Effect of Capital Budgeting Decisions on Profitability of Listed Firms at Nairobi Securities

Abstract

The listing of firms in an authorized security exchange does not exempt any organization from accountability and transparency in allocating the funds available for investment. In this regard every decision made by management should be authorized and be implemented to maximize the shareholders wealth. The huge amount of capital invested should be able to produce a payoff exceeding the investment so that an organization would experience returns to compensate the risk takers i.e. the shareholder and lenders of debt. This study sought to determine the effect of capital budgeting decisions on profitability of listed companies in Kenya. The population for the study was all the 64 companies listed in Kenya. The independent variables for the study were capital expenditure as measured by natural logarithm of total assets, revenue as measured by natural logarithm of total revenue and leverage as measured by long term debt divided by (shareholders equity + long term debt). Financial performance was the dependent variable and was measured by Return on Assets (ROA). Secondary data was collected for a period of 5 years (January 2012 to December 2016) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.694 which means that about 69.4 percent of the variation in profitability of listed companies in Kenya can be explained by the four selected independent variables while 30.6 percent in the variation of profitability was associated with other factors not covered in this research. ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the relationship between the selected variables. The results further revealed that capital expenditure and revenue produced positive and statistically significant values for this study while leverage produced negative but statistically significant values. This study recommends adequate measures to be put in place by managers of listed firms to improve and grow their profitability through capital expenditure. Listed firms and all firms in general should make appropriate capital budgeting decisions that will lead to an increase in profitability because this translates to improved shareholder wealth which is the main goal of a firm.