The relationship between capital budgeting techniques and financial performance of companies listed at the Nairobi securities exchange

Abstract

This study overall objective was to examine the capital budgeting techniques used in investment appraisal among companies listed at the Nairobi Securities Exchange. It sought to establish the techniques of capital budgeting specifically used by companies listed at the Nairobi Securities Exchange to undertake their firm’s investments and also to establish the relationship between the applied capital budgeting techniques and the financial performance of companies listed in the Nairobi Securities Exchange. The objective of this study arose due to the inconsistent research findings both elsewhere and in Kenya. The research adopted a correlation cross-sectional survey research design which is best suited for explaining or exploring the existence of two or more variables at a given point in time. The population of the study consisted of all companies listed at the Nairobi Securities Exchange. Data was collected from the primary sources which comprised of the questionnaires administered to the officers directly involved in capital budgeting as well the secondary sources which comprised of the data derived from the published accounts of the companies. The data was analyzed using the regression analysis model to test the effect of the capital budgeting techniques on the financial performance of the companies. The study found out that all of the four capital budgeting techniques researched on; payback period, net present value, accounting rate of return and internal rate of return were being used by companies listed in the Nairobi Securities Exchange and results depicted that there was no correlation between the financial performance of banks and the capital budgeting techniques employed. The study concluded that payback period, net present value, accounting rate of return and internal rate of return capital budgeting techniques were all adopted by the companies listed at the Nairobi Securities Exchange and that there was no significant relationship between the capital budgeting techniques employed and the financial performance of the same. The study suggests further research be conducted on other sectors across the Kenyan market to establish whether the results obtained were homogeneous as well as using a different financial performance variable(s) to test the same relationship. It is also recommended that a similar study be carried out in other companies not listed in the Nairobi Securities Exchange to test the same relationship and also in a specific industry to obtain homogeneous results.