Effect of Capital Budgeting Decisions on Financial Performance of Commercial and Services Firms Listed on Nairobi Securities Exchange in Kenya

Abstract

Capital budgeting decisions helps an organization to maximize the wealth of its shareholders in the most effective way. The capital budgeting decisions have attracted a lot of attention in corporate finance because they are complex and they determine the future direction and operations. Capital budgeting decisions affect the risk perceptions of shareholders in an organization and they require a heavy initial outlay. Despite the adoption of capital budgeting decisions, most Commercial and Services firms listed on NSE have successively recorded losses. The study sought to examine how capital budgeting decisions affected the ability of commercial and services firms registered on the NSE to perform financially. A total of 12 firms were studied. Data was obtained from secondary sources on a time horizon starting from 2013 all through to 2017. The collected data was coded into SPSS software and the findings were analyzed descriptively and inferentially. It was shown that asset expansion beta=-0.394 and p=0.000<0.05 had an inverse and significant effect on financial performance. Asset contraction had the beta=0.438 and p=0.004<0.05 thus it significantly influenced performance financially. The study concludes that capital budgeting decisions significantly affected financial performance. The study recommends that the finance managers of all commercial and services firms listed on the NSE should minimize on asset expansion and maximize on asset contraction decisions. This would positively and significantly influence financial performance of their firms. The regulatory bodies like the Capital Market Authority need to come up with sound regulations that allow the listed firms to maximize on their asset expansion and contraction decisions and thus influencing financial performance