Capital budgeting practices : an empirical study of companies listed on the ALT X

Abstract

The main focus of this study is the analysis of the capital budgeting practices and techniques implemented by companies listed on the Alternative Exchange (Alt X) of the Johannesburg Securities Exchange (JSE). Dayananda, Iron, Harrison, Herbohn and Rowland (2002) explain that capital budgeting is the process through which companies assess various sizeable investments, both tangible and intangible, to determine the most viable investment projects for the company. Dayananda et al. (2002) further explain that viable investment projects are ventures that correspond with the company’s objective of maximising shareholder wealth. Therefore, the capital budgeting process used by a company is very influential to its long-term sustainability. Ryan and Ryan (2002) add that an effective capital budgeting process employs appropriate measures and accurate techniques that ensure the company invests only in the most lucrative proposed projects. This study commences by presenting a general introduction into the research conducted, offering background insight that explains the need for a study of this nature. The research problem that was identified is discussed, followed by the purpose statement of the study and a definition of all the research objectives that guide the study. Furthermore, the academic value and intended contribution of the study as well as its practical benefits are disclosed. The introductory chapter also consists of the delimitations of the study and the key concepts covered in this study. In order to provide a complete analysis of the capital budgeting practices employed by the companies listed on the Alt X, a comprehensive literature review was conducted. This highlighted the importance of capital budgeting as well as the capital budgeting behaviour of large firms in South Africa and internationally. What emerged from this research was that the capital budgeting practices and techniques implemented by large companies generally tend to align with the recommendations of financial theory which advocates the use of discounted cash flow techniques and a discount rate that accounts for all sources of funds available to the company. The literature review also assesses studies conducted on the capital budgeting practices of small and medium sized enterprises (SMEs), the category under which Alt X listed companies fall. Findings from those studies reveal that SMEs traditionally employ inferior capital budgeting techniques in comparison to their - iii - larger counterparts and use no formal procedures to calculate an acceptable rate of return required from proposed investment projects. The theoretical background gained from the literature review is complimented by an empirical analysis which investigates the actual capital budgeting behaviour of the SMEs listed on the Alt X. Companies included in the study were from all seven sectors represented on the Alt X and selection was limited only to those with an active primary listing on this board. A web-based survey comprising of 28 questions was formulated using Survey Monkey Software to collect and analyse responses. The survey was divided into sections which included questions about respondent demographics, company profiles, capital budgeting practices implemented, capital rationing and the use of discount rates. The survey remained active for a period of eight weeks to allow sufficient time for all respondents invited to participate. A total of 15 responses were obtained from this process when the survey was closed to further responses. The research design, methodology and techniques that guided this study are also disclosed in this dissertation. The final part of this dissertation contains research findings obtained from analysing the primary data gathered through the survey. These findings are analysed and interpreted in isolation, by relating them to findings from comparable studies of the same population as well as to similar studies conducted both locally and internationally. Finally, this dissertation concludes by summarising all research findings derived from the literature review and the empirical study. It also presents recommendations and areas for further study that could be of academic and practical value to the field of finance.