Relationship Between Capital Budgeting Techniques and Financing Decision Among Major Supermarkets in Nairobi County, Kenya

Abstract

There are significant connections between corporate financing and investment decisions (Jensen, 1984). The cash flow method used in capital budgeting facilitate the undertaken financing decisions. The choice of whether to accept or reject an investment is dependent on not only the profitability and viability of the project but also on the ability of the company to raise the initial capital.The research objectiveestablishedrelationship between capital budgeting techniques and financing decisions among major retail outlets in Nairobi County, Kenya. The theories that inform this study was informed by the portfolio theory and the real options theory. The research design adopted was causal research design, while the population of the study consisted of 41 major supermarkets in Nairobi County, Kenya. The study applied a census approach where the whole population was analyzed, and no sample was drawn. The study employed primary as well as secondary data collection methods where a closed ended questionnaire was identified for collecting primary data. The cross-sectional study that was deployed in the study undertook correlation as well as multiple linear regression analysis. The study findings established that capital budgeting techniques have no significant effect on the capital structure and therefore they cannot significantly predict a firm’s capital structure. Further study findings were that none of the capital budgeting techniques had significant effect on capital structure. The final study finding indicated that the size of the firm had significant association with capital structure. There are various policy recommendations made to the government officials and policy formulators in the retail industry, mainly the regulator CAK and the Ministry of Trade and Industrialization, that they should not focus on capital budgeting techniques when trying to regulate the capital structure of supermarkets. However, they should encourage supermarkets to increase in size since large supermarkets are most likely to employ capital budgeting techniques, which will most likely influence their capital structure. Further recommendations were to retail market practitioners and consultants not to focus on capital budgeting techniques when deciding on the optimal capital structure. However, they should focus on the size of the retail outlets when deciding on the optimal capital structure.