profit margins over the short-term, although strategic capital investments are essential in the development of the innovation required to support long-term profitability. Many firms based in the United States are not making strategic capital investments at levels sufficient to assure the development of the competitive advantage necessary to assure long-term profitability in the global economy (Vitale & Mavrinac, 1995, p. 43). "Outdated and inappropriate" capital budgeting systems are identified as a causal factor underlying this situation because such systems "often fail to direct capital towards the corporate development projects that offer the greatest strategic rewards" (Vitale & Mavrinic, 1995, p. 43).
A part of the problem may be associated with contradictions between firm-level risk-return relationships incorporated into capital budgeting systems and the positive risk-return relationships derived from financial portfolio theory (Miller & Leiblein, 1996, p. 91). Capital budgeting systems tend to mirror the risk-avoidance behavior of most managers. The capital budgeting problem is directly relevant to the accounting functions within an organization, because capital budgeting decisions are based upon accounting-based data (Messina & Singh, 1995, p. 62).
Another part of the problem may be associated with the functional structure of the capital budgeting process in most firms (Laverty, 1996, p. 842). Capital investment decisions in most firms are made at successive levels of the organization·from bottom to top. Laverty (1996, p. 842) pointed-out that structure is important because it affects the set of choices presented to the decision maker. Structure involves the "sequence in which conflicts are resolved, and agendas evolve as conflicts flow upward to top management. Thus, choices are made based upon the alternatives presented, not from the full range of options that were considered at lower levels" (Laverty, 1996, p....