Capital budgeting practices: evidence from Korea

Abstract

PurposeThe authors present the results of a survey on how Korean firms evaluate new projects and estimate their capital costs. The authors report how Korean firms’ capital budgeting practices compare to other developed countries and to best practices in the field of finance.Design/methodology/approachThe authors survey CFOs of major Korean firms on their capital budgeting practices. The authors then compare the results against the US and European firms and best practices of leading firms and financial advisors.FindingsThe authors find that the capital budgeting practices of Korean firms are as strong as or stronger than firms in developed markets. A majority of Korean firms use best practices techniques such as NPV, IRR and the CAPM for project evaluation and cost of equity estimation. Chaebol affiliation results in somewhat stronger capital budgeting practices. The authors also find that other factors, such as company size, leverage, CEO age and CEO education, impact capital budgeting practices.Originality/valueThis paper is the first article that comprehensively examines Korean firms' capital budgeting practices.