.70 Maximise Growth in 2.45 Company Sales Maximise ROA 3.02 Maximise ROA 3.03 Maximise Value of 2.65 Company Capital Availability 3.45 Capital Availability 3.11 Capital Availability to 50 Weighted 50 to 100 Weighted 100 to 500 Weighted Maximise Growth in 1.94 Maximise Growth in 1.67 Maximise Growth in 1.40 Sales Sales Sales Maximise Value of 2.19 Maximise ROA 1.88 Maximise ROA 1.90 Company Maximise Stability of 2.53 Maximise Value of 2.00 Maximise ROE 1.91 Earnings Company Maximise ROE 3.00 Maximise ROE 2.17 Maximise Value of 2.00 Company Maximise ROA 3.13 Maximise Stability of 2.22 Maximise Stability of 2.40 Earnings Earnings Capital Availability 3.73 Capital Availability 2.75 Capital Availability

5 Investment Decision Criteria in Small New Zealand Businesses Patterson (1989) attempts to explain the apparent lack of motivation of New Zealand firms to maximise shareholder wealth. He references authors such as Scott and Petty (1984), Gurnani (1984), Bierman (1986), McMahon (1981), McNally and Eng (1980), and Singer (1985) who have observed that it is likely many financial executives focus on rates of return and earnings growth as tangible and controllable means to the somewhat abstract end of value maximisation, rather than as distinct goals in themselves. This could also assist understanding of the relatively low rankings of value maximisation found in Table 4. Use Of Financial Analysis In The Investment Decision Making Process To assess the level of financial analysis used, as opposed to intuition or market knowledge, and the importance that the firms placed on this financial analysis, the firms were asked Do you use financial analysis in your investment decision making process? and What weighting do you give the financial analysis in the decision making process? Tables 5 and 6 below show the responses given by each size septile, which indicate that as the size of the business increases, they are more likely to incorporate financial analysis techniques. Furthermore, of the businesses that do use financial analysis techniques, as the size of the business increases the importance given to financial analysis as opposed to non-financial analysis becomes equally weighted, as shown in Table 6. Although the trend of increasing use of financial analysis with the increase in size appears strong, some respondents answered no to using financial analysis but continued on to indicate that they used net present value or internal rate of return techniques. Comments from firms indicated that some respondents considered financial analysis an activity that is undertaken by an accountant or financial advisor outside of the firm, which may explain why 33% of businesses with 0 to 5 employees responded that they do not use financial analysis in their investment decision making process. Table 5 Use of Financial Analysis for Investment Decision Making in Small Unlisted New Zealand Businesses Financial Analysis Yes No 0 to 5 67% 33% 5 to 10 72% 28% 10 to 20 77% 23% 20 to 50 82% 18% 50 to % 0% 100 to % 10% Total Sample 72% 28% Table 6 Weighting of Financial Analysis for Investment Decision Making in Small Unlisted New Zealand Businesses Financial Analysis Primary Equal Secondary Weighting 0 to 5 41% 41% 19% 5 to 10 61% 32% 7% 10 to 20 59% 29% 12% 20 to 50 29% 43% 29% 50 to % 56% 0% 100 to % 67% 11% Total Sample 44% 40% 15% Evaluation Methods A large number of studies have been undertaken investigating the relative use of various methods for evaluating investment projects. Patterson (1989) notes that five techniques are widely used in industrial practice, and of these net present value (NPV), internal rate of return (IRR), and profitability index (PI) are prescribed by the academic literature as being theoretically correct and consistent with maximisation of shareholder wealth. 5

6 Small Enterprise Research Results for the evaluation methods used by the total sample are shown in Table 7. The most frequently used financial methods are accounting based procedures, payback (PBP) and accounting rate of return (ARR). The profitability index (PI) is not considered further in this analysis as a significant number of respondents indicated that they used a PI, but never used net present value analysis, and did not subsequently provide any indication of how cash flows were discounted. A resounding 49% and 51% of companies never used net present value or internal rate of return techniques respectively, with 67% of firms always, or usually, using intuition / gut feel (which was the phrase used in the questionnaire) in the decision making process. The intuition part of the decision making process refers to the market knowledge, experience, gut feel or managerial knowledge that the decisionmaker uses to influence the determination. This high level of non-financial reliance in the decision making process indicates the low level of quantitative sophistication in small New Zealand businesses. When broken into size septiles, as shown in Table 8, the three theoretically incorrect methods of intuition, PBP and ARR are consistently the top three evaluation methods throughout all size groups. Net present value and internal rate of return are the least used methods in all size groups. Table 7 Evaluation Methods of Small Unlisted New Zealand Firms Always Used Usually Used Used Sometimes Minor Use Not Used Weighted % % % % % Intuition 41% 26% 17% 5% 10% 2.17 PBP 18% 31% 17% 7% 27% 2.94 PI 21% 20% 11% 11% 36% 3.21 ARR 16% 16% 15% 13% 39% 3.43 NPV 11% 9% 16% 15% 49% 3.84 IRR 8% 9% 16% 16% 51% 3.95 Table 8 Weighted of Evaluation Techniques of Small Unlisted New Zealand Businesses Based on Size 0 to 5 Weighted 5 to 10 Weighted 10 to 20 Weighted Intuition 2.17 Intuition 2.12 Intuition 2.25 PBP 3.02 PBP 2.67 PBP 3.18 ARR 3.47 ARR 3.06 ARR 3.63 NPV 3.83 NPV 3.58 IRR 3.81 IRR 3.99 IRR 3.73 NPV to 50 Weighted 50 to 100 Weighted 100 to 500 Weighted Intuition 2.29 Intuition 2.33 Intuition 1.75 PBP 2.60 ARR 3.00 PBP 2.63 ARR 3.86 NPV 3.50 ARR 3.56 NPV 3.93 PBP 3.67 NPV 3.88 IRR 4.29 IRR 3.83 IRR

7 Investment Decision Criteria in Small New Zealand Businesses Comparisons of this New Zealand survey s responses with Patterson s 1989 New Zealand survey and a recent survey of United Kingdom listed firms (reported by Reid 1999) are shown in Table 9. The comparison highlights the high use of accounting based methods in both listed and unlisted firms, although the UK appears to have a higher usage of financially correct techniques. Table 9 Comparison of Listed and Unlisted Firm s Investment Evaluation Techniques NZ Small Business Current Study NZ Listed Business Patterson 1989 UK Listed Business Reid 1998 Weighted Weighted % Intuition 2.17 ARR 2.81 PBP - CF 60% PBP 2.94 PBP 2.81 IRR 56% ARR 3.43 NPV 3.11 NPV 39% NPV 3.84 IRR 3.24 ARR 39% IRR 3.95 PI 4.33 PBP - Profits 36% Other 10% The Discount Rate Used For Discounted Cash Flow Calculations For the companies who responded that they did use a discounted cash flow (DCF) technique for evaluating investment decisions, responses to the question If you use a method which requires calculation of discounted cash flows (i.e. NPV, IRR, PI), what do you use as the discount rate? are shown in Table 10. Table 10 Discount Rates Used by Unlisted New Zealand Firms Method Used % Judgment-Based target return 42% Historical accounting ROA 15% No Method Indicated 14% Cost of debt capital alone 13% WACC 10% Other 6% Normative finance theory prescribes the use of WACC [or related techniques such as adjusted present value (APV)] for this purpose, where the marginal costs of different sources of capital are estimated and weighted by their target capital structure proportions (Patterson 1989). Despite this, only 10% of New Zealand unlisted firms reported using DCF techniques. Furthermore, all other methods indicated were used more than WACC, with a judgement based target return being used by 42% of companies. While this use of judgement based target returns is comparable to both Patterson s (1989) and Petty and Scott s (1981) results, the remainder of the methods differed in the frequency of use. As shown in Table 11, small unlisted firms use Historical accounting ROA (this is return on assets as reported on the financial accounting statements which are, by definition, historical in their nature) more than listed firms which supports the trend of small businesses relying heavily on accounting, rather than financial, methods and techniques. There are no size patterns apparent when the sample is broken into size septiles. 7

8 Small Enterprise Research Table 11 Comparison of New Zealand Listed and Unlisted Firm s Discount Rates Vos & Vos Patterson Petty & Scott % % % Judgment-Based Target 42% Judgement Based 57% Judgement Based 66% return Target Return Target Return Historical accounting 15% WACC 30% WACC 44% ROA No Method Indicated 14% Cost of Debt Alone 27% Cost of Debt Alone 11% Cost of debt capital 13% Historical ROA 9% Historical ROA 15% alone WACC 10% Other 5% Other Other 6% No Method Indicated 5% No Method Indicated Of the businesses that reported that they made estimates of the cost of equity capital, 27% used an accounting ROE, and 20% used a historical risk premium. Table 12 shows the summary of techniques, which again indicates the high usage of accounting and past based methods, with only 9% of companies using the capital asset pricing model (CAPM). A comparison of New Zealand listed and unlisted firms' cost of equity capital estimation is provided in Table 13. Smallunlisted businesses use the CAPM significantly less, most likely due to its inability to fully capture the risk exposure, and the non-liquidity of the small business equity market, (Vos 1992b). In addition, it is clear that unlisted firms have a much lower magnitude of usage for any given approach to cost of equity capital estimation. Table 12 Methods Used for Cost of Equity Capital Estimation Unlisted New Zealand Firms Method % Accounting ROE 27% Historical risk premium 20% Capital asset pricing model 9% Other 7% DCF estimate 5% Table 13 Comparison of New Zealand Listed and Unlisted Firm s Cost of Equity Capital Estimation Vos & Vos Patterson % % Accounting ROE 27% Accounting ROE 46% Historical risk premium 20% Capital asset pricing model 38% Capital asset pricing model 9% Historical risk premium 21% Other 7% DCF estimate 13% DCF estimate 5% Other 13% 8

9 Investment Decision Criteria in Small New Zealand Businesses Adjustment For Differences In Investment Risks Of the 170 businesses who answered yes to Do you differentiate between projects on the basis of risk? a summary of the frequency of use is shown in Table 14. Table 14 Frequency of Risk Adjustment in Small Unlisted New Zealand Businesses % Always Used 41% Usually Used 33% Used Sometimes 17% Minor Use 2% Rarely Used 2% When asked to indicate the method(s) used in adjusting for risk, 33% of businesses responded that they used other techniques, as shown in Table 15. The qualitative responses associated with the other responses included gut feeling / intuition, market knowledge and experience. The next most frequently used method was to adjust the payback period according to risk, which is again an accounting based evaluation procedure. These two methods total 64% of businesses, with only 29% and 11% using an adjusted cash flow or a risk adjusted discount rate respectively. Table 15 Method of Risk Adjustment in Small Unlisted New Zealand Businesses % Other 33% Adjusted Payback period 31% Adjusted Cash Flow 29% Risk-Adjusted discount rate 11% When broken into size septiles there were no patterns, with adjusted payback period and other being the lead responses in every size. Capital Rationing If markets are informational efficient (i.e. all information is imbedded in the price), normative financial theory predicts that all positive NPV projects should be accepted and that the choice of investment should not be constrained by the availability of capital. However, 79% of businesses responded that they either sometimes, usually, or always were constrained by capital rationing, as shown in Table 16. Table 16 Frequency of Capital Rationing in Small Unlisted New Zealand Businesses Always 22% Usually 27% Sometimes 20% Seldom 19% Never 12% This result is somewhat contradictory to the earlier finding that capital availability was the least of small business s investment objectives. This indicates that although small businesses feel restrained by capital constraints when they have an investment opportunity, they rarely prepare the adequate financial plans, with detailed quantitative analysis, to present to the capital markets (banks etc.), and simply feel or know that the project is profitable over time. The implications of this will be further revealed in subsequent discussions. Sources Of Finance And Their Impact On The Objectives And Methods Of Investment Decision Making Perhaps firms with outside sources of capital are more likely to use more theoretically correct investment analysis. Thus, correlation coefficients were calculated between the source of start up financing, the source of debt now, and the investment objective and the method used to evaluate this investment opportunity. The results of which are shown in Table 17. No statistically significant correlations 9

10 Small Enterprise Research are found, which implies neither the source of funds (internal or external) or the source of debt now (whether the firm currently has debt or not), influence the investment objective or evaluation method employed by the firm. When broken into size septiles, there is no difference in results. Table 17 Correlation between Source of Finance and Investment Methods and Objectives Source of Start-up Funds Source of Debt Now Method Objective Discussion The results show that as small businesses increase in size, they do not use more advanced or theoretically correct investment analysis techniques, even though they pay more attention to the financing decision as they grow (Table 5). Indeed, it has been found that only 72% of small enterprises use quantitative analysis techniques in their investment making process, with 55% of those that do weighting it equal or less than other factors. Small businesses, irrelevant of their size, use gut feel and accounting methods to evaluate potential investment opportunities, with very few firms employing a discounted cash flow method. This may be an extension of the difference in the objective of the investment decision between large and small businesses, as the tendency not to focus on shareholder wealth maximisation may lead a small firm to lessen the emphasis on financial analysis. Because the objective of a small business is to maximise the utility of the owner(s), and the utility function for each person is different, it is not surprising that there is a high use of gut feel or managerial knowledge in the decision making process. This intuition based decision making may be due to the utility of the owner being maximised when they feel that they have done the right thing, opposed to investing in the most financially sound project. Given this lack of financial emphasis, do small businesses allow for risk in the investment decision making process? As shown above 78% of businesses responded that they differentiated investment opportunities on the basis of risk. The most used method for evaluating this risk was other, where the qualitative responses indicated a reliance on intuitive, or behavioural, process involved. When combined with the adjusted payback period, 64% of small businesses again relied on accounting or intuitive processes, this time to evaluate the risk in a project. While 69% of small businesses indicated that they encountered capital rationing more than sometimes, each size septile rated maximise availability of capital as the least important investment objective. Consequently, combined with the high tendency to use gut feel and financially incorrect techniques to evaluate investment opportunities, it is not surprising that small businesses face substantial capital rationing. If an investor is unable to view a potential return on investment, it is unlikely that they will be willing to part from their money, especially to a firm who uses gut feel to decide whether to invest or not. This may even contribute to the well-documented adverse relationship between small firms and banks, because of the gap between the two on what is required and provided to evaluate an investment opportunity. Conclusions Results from this paper indicate that the investment decision-making techniques employed by small unlisted businesses rely heavily on intuition and accounting based, rather than market-based, techniques. This does not significantly differ from their larger, publicly listed counterparts, except 10

11 Investment Decision Criteria in Small New Zealand Businesses for the high reliance on intuition by small firms. The most important findings are: New Zealand small businesses, regardless of size, use gut feeling, experience, intuition and market knowledge more than other recognised analysis techniques in evaluating investment opportunities. Furthermore, accounting techniques are more widely used than financial techniques, despite the size of the small business. The overall objective of investment decisions is to maximise growth in sales, with maximising the stability of earnings following in second place. Maximisation of firm value is in third place. As the size of the business increases the importance of stability of earnings decreases, but the importance of firm value maximisation does not change. Only 72% of small businesses use quantitative techniques in their decision-making, and of those 55% weight it equally or less important as other factors in the decision making process. Regardless of size, small businesses use intuition more than any other investment analysis technique, with all sizes employing accounting based methods above market-based methods. Of the firms who use discounted cash flow methods, only 10% use a weighted average cost of capital, and of those only 9% use the capital asset pricing model for the cost of equity estimation. This indicates a very low usage of theoretically correct financial techniques by small businesses, which are employed by large publicly listed companies. More than two thirds of small businesses differentiate projects on the basis of risk, with the most frequent method employed being other. The other category applies to intuition, market knowledge and managerial experience, indicating a further reliance on non-financial processes in the investment decision making process. There is no correlation between the source of funds (internal or external) used in the business, and the investment objective or method employed for evaluation. This shows that despite whether a small business has debt or not, it maintains the same objectives and evaluation techniques. These results are characterised well by Ang (1992), where he states most new small businesses owners have neither business experience nor training. In fact, most business ideas are pretty mundane; they are neither new nor profitable. He continues thus, there is a difference between what they ought to do, what they are capable of doing, what they want to do, and what they actually end up doing. Small businesses magnify a dilemma in financial research: mostly normative theoretical models are being used to explain positive empirical observations. This paper empirically confirms these results for the sample studied. Further research is recommended to develop a more detailed and applicable model of the objective function of small business, and to further evaluate the role of intuition, and the lack of quantitative analysis, in the investment decision making process. References Ang, James (1992), On the Theory of Privately Held Firms, Journal of Small Business Finance 1 (3),

12 Small Enterprise Research Bierman, H. (1986) Implementation of Capital Budgeting Techniques: Survey and Synthesis, Financial Management Association, Tampa, Fla. Gurnani, C. (1984), Capital Budgeting: Theory and Practice, Engineering Economist, Jones, Colin (1986), Financial Planning and Control Practices in U.K. Companies: A Longitudinal Study, Journal of Business Finance and Accounting 13 (2), McMahon, R., Holmes, S., Hutchinson, P. & Forsaith, D. (1993) Small Enterprise Financial Management Theory and Practice, Harcourt Brace, 206. McMahon, R.G., (1981) The Determination and Use of Investment Hurdle Rates in Capital Budgeting: A Survey of Australian Practice, Accounting and Finance, McMahon, R., Stanger, A (1993), Formulating the Small Enterprise Financial Objective Function, Accounting, Finance and Management Research Paper, The Flinders University of South Australia. McNally, G.M. and Eng, L.H. (1980), Management Accounting Practices and Company Characteristics, Abacus, Patterson, Cleveland (1989), Investment Decision Criteria Used by Listed New Zealand Companies, Journal of the Accounting Association of Australia and New Zealand 29 (2), Pike, Richard (1996), A Longitudinal Survey on Capital Budgeting Practices, Journal of Business Finance and Accounting 23 (1), Reid, Bernard (1999), Surprising Survey Results, Boardroom, (May) 6-7. Sangster, Alan (1993), Capital Investment Appraisal Techniques: A Survey of Current Usage, Journal of Business Finance and Accounting 20 (3), Scott, L.D. and Petty, J.W., (1984), Capital Budgeting Practices in Large American Firms: A Retrospective Analysis and Synthesis, The Financial Review, Singer, A. (1985), Strategic and Financial Decision-Making Processes in New Zealand Public Companies, New Zealand Journal of Business, Vos, E., Forlong, C. (1998), The Agency Advantage of Debt Over the Lifecycle of the Firm, Entrepreneurial and Small Business Finance 5 (3), Vos, Ed (1992a), Unlisted Businesses are Not Financial Clones of Listed Businesses, Journal of Entrepreneurship Theory and Practice, (Summer) Vos, E. (1992b), Differences in Risk Measurement for Small Unlisted Businesses, The Journal of Small Business Finance 1 (3),