Capital Budgeting Decision-Making Practices: Evidence From Pakistan

Afeera Mubashar, Yasir Bin Tariq, (2018) "Capital budgeting decision-making practices: evidence from Pakistan", Journal of Advances in Management Research,DOI/10.1108/JAMR-07-2018-0055

Posted: 18 Dec 2018

See all articles by Afeera Mubashir

Afeera Mubashir

COMSATS Institute of Information Technology Abbottabad

Dr. Yasir Bin Tariq

COMSATS University Islamabad, Abbottabad Campus

Date Written: November 28, 2018

Abstract

Purpose
The purpose of this paper is to examine the current trends of capital budgeting practices (analysis techniques, discount rate estimations and risk assessment methods) among Pakistani listed firms and analyze the responses conditional on firms’ demographics and executive characteristics.

Design/methodology/approach
An online questionnaire was sent via e-mail to top 200 non-financial firms (in terms of market capitalization) listed on Pakistan Stock Exchange.

Findings
With a response rate of 35 percent, it is concluded that the theory–practice gap is low as Pakistani listed firms are using discounted cash flow methods of capital budgeting and preferring net present value over internal rate of return. Similarly, weighted average cost of capital is estimated using target value weights, and capital asset pricing model (with extra risk factors) is used to determine the cost of equity capital. For risk assessment, sensitivity analysis and scenario analysis are the dominant approaches; however despite the theoretical superiority, the use of real options is very low. Overall, investment decision responses significantly differ across firm’s demographics and executive characteristics.

Practical implications
Pakistani business schools need to address the low usage of advanced methods such as modified internal rate of return and real options among Pakistani listed firms.

Originality/value
This is the first comprehensive study on the topic in Pakistan and have highlighted the areas of capital budgeting where Pakistani firms’ practices deviates from finance theory.

Keywords: Real Options, Risk, Cost of Equity, Cost of Capital, Capital Budgeting

JEL Classification: G30, G31

Suggested Citation

Mubashir, Afeera and Bin Tariq, Yasir, Capital Budgeting Decision-Making Practices: Evidence From Pakistan (November 28, 2018). Afeera Mubashar, Yasir Bin Tariq, (2018) "Capital budgeting decision-making practices: evidence from Pakistan", Journal of Advances in Management Research,DOI/10.1108/JAMR-07-2018-0055. Available at SSRN: https://ssrn.com/abstract=3292164

Afeera Mubashir

COMSATS Institute of Information Technology Abbottabad ( email )

University Road Tobe Camp
Abbottabad, Khyber Pakhtun Khawa 22060
Pakistan

Yasir Bin Tariq (Contact Author)

COMSATS University Islamabad, Abbottabad Campus ( email )

University Road
Tobe Camp
Abbotabad, Khyber Pakhtun Khawa 22060
Pakistan

HOME PAGE: http://www.cuiatd.edu.pk

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