Capital Budgeting Sophistication and
Date
2011-06-07
Authors
Peek, Johannes Samuel
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Abstract
The academic community has tried to convince corporate business managers
that the capital budgeting decision-making process can be made more effective
by using more sophisticated capital budgeting techniques. There are different
capital budgeting tools and techniques available. The question that needs to be
answered is whether using sophisticated capital budgeting techniques will give
business a competitive edge?
The study investigates the relationship between a firm’s capital budgeting
sophistication and its long term operating performance. The study firstly
investigates the use of different capital budgeting techniques. Using this
information, a capital budgeting sophistication score is calculated.
Secondly, financial information of the firm is used to calculate the firm’s average
operating rate of return for the firm, relative to the average operating rate of
return for the industry. The study takes into account firm size, capital intensity,
operating risk and the degree of focus.
Thirdly, the capital budgeting sophistication of companies and operating
performance are compared to investigate a possible statistical relationship.
It is concluded that there is a statistically significant, positive relationship between
the degree of capital budgeting sophistication of a company and its operating
performance.
It would therefore be beneficial to industry to increase capital budgeting
sophistication. This would lead to increase in return to shareholders, increasing
the value of the company
Description
MBA - WBS
Keywords
Budgets, Capital budgeting