The Effect of Capital Budgeting Techniques on the Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

The study objective was determining the effects of capital budgeting techniques on how the financial performance of those companies which are listed by the NSE. Reap option and contingency theories guided this research. The research applied cross sectional survey and involved the 66 companies listed in the NSE as at August 2018. Sampling was not employed because at the time of study there were only 66 listed companies at NSE. The study covered a period of five years from 2013-2017. Primary and secondary data were used. Questionnaires were used to collect primary data. The published financial statements of those firms that are listed provided secondary data. Analysis and processing of the collected data aligned to the objectives of the research. Statistical Package for Social Science (SPSS) version 23 was applied in analysis that was collected where by descriptive statistics were used to understand better the findings, the information presented into percentages, pie charts and tables with an analysis while inferential statistics was applied by use of multiple regression model. In this study, it was that a big number of companies were for the NPV method as an instrument for capital budgeting and followed by payback period and finally IRR method. There was no unanimous agreement on the ARR method in appraisal of investment projects but some of the companies still applied it. Slightly more than a half of the respondents preferred using cost of debt and cost of equity in determining acceptable rate of return while more than a quarter of them had no idea which method is used to determine the acceptable rate of return. The outcomes showed significance of the model since R2 = 0.652 indicating 65.2% support. From outcomes of the research, results indicated that companies incorporated capital budgeting methods when they were performing investment appraisals. A conclusion was therefore made that a big number of companies employed NPV, payback period, IRR and ARR as methods for budgeting. A recommendation by the research is that sufficient measures needs to be employed in order to create progress on how the company performs through capital expenditure. Participation of employees is fundamental in making decisions concerning capital budgeting since an oversight role carried out by the executive management may be captured. As well, employment of fulltime employees is required as an important variable in the analysis of investments and include them in the production sector and in giving an overview of guidelines concerning capital expenditure. CMA and NSE are supposed to bring on board seminars pertaining the impacts of decisions made by the managers with regard to investments and the economy at large.