Sensitivity analysis for the determinants of investment appraisal

Shujahat Haider Hashmi,Munawar Hussain,Muhammad Asif Khan,Raja Muhammad Ahsan Ilyas

doi:10.20869/auditf/2017/148/686

Abstract

This study empirically conducts the sensitivity analysis for the determinants of investment appraisal of Pakistani non-financial firms listed at Pakistan Stock Exchange (PSX) across sectors. We employed OLS regression along with common effect and fixed effect model on panel data pertaining to 60 non-listed firms at Pakistan Stock Exchange (PSX) over the period from 2003 to 2015. Empirical results document that leverage, growth, dynamism and inflation have strong positive associations with investment appraisal, however, munificence and GDP influence the process conversely. The study provides useful framework for potential investors to evaluate all these vital factors besides conventional mechanism, prior to making investment decision. Policy makers for non-financial sectors may get benefit by apply this diagnostic model to evaluate prospective investment projects for the most optimistic outcome. Corporate finance literature reveals that there is no formal evidence of determinants of capital expenditure at different levels of economic recessions; therefore, the study is pioneer effort to identify the significant determinants of investment appraisal of Pakistani listed non-financial firms across sectors, eventually, a useful contribution in existing literature.

Highlights

Capital expenditure refers to the planning process used to identify, evaluate and select the most appropriate long-term project in compliance with budget constraints; every firm has specific strategies to achieve the desired objectives with optimized utilization of available resources, considering the value creation metaphor for shareholders (Penman, 2010)
Sensitivity analysis method is often applied to help making investment decisions regarding capital budgeting under uncertainty, it is the procedure that examines how changes in certain input values, which occur due to inadequate forecasting or for another reason, influence certain criteria and budget total capital values
Some other determinants at sectors level e.g. Munificence shows negative significant relationship with investment because the sign of coefficient is negative and p-value is significant by applying both models OLS regression and fixed affects model

Summary

Introduction

Capital expenditure refers to the planning process used to identify, evaluate and select the most appropriate long-term project in compliance with budget constraints; every firm has specific strategies to achieve the desired objectives with optimized utilization of available resources, considering the value creation metaphor for shareholders (Penman, 2010). Capital expenditure decision has long-term range impact on the strategic performance of the organization and is a key to the success or the failure of the organization. Mc Connell and Muscarelle (1985) document that capital expenditures affect business performance. Capital spending affect aggregate demand and GDP, economic development, and business courses (Dornbusch and Fisher, 1987). Many studies examine the factors that influence the level of capital expenditures, some researchers focusing on country-level factors and institutional differences across developed and emerging economies (Wnuk-Pel, 2014). Sensitivity analysis method is often applied to help making investment decisions regarding capital budgeting under uncertainty, it is the procedure that examines how changes in certain input values (revenue, costs and the value of investments, etc.), which occur due to inadequate forecasting or for another reason, influence certain criteria and budget total capital values

Methods

Results

Conclusion