Capital budgeting practices: evidence from Korea

Abstract

PurposeThe authors present the results of a survey on how Korean firms evaluate new projects and estimate their capital costs. The authors report how Korean firms’ capital budgeting practices compare to other developed countries and to best practices in the field of finance.Design/methodology/approachThe authors survey CFOs of major Korean firms on their capital budgeting practices. The authors then compare the results against the US and European firms and best practices of leading firms and financial advisors.FindingsThe authors find that the capital budgeting practices of Korean firms are as strong as or stronger than firms in developed markets. A majority of Korean firms use best practices techniques such as NPV, IRR and the CAPM for project evaluation and cost of equity estimation. Chaebol affiliation results in somewhat stronger capital budgeting practices. The authors also find that other factors, such as company size, leverage, CEO age and CEO education, impact capital budgeting practices.Originality/valueThis paper is the first article that comprehensively examines Korean firms' capital budgeting practices.

The Impact of Capital Budgeting Practices on Financial Performance of Lebanese Banks

“…Capital budgeting was evaluated using a longitudinal survey by Graham & Sathye, 2020;Kim et al, 2021). He sees an upward trend in the use of discounted cash flow methods.…”

Capital Budgeting Practices: A Survey of Two Industries

“…Capital budgeting (CB) practices have been widely studied, with the literature concentrating on identifying companies' most commonly applied capital budgeting indicators and reasons for using some rather than others. Most studies are based on large listed companies in big countries with developed economies, such as the USA (e.g., Graham and Harvey 2001), the UK, Germany, the Netherlands, France, Sweden, Italy, Spain (e.g., Brounen et al 2004;Daunfeldt and Hartwig 2014;Rossi 2014), Brazil (e.g., de Souza and Lunkes 2016), Canada (e.g., Bennouna et al 2010), Australia (e.g., Truong et al 2008), and Korea (e.g., Kim et al 2021). There are also studies in other countries such as Croatia (e.g., Dedi and Orsag 2008), Sri Lanka (e.g., Nurullah and Kengatharan 2015), Kuwait (e.g., AlKulaib et al 2016), Barbados (e.g., Alleyne et al 2018), andPortugal (e.g., João et al 2007).…”

Investment decisions in the context of SMEs: A non-financial factor approach

“…used techniques (Kim, Lee, Park, & Waggle, 2021;Siziba & Hall, 2021). Literature review shows that larger organizations have more resources at their disposal and have more sophisticated capital budgeting techniques than smaller ones that are less likely to use the considered "best practices" (Batra & Verma, 2017;Chittenden & Derregia, 2015;Kim et al, 2021;Nawaiseh, Al-nawaiseh, Attar, & Al-nidawy, 2018;Tresierra-Tanaka & Vega-Acuña, 2019).…”

“…used techniques (Kim, Lee, Park, & Waggle, 2021;Siziba & Hall, 2021). Literature review shows that larger organizations have more resources at their disposal and have more sophisticated capital budgeting techniques than smaller ones that are less likely to use the considered "best practices" (Batra & Verma, 2017;Chittenden & Derregia, 2015;Kim et al, 2021;Nawaiseh, Al-nawaiseh, Attar, & Al-nidawy, 2018;Tresierra-Tanaka & Vega-Acuña, 2019). Lack of time, non-information, or excessive confidence about having precise human capital without knowledge and skills conspire against small businesses to apply 'rules of thumb' in capital budgeting and the most convenient decision to accept or reject an investment project (Elgebeily et al, 2021;Jiang & Hu, 2021;Tresierra-Tanaka & Vega-Acuña, 2019).…”

“…Knowing that, (1) The traditional methods and rules to make wise investment decisions are difficult to use by small and medium entrepreneurs (Fehrenbacher et al, 2020;Kim et al, 2021;Magni & Marchioni, 2020;Tresierra-Tanaka & Vega-Acuña, 2019). (2) The economic reliability of well-known measures of financial efficiency is not strongly consistent (Brincks, Haddad, Lotfaliei, & Trombley, 2020;Magni & Marchioni, 2020;Marchioni & Magni, 2018;Sureka, Kumar, Colombage, & Abedin, 2022;Tresierra-Tanaka & Vega-Acuña, 2019).…”