Literature Review

Abstract

This chapter critically reviews the existing literature in some areas of business that impact investment appraisal decisions. These areas include capital budgeting, corporate governance, capital markets, accounting practices, and investment appraisal methods. To discuss these concepts and their interrelationships, some relevant theories are discussed including the following: agency theory, stakeholder theory, stewardship theory and resource dependence theory. The capital market variables include interest rates (cost of capital) and agency costs, which impact on corporate governance, which in turn have an impact on capital budgeting decisions (Ruiz-Porras and Lopez-Mateo 2011). There are two main sources of capital – equity and debt (Whitehead 2009). Debt is an external source of capital which bears a specified interest rate. It is mainly supplied by capital markets including commercial banks, investment banks and other financial institutions such as insurance companies, superannuation funds, etc. The company (the borrower) and the financial institution (the lender) enter into a contract which specifies the interest rate to be charged and other restrictive debt conditions which have to be observed during the life of the debt. Through the interest charges and other conditions imposed on the borrower (investor), the capital markets influence the firm’s corporate governance, agency costs and capital budgeting decisions. Therefore, making capital budgeting decisions without considering capital market interactions ignores one of the major factors that influence investment appraisal decisions.KeywordsCorporate GovernanceCash FlowStakeholder TheoryAgency CostCapital BudgetThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.