An Empirical Insight into Different Stages of Capital Budgeting

Abstract

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.

Capital budgeting: a systematic review of the literature

“…These characteristics involves schooling, technical knowledge, experience, age, gender, and more and may be applied to capital budgeting. However, only 6 studies (for example, Khamees et al, 2010;Batra & Verma, 2014;Vecino et al, 2015) evaluated the relationship between the attributes of the manager and decision-making in investments, but it did not really verify the implications of characteristics in choosing simpler or more sophisticated practices.…”

National development level effects on capital budgeting practices: a comparative study of nature vs nurture

“…The corporate finance literature distinguishes two key concepts in CB: CB processes and CB technqiues. CB processes explain how firms treat investment decisions in practice (Batra and Verma, 2014;Farragher et al, 2001). On the other hand, CB technqiues are defined as the methods and techniques used to evaluate and select an investment (Bennouna et al, 2010).…”

An Empirical Insight into the Theory and Practices of Capital Budgeting in Pakistan

“…A firm's main aim is to enhance its market value through rational financial decisions, including financing, dividend, liquidity, and investment decisions (Batra & Verma, 2014). Thus, capital budgeting decisions are an important facet of a firm's financial management strategy.…”

“…Similarly, Batra and Verma (2014) suggest that a firm's stakeholders are interested in evaluating a firm's prevailing competitive activities. Thus, firms interested in sustainable growth should adopt a well-structured appraisal process in their core business strategy.…”

“…Thus, irrational capital investment decisions can adversely affect the future of a firm. Batra and Verma (2014) also suggest that large capital investment decisions are complicated because of many uncontrollable factors. Some of those uncontrollable factors are future cash flow, social, technological, economic, and political environment.…”