Capital budgeting techniques and firms´ performance. Case study: Jordanian listed services firms

Abstract: Capital investment decision is one of the most important decisions, because it is thought to be affecting the short and long run situations of firms, and according to theory, it is thought to be affecting shareholders’ wealth. The researchers have recognized the two previously mentioned phases and conducted this study.   This study aims at identifying the extent to which capital budgeting techniques and its related practices are used by Jordanian listed services firms, and identifying reasonable justifications behind that pattern of this use. The study also aims at identifying if there is any relationship between firms’ performance and the degree of capital budgeting sophistication.   The researchers planned the study by formulating 3 research questions; these are, what are the capital budgeting techniques and their related practices that used by Jordanian listed services firms? Why Jordanian listed services firms use some capital budgeting techniques rather than others? What is the effect of the technique used on the firm’s performance?   To answer these questions, the researcher developed a questionnaire and addressed it to the capital budgeting decision makers of Jordanian listed services firms. The sample of the study is the whole population; 63 Jordanian listed services firms. The researchers received back 38 usable replies after which they started their statistical analysis to reach at findings about their first two questions. As to the third question, the researchers used a multiple regression model that explains performance by the degree of sophistication and size of the firm. The researchers run the analysis for the multiple regression model on 30 firms, the firms that have their financial statements available at JSC.   The results showed that PBP is the most used technique by the Jordanian listed services firms, followed by NPV, PI, ARR, and IRR. The results showed that the practices related to capital budgeting techniques; cost of capital estimation methods, risk analysis techniques, and cash flow forecasting techniques, are not widely used by the Jordanian listed services firms because of the domination of subjective judgment.   When started their study, the researchers expected that the selection of the capital budgeting techniques is explained by demographical characteristics, type of capital investment decision, and\ or the perception of the respondents to the advantages and disadvantages of each technique. The results showed that academic qualification has a positive effect on the use of DCF techniques, while the type of capital investment decision has no effect on the capital budgeting techniques selection. Based on the respondents’ perception to the advantages and disadvantages of each technique, the advantages of PBP and NPV explain their high use, and the disadvantages of IRR explain its low use. Finally, the results of the multiple regression analysis indicate that there is no relationship between the degree of capital budgeting sophistication and the performance of the firms.