Observability and the payback criterion

摘要: Among the enigmas of corporate finance theory that have received little attention is puzzling use payback method as a capital budgeting tool. Although has many drawbacks, it widely used in industry (see Klammer 1972; Fremgren 1973; Schall, Sundem, and Geijsback 1978).1 Gordon (1955) attempted to explain this anomaly by observing inverse period an approximation for internal rate return. But Sarnat Levy (1969) point out, accuracy depends on life project its IRR. For low values IRR very poor approximation. Moreover, difficult believe corporations complex sophisticated technologies need rule thumb approximate something simple compute In fact, empirical evidence shows most firms both Schall The criterion continues be industry, although there support among academicians. This paper attempts find economic rationale using incentive model with asymmetric information. It argues when managers possess private information regarding projects selected implementation, their interest choose, ceteris paribus, pay back faster. Since manager's wages depend output (because productivity unknown), choosing fast they hope improve reputations. * I wish thank Milton Harris anonymous referee helpful suggestions, while retain responsibility any remaining errors. 1. been found rarely primary method. secondary discounted cash-flow such NPV (net present value) or (internal return).