Corporate Finance Practices in Canada: Where Do We Stand?

Multinational Finance Journal, 2011, Vol. 15, No. 3/4, pp. 157–192

36 Pages Posted: 10 Jan 2013

See all articles by H. Kent Baker

H. Kent Baker

American University - Kogod School of Business

Shantanu Dutta

The University of Ontario Institute of Technology (UOIT)

Samir Saadi

Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2011

Abstract

This study investigates the financial practices of Canadian firms involving capital budgeting, cost of capital estimation, capital structure, and real options. Survey respondents express a strong preference for net present value followed by internal rate of return and payback methods. The least popular capital budgeting technique is real options. Unlike their U.S. and European counterparts, Canadian firms rely more on subjective risk assessments in adjusting their discount rate. The use of subjective judgment by Canadian managers also applies to risk analysis, forecasting project cash flows, and estimating the cost of equity capital. This finding differs markedly from the widespread use of the capital asset pricing model by U.S. and European firms. In examining capital structure choice, the results show support for trade-off theory relative to pecking order theory. Finally, firm size and the education of the chief executive officer influence corporate finance decisions.

Keywords: capital budgeting, cost of capital, risk analysis, real options

JEL Classification: G35

Suggested Citation

Baker, H. Kent and Dutta, Shantanu and Saadi, Samir, Corporate Finance Practices in Canada: Where Do We Stand? (2011). Multinational Finance Journal, 2011, Vol. 15, No. 3/4, pp. 157–192. Available at SSRN: https://ssrn.com/abstract=2198438

H. Kent Baker

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1949 (Phone)
202-885-1992 (Fax)

Shantanu Dutta

The University of Ontario Institute of Technology (UOIT) ( email )

2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada

Samir Saadi (Contact Author)

Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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