Sophisticated Capital Budgeting Research Articles

What restricts SMEs from adopting sophisticated capital budgeting practices?

What restricts SMEs from adopting sophisticated capital budgeting practices?

The relationship between national culture, capital budgeting systems and firm financial performance: evidence from Australia and Indonesia

The aim of this study is to examine the relationship between national culture, capital budgeting systems (CBS) and firm financial performance. Prior research has found that capital budgeting systems are influenced by national culture. However, these studies measure national culture narrowly. We contribute to the literature by including a refined measure of national culture and examine its effects on capital budgeting systems. We surveyed a sample of 100 non-financial firms in Indonesia and Australia. We found that firms using sophisticated capital budgeting procedures (a type of CBS) performed better than firms using less sophisticated capital budgeting procedures. In contrast, firms using more non-financial information (a naïve type of CBS) did not perform as well as firms using less non-financial information. We also found that Indonesian firms use more sophisticated capital budgeting systems than Australian firms due to the differences in national culture.

The relationship between national culture, capital budgeting systems and firm financial performance: evidence from Australia and Indonesia

The aim of this study is to examine the relationship between national culture, capital budgeting systems (CBS) and firm financial performance. Prior research has found that capital budgeting systems are influenced by national culture. However, these studies measure national culture narrowly. We contribute to the literature by including a refined measure of national culture and examine its effects on capital budgeting systems. We surveyed a sample of 100 non-financial firms in Indonesia and Australia. We found that firms using sophisticated capital budgeting procedures (a type of CBS) performed better than firms using less sophisticated capital budgeting procedures. In contrast, firms using more non-financial information (a naive type of CBS) did not perform as well as firms using less non-financial information. We also found that Indonesian firms use more sophisticated capital budgeting systems than Australian firms due to the differences in national culture.

AS CARACTERÍSTICAS DO GESTOR INFLUENCIAM NO ORÇAMENTO DE CAPITAL DE EMPRESAS HOTELEIRAS?

Este artigo objetiva verificar a influência das características do gestor no orçamento de capital de empresas hoteleiras de Florianópolis/SC. Propõe-se que o efeito das características do gestor no desempenho dos hotéis é indireto por meio de variáveis mediadoras da utilização de práticas de orçamento de capital sofistificadas e não sofisticadas. Utilizou-se o método Partial Least Square para analisar as relações. Os resultados mostram que gestores mais velhos e com mais tempo no cargo tendem a utilizar menos práticas sofisticadas de orçamento de capital. Não foi confirmada a influência positiva do uso de práticas sofisticadas de investimentos no desempenho não financeiro.

National Differences in Capital Budgeting Systems: A Comparison between Indonesian and Australian Firms

Manuscript type: Research paper. Research aims: This study examines the impact of cross-cultural differences on capital budgeting systems. Design/ Methodology/ Approach: Drawing on the contingency theory, 67 non-financial firms listed in Indonesia and Australia were analysed on a comprehensive range of capital budgeting systems. Research findings: The findings support our predictions that relative to Australian firms, the Indonesian firms were found to emphasise more on sophisticated capital budgeting systems (e.g. real options). The results seem to be driven by Indonesia’s higher level of perceived environmental uncertainty coupled with Sharia governance rules that aim to mitigate risky transactions. This study also provides evidence to show that the emphasis on sophisticated capital budgeting systems was driven by firm size and finance managers’ level of education attainment. Theoretical contributions/ Originality: Prior research has docu- mented an incomplete picture of the link between national culture and capital budgeting systems. This is attributed to the lack of the development of contextual foundations for looking at cross-cultural differences followed by the narrow range of capital budgeting systems being considered in research. Practitioner/ Policy implications: The findings of this study reflect the  capital  budgeting  practices  of  Indonesia  and  Australia.  The findings are important for practitioners who wish to evaluate project investments in these two countries. Research limitation: Future research should consider looking into how Sharia impacts the use of capital budgeting systems and the performance effects of using different approaches. Keywords: Capital Budgeting Systems, National Culture, Indonesia, Australia, Environmental Uncertainty JEL Classification: M41

Non-financial criteria in project appraisal methodologies: empirical evidence from Indian companies

There is an abundance of literature advocating the growing usage of sophisticated capital budgeting practices in corporate India. However, the qualitative aspects in project appraisal are still disregarded. Our research investigates the extent to which Indian companies incorporate non-financial criteria in their project appraisal practices. In addition it makes a contribution to project appraisal methodologies by presenting a comprehensive framework of factors to be considered in project selection. Based on a survey of 77 listed companies, SWOT analysis, customer market analysis, technical considerations, social considerations and necessity to maintain existing product lines emerged as important non-financial criteria in project appraisal. Gratifyingly, the qualitative criteria are used by almost all companies and only 2.6% of the companies do not use this type of criterion. Furthermore exploratory factor analysis identified technical factors, stakeholders' expectations, financial feasibility, social factors, strategic alignment and external factors as the prime factors affecting project selection. According to the authors' knowledge, this is the first study on the significance of non-financial criteria in project appraisal in a developing country like India.

Non-financial criteria in project appraisal methodologies: empirical evidence from Indian companies

There is an abundance of literature advocating the growing usage of sophisticated capital budgeting practices in corporate India. However, the qualitative aspects in project appraisal are still disregarded. Our research investigates the extent to which Indian companies incorporate non-financial criteria in their project appraisal practices. In addition it makes a contribution to project appraisal methodologies by presenting a comprehensive framework of factors to be considered in project selection. Based on a survey of 77 listed companies, SWOT analysis, customer market analysis, technical considerations, social considerations and necessity to maintain existing product lines emerged as important non-financial criteria in project appraisal. Gratifyingly, the qualitative criteria are used by almost all companies and only 2.6% of the companies do not use this type of criterion. Furthermore exploratory factor analysis identified technical factors, stakeholders' expectations, financial feasibility, social factors, strategic alignment and external factors as the prime factors affecting project selection. According to the authors' knowledge, this is the first study on the significance of non-financial criteria in project appraisal in a developing country like India.

Do Firms' Characteristics Make a Difference of the Choice of Capital Budgeting Practices? Evidence from Sri Lanka

The aim of this study was to examine the differences of the choice of capital budgeting practices in terms of firms’ characteristics of Sri Lankan companies. The primary data were garnered from 186 financial officers using self-administered questionnaires. Collected data were then analysed using independent sample t- test. The Results of the study revealed that the use of simple capital budgeting practices were mostly preferred by small sized firms and mainly managed by finance professionals with non-MBA educational qualifications and short tenure. Sophisticated and advanced capital budgeting practices were used mostly by large firms; and were mainly managed by finance professionals with master of business administration qualification and long tenure. According to the industry differences, accounting rate of return was primarily applied by non-MBA qualified financial officers and was also preferred by non-manufacturing firms. None of the other methods made any significant differences in terms of type of industry. Sophisticated capital budgeting practices were determined by the size of the capital budget, advanced capital budgeting practices were determined by both the size of the capital budget and the educational qualifications of the finance professionals. In a similar vein, simple capital budgeting practices were determined by the size of the capital budget, the educational qualifications of the financial officers, and type of industry. Overall, this study has made parametric contributions to the choice of capital budgeting practices in terms of firms’ characteristics of Sri Lankan companies. The findings of the study are useful to the investment decision makers when they are appraising investment projects.

Moderating Effect of Social Uncertainty between Capital Budgeting Practices and Performance

Capital budgeting is crucial in order for companies to sustain themselves, survive and flourish in markets and to increase shareholders’ wealth. The performance of a firm depends on its effective investment decisions. Investing in the 'right' project has an influence on the success of the firm and its future growth. Even though risk and uncertainty factors carefully considered in investment decision making. Therefore, aim of this study was to evaluate the moderating effect of uncertainty between capital budgeting practices and performance based on Sri Lankan emerging market. The data were garnered from primary data and secondary data sources. The primary data were collected from 186 CFOs working in companies in Sri Lanka using self-administered questionnaires. The questionnaire was piloted with a sample of five CFOs. The secondary data were mainly collected from CSE via the Bloomberg website/annual reports for the 5 years period. In order to evaluate the moderating effect of uncertainty between capital budgeting practices and performance, social uncertainty has been considered in this study. Performance was measured by Tobin_q. Data were analysed using descriptive, inferential and multivariate analysis. Findings of the study revealed that an increased level of social uncertainty weakens the positive relationship between sophisticated capital budgeting practices and Tobin_q. In a similar way, an increased level of social uncertainty weakens the positive relationship between advanced capital budgeting practices and Tobin_q and vice versa. Overall, this study has made contribution as identified the moderating effect of uncertainty between the relationship of capital budgeting practices and performances. In a nutshell, beyond its valuable contribution, this study serves as a springboard for future research in many ways.

Capital Budgeting Theory and Practice: A Review and Agenda for Future Research

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE) , SciVerse ScienceDirect (Elsevier) , Informa - Taylor & Francis (CrossRef) , Wiley (CrossRef) , Business (JSTOR) , Arts & Sciences (JSTOR) , Proquest , MEDLINE (NLM) , and Wiley Online Library . Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Recent studies lent credence on the use of more sophisticated capital budgeting techniques along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioral finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company.

Capital budgeting practices: evidence from Sri Lanka

Purpose – The purpose of this paper is to investigate prevailing capital budgeting practices in Sri Lankan listed companies. Design/methodology/approach – A comprehensive primary survey was conducted of 32 out of 46 chief financial officers (CFOs) of manufacturing and trading companies listed on the Colombo Stock Exchange in Sri Lanka. Garnered data were then analyzed using appropriate statistical techniques. Findings – The results revealed that net present value (NPV) was the most preferred capital budgeting method, followed closely by payback (PB) and internal rate of return (IRR). Similarly, sensitivity analysis was regarded as the dominant capital budgeting tool for incorporating risk and the widely used method for calculating cost of capital was the weighted average cost of capital. Moreover, results revealed that size of the capital budget affects the use of the capital budgeting methods (NPV, IRR and PB) and incorporating risk tool (sensitivity analysis and simulation). Further, results revealed that CFOs had higher educational qualification were preferred to use sophisticated capital budgeting practices dominantly NPV, IRR and incorporating risk tool of sensitivity analysis although they were found to be reluctant in use of accounting rate of return. In a similar vein CFOs with higher experience were preferred using IRR and sensitivity analysis. Originality/value – This study contributed to academics, practitioners, policy makers and stakeholders of the company. Moreover, this research has proffered a more reliable and comprehensive analysis of capital budgeting practices in Sri Lankan listed manufacturing and trading firms. Since Sri Lanka is an unexplored country on capital budgeting practices, this research was originally contributed to the extant literature per se.

Practices of performance measurement in companies in the Republic of Serbia

large number of acronyms which indicate different performance metrics, such as EBIT (Earnings Before Interest And Taxes), EBITDA (Earnings Before Interest, Taxes, Depreciation, And Amortization), ROIC (Return On Invested Capital), NPV (Net Present Value), EVA (Economic Value Added), IRR (Internal Rate Of Return), ROE (Return On Equity), ROA (Return On Assets) etc. are in use nowadays. In practice, managers cannot and do not want to apply all of these metrics and managers' choice does not necessarily rely on what theory emphasizes as their advantages and disadvantages. We surveyed 64 CFOs in order to explore the corporate practice in the Republic of Serbia. The DCF-based capital budgeting metrics are dominant compared to the traditional metrics, and the one that is used the most is the profitability index, only to be followed by the IRR and the NPV. The Payback Period is yet frequently used. The earnings based corporate performance metrics are still the most important. However, the presence of EVA and the balanced scorecard is not negligible. Large companies use them significantly more than small companies. The orientation towards EVA and the balanced scorecard increases with the internationalization of a firm as well. Finally, companies using sophisticated capital budgeting metrics are prone to using sophisticated corporate performance metrics.

An Empirical Insight into Different Stages of Capital Budgeting

In today’s highly turbulent and volatile business environment where companies are exposed to a multitude of risks, only globally competitive and professionally managed companies can thrive and grow. In such a competitive environment, the capital budgeting decisions made by a company are critical to a firm’s long-term survival. Is the Indian corporate sector using theoretically sound and sophisticated capital budgeting techniques for decision making purposes? Are the Indian firms adopting risk analysis techniques for handling various risks in investments? These issues have been the focus of research studies over the past so many years. The most prevalent emphasis of previous capital budgeting surveys continues to be mainly on financial analysis and project selection stage of capital budgeting. The article reviews the past capital budgeting survey literature till the year 2012 and brings to light some of the neglected areas of capital budgeting. It is noticed that project definition and cash flow estimation (identification and development) (Stage I), project implementation (Stage III) and project review (post audit and control) (Stage IV) are the specifically neglected areas of the capital budgeting process. Further Indian studies encompassing the overall stages of capital budgeting process still remain relatively unexplored. The main aim of the present study is to not only provide an insight on the past literature, but also explore the CFOs opinions and perceptions about the relative difficulty and significance of different stages of capital budgeting in India, particularly in an era of full-fledged globalization and cutthroat competition, where companies are being exposed to various degrees of risk. The study is based on a primary survey of CFOs of 77 Indian companies listed on Bombay Stock Exchange. The study further endeavours to evaluate the impact of different company related variables of size of capital budget, nature of industry, company age, CEO education and CEO age on the level of difficulty of different stages of capital budgeting.

An Empirical Study on the Relationship between Sophisticated Capital Budgeting Practices and the Performance of Japanese Firms

An Empirical Study on the Relationship between Sophisticated Capital Budgeting Practices and the Performance of Japanese Firms

The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

In this paper Swedish listed companies use of capital budgeting and cost of capital estimation methods in 2005 and 2008 are examined. The relation between company characteristics and choice of methods is investigated and both within-country longitudinal and cross-country comparisons are made. Larger companies seem to have used capital budgeting methods more frequently than smaller companies. When compared to U.S. and continental European companies, Swedish listed companies employed capital budgeting methods less frequently. In 2005 the most common method for establishing the cost of equity was by asking the investors what return they required. By 2008 CAPM was instead the most utilised method, which could indicate greater sophistication. The use of project risk when evaluating investments also seems to have gained in popularity, while the use of company risk declined. Overall, the use of sophisticated capital budgeting and cost of capital estimation methods seem to be rising and the use of less sophisticated methods declining.

Investment Decisions on Long-term Assets: Integrating Strategic and Financial Perspectives

This paper aimed to verify how companies formalise the decisions and control on long-term investments. In particular, an analysis of the published literature reveals a relevant gap between the strategic and financial perspectives in addressing this issue, and Agency Theory was proposed as a linking construct to bridge this gap. A survey was conducted among 82 companies, and the data were treated using the structural equation modelling technique. The results of this survey indicate that firms with intensive external funding use sophisticated capital budgeting methods more frequently when evaluating the profitability of their long-term investment proposals. As these methods require detailed information, these firms use additional appraisal mechanisms to conduct their investment analysis more frequently. Additional mechanisms are also used if the long-term investment is funded by external sources and perceived as a riskier investment. These deeply analysed long-term investment proposals often appear and are decided as a part of the strategic planning process instead of being strongly associated with the budgeting process. Finally, these long-term investments, which are funded externally, analysed using sophisticated methods and mechanisms and decided as a part of the strategic planning cycle, are more tightly controlled than other investments. These findings help to reduce the heuristics within the related literature.

Capital Budgeting Practices and Economic Development: A Comparative Study of Companies in Western Europe and West Africa

Over the years, efforts have been made to increase the developmental strides of African countries. Many projects move from donor countries like the United Kingdom and the United State into Africa to help improve the lives of the people. However, these efforts have not been able to redeem Africa from abject poverty and indebtedness to the West. Various projects that are targeted towards the reduction of poverty are normally completed with no changes in the lives of the people. These projects, in my opinion, have not been scrutinised to assess their capabilities of meeting some stated target. Capital budgeting practices are some of the vital inputs in the decision-making process of embarking on investment projects. A very good analysis, scrutiny, implementation and monitoring of such projects could yield the expected results for the stakeholders (people of the country). According to Dayananda et al (2002), the capital budgeting practices are used to make investment decisions so as to increase shareholders value. Capital budgeting is primarily concerned with sizable investments in long-term assets, Brealey & Myers (2003). These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design, development and testing – through which new technology and new products are created – may also be viewed as investments in intangible assets (IBID). Dayananda et al (2002), argued that irrespective of whether the investments are in tangible or intangible assets, a capital investment project can be distinguished from recurrent expenditures by two features. One is that such projects are significantly large. The other is that they are generally long-lived projects with their benefits or cash flows spreading over many years. Sizable, long-term investments in tangible or intangible assets have long-term consequences (IBID). This implies that today’s investment will determine the overall corporate strategic position over many years. These capital investments also have a considerable impact on the future cash flows of the organization and the risk associated with those cash flows. Capital budgeting decisions thus have a long-range impact on the strategic performance of the organization and are also critical to its success or failure. This paper compares the use of capital budgeting techniques by companies in Europe and West Africa, using data obtained from a survey between 225 European and 120 West African companies. The main aim is to analyse the use of capital budgeting techniques by companies in both economic blocs from a comparative perspective to see whether economic development matters in the choice of which technique to use. The empirical analysis provides evidence that European CFOs on average use more sophisticated capital budgeting techniques than their counterparts in West African. At the same time, however, the results suggest that the differences between European and West African companies is smaller than might have been expected based upon the differences in the level of economic development between both economic blocs. At least, this is evident with respect to the use of methods of estimating the cost of capital and the use of CAPM as the method of estimating the cost of equity.

Evaluating the Impact Of Foreign Exchange Rate Risk On The Capital Budgeting For Multinational Firms

Capital budgeting analysis has evolved to the point where large firms universally use sophisticated capital budgeting techniques.[1] However, small firms are less likely to use sophisticated capital budgeting techniques.[2] Even large firms do not generally use simulation for risk analysis in multinational project capital budgeting analysis.[3] This paper provides a discussion and example of the use of simulation in evaluating the impact of foreign exchange rate volatility on multinational project capital budgeting analysis.[1] Bierman, Harold, Jr. Capital Budgeting in 1991: A Survey, Financial Management, Autumn 1993, pp. 21-29.[2] See, for example, Block, Stanley. Integrating Traditional Capital Budgeting Concepts into an International Decision-Making Environment, The Engineering Economist, 45(4), 2000, pp. 309-325 or Graham, John R. and Campbell R. Harvey. The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60, 2001, pp. 187-243.[3] See, for example, Farragher, Edward, Robert Kleiman, and Anandi, Sahu. The Association Between the Use of Sophisticated Capital Budgeting Practices and Corporate Performance, The Engineering Economist, 46(4), 2001, pp. 300-31, Ho, Simon S. M. and Richard H. Pike. Risk Analysis in Capital Budgeting Contexts: Simple or Sophisticated?, Accounting and Business Research, 21(83), 1991, pp. 227-238, Klammer, T. Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques, The Journal of Business, July 1972, pp. 387-397, and Klammer, T., B. Koch, and N. Wilner. Post-auditing Capital Assets and Firm Performance: An Empirical Investigation, Managerial and Decisions Economics, (12), 1991, pp. 317-327.

Capital Budgeting - Decision Making Practices in Pakistan

A number of capital budgeting techniques find place in basic as well as advanced text books on Financial Management and Corporate Finance. Each technique has its pros and cons as a decision making tool. The research paper investigates the decision making practices of Pakistani companies with respect to Capital Budgeting including the techniques employed and basis for estimation of cost of Capital / Project risk. The paper also examines the linkage between the techniques employed and various factors such as; size of investment outlay, nature of industry, company size, growth rate and capital structure. Also probed is the extent of delegation of decision making authority in respect of capital budgeting decisions. Further, the respondents' views on relative popularity/significance of the techniques and reasons for the same have also been studied. Furthermore, the differences in techniques and decision making practices of local and foreign companies operating in Pakistan have also been looked into. The information/data for the above stated purpose was collected through a questionnaire from sample companies listed on the Karachi Stock Exchange (KSE).The main findings extracted from the responses to the questionnaire are, that key decision makers in Pakistani firms are quite aware of and practically using sophisticated capital budgeting techniques. The study shows that bigger size companies give greater preference to IRR, while smaller firms rely more on NPV. Also smaller firms are keener in estimating the pay back period (PP) as compared to larger companies. Consciously or unconsciously the firms relying more on debt financing or with high growth rates give more preference to the NPV technique, while low leverage and low growth firms rely more on IRR.

Capital budgeting methods, management control systems and the R&D intensity of the firm

This paper investigates the effect of the Research and Development (R&D) intensity of the firm on the use of management control systems, capital budgeting methods and the methods to determine the cost of capital. Based on earlier literature, we develop several hypotheses that we test empirically, using survey data of the 101 Finnish firms operating in the capital area. The results indicate that the use of management control systems such as control and bonus systems, budgeting and strategic alliances increases with the degree of the R&D intensity of the firm. The results also indicate that high-R&D-intensity firms use formal capital budgeting methods within large and strategic projects. Finally, our results show that the use of sophisticated capital budgeting methods such as Net Present Value (NPV) and Internal Rate of Return (IRR) methods increases with the R&D intensity of the firm. Our results remain materially the same after controlling for several firm characteristics.