A Survey of Capital Budgeting Practices in Corporate India

Abstract

The present study aims to unveil the status of capital budgeting in India particularly after the advent of full-fledged globalisation and in the era of cutthroat competition, where companies are being exposed to various degrees of risk. For the above objective a comprehensive primary survey was conducted of 30 CFOs/CEOs of manufacturing companies in India, so as to find out which capital budgeting techniques is more preferred, discounted or non-discounted. The study also aims at examining the capital budgeting methods used for incorporating risk in investment proposals. It further endeavours to evaluate the impact of different factors or variables on the selection of a particular capital budgeting technique. For example, it was investigated that whether there exists any relationship between a size of company's capital budget and the method of capital budgeting adopted by it. Similarly it was discovered that is there any systematic relationship between different company related factors like age of a company, CEO education/qualification and the capital budgeting method adopted by it.

Czynniki determinujące wybór metod budżetowania kapitałowego w przedsiębiorstwach działających w Polsce

“…Graham and Harvey, 2001;Ryan and Ryan, 2002;Baker et al, 2011), Asia and Pacific (e.g. Kester et al, 1999;Lam et al, 2007;Truong et al, 2008;Leon et al, 2008;Verma et al, 2009) and Western Europe (e.g. Arnold and Hatzopoulos, 2000;Sandahl and Sjögren, 2003;Brounen et al, 2004;Liljeblom and Vaihekoski, 2004;Hermes et al, 2007;Daunfeldt and Hartwig, 2011).…”

“…Hermes et al, 2007). Verma et al (2009) showed that companies with large capital expenditures use NPV more often than those with small ones (the difference was not significant for other methods), similar results were obtained by Correia (2012 When evaluating investments, managers can choose from different methods to facilitate their decision: 1) formalization of investment appraisal (FORMAL_APR), 2) the investment appraisal method used: accounting rate of return -ARR (APR_ARR), payback -PB (APR_PB), discounted payback -DPB (APR_DPB), internal rate of return -IRR (APR_IRR), net present value -NPV (APR_NPV), 3) the discount rate used in DCF methods: marginal cost of capital -MCC (COST_MCC), weighted average cost of capital -WACC (COST_WACC), cost of debt (COST_DEBT), arbitrary cost (COST_ARBITRARY), 4) the methods of risk assessment: sensitivity analysis (A_SENSITIVITY), scenario analysis (A_SCENARIO), 5) monitoring investment during implementation (AUD_DUR_IMPLEMENT), 6) post-investment audit (AUD_POST_INVEST).…”

“…DCF methods are less common among companies from Western Europe and they are least commonly used in the countries of Central and Eastern Europe -CEE. (Andor et al, 2011) 20 35% N/A N/A 40% 30% Canada (Baker, et al, 2011) 214 N/A 75% 68% 67% 40% China (Hermes et al, 2007) 45 92% 49% 89% 84% N/A Croatia (Andor et al, 2011) 16 56% N/A N/A 69% 63% Czech Republic (Andor et al, 2011) 57 37% N/A N/A 53% 40% Finland (Liljeblom and Vaihekoski, 2004) 144 N/A 52% 44% 97% 21% France (Brounen et al, 2004) 61 55% 35% 44% 51% 16% Germany (Brounen et al, 2004) 132 60% 48% 42% 50% 32% Hong Kong (Lam et al, 2007) 46 N/A 72% 65% 85% 83% Hungary (Andor et al, 2011) 46 43% N/A N/A 63% 76% India (Verma et al, 2009) 30 N/A 63% 77% 80% 27% Indonesia (Leon et al, 2008) 108 N/A 64% 64% 86% 41% Latvia (Andor et al, 2011) 9 44% N/A N/A 33% 67% Lithuania (Andor et al, 2011) 14 43% N/A N/A 57% 50% Malaysia (Kester et al, 1999) 35 89% 71% 68% 70% 35% Netherlands (Hermes et al, 2007) 42 100% 89% 74% 79% 2% Poland (Szychta, 2001) 60 N/A 30% 25% 40% 35% Poland (Andor et al, 2011) 143 58% N/A N/A 81% 59% Romania (Andor et al, 2011) 57 58% N/A N/A 61% 68% Singapore (Kester et al, 1999) 54 82% 59% 70% 70% 44% Slovakia (Andor et al, 2011) 25 56% N/A N/A 64% 72% Slovenia (Andor et al, 2011) 13 46% N/A N/A 62% 77% Sweden (Daunfeldt and Hartwig, 2011) 88 N/A 61% 30% 54% 24% UK (Brounen et al, 2004) 68 68% 47% 53% 69% 38% USA (Ryan and Ryan, 2002) 205 N/A 85% 77% 53% 15% USA and Canada (Graham and Harvey, 2001) 392 97% 75% 76% 57% 20% * Total internal rate of return and net present value Source: own research. Table 1 shows that in some countries (e.g.…”

Capital Budgeting Theory and Practice: A review and agenda for future research

“…Scholarship on the practice of capital budgeting in many countries has found that firms are increasingly employing more sophisticated capital budgeting techniques in order to make investment decisions over several years (Klammer, 1973;Klammer and Walker,1984;Pike,1988;Jog and Srivastava,1995;Gilbert and Reichart,1995;Farragher, Kleiman and Sahu,1999;Arnold and Hatzopoulos, 2000;Brounen, de Jong and Koedijk, 2004;Truong, Partington and Peat,2008;Baker, Dutta and Saadi,2011). In the contemporary world, there are a number of sophisticated capital budgeting methods including the oft-cited: Monte Carlo Simulations, Game theory decision rules , Real option pricing, Using certainty equivalents, Decision trees, CAPM analysis / ß analysis, Adjusting expected values, Sensitivity analysis/break-even analysis, Scenario analysis, Adaptation of required return/discount rate, IRR, NPV, uncertainty absorption in cash flows, and PB (e.g., Arnold and Hatzopoulos, 2000;Hall, 2000;Graham and Harvey, 2001;Ryan and Ryan, 2002;Murto and Keppo, 2002;Cooper et al, 2002;Smit, 2003;Sandahl and Sjogren, 2003;Brounen, de Jong, and Koedijk 2004;Lazaridis, 2004;Lord, Shanahan and Bogd, 2004;du Toit and Pienaar, 2005;Verbeeten, 2006;Elumilade, Asaolu and Ologunde, 2006;Hermes, Smid, and Yao , 2007;Leon, Isa and Kester, 2008;Correia and Cramer, 2008;Verma, Gupta and Batra, 2009;Bennouna, Meredith and Marchant, 2010;Shinoda, 2010;Hall and Millard, 2010;Dragota et al, 2010;Poudel et al, 2009;Kester and Robbins, 2011;Maroyi and Poll, 2012;…”

Moderating Effect of Social Uncertainty between Capital Budgeting Practices and Performance

“…Capital budgeting practices was measured with questionnaire originally developed and validated by (Graham and Harvey, 2001;Brounen, deJong and Koedijk., 2004;Verma,Gupta and Batra, 2009). Respondents was asked to indicate on a 5-point Likert scale (ranging from 1 = never, to 5 = always) to what extent they consider several capital budgeting techniques useful or important in the investment process.…”