Effects of capital investment appraisal techniques on financial performance of banks listed at the Nairobi Securities Exchange

Abstract

The overall objective of this study was to investigate the relationship between capital investment appraisal techniques and financial performance of Banks listed at Nairobi Securities Exchange. The study employed a descriptive design to determine the relationship between capital budgeting techniques and financial performance of Banks listed at Nairobi Securities Exchange. The target population consisted of all the 11 Banks listed at The Nairobi Securities Exchange as at 31st December 2014 (see appendix II). With this in mind, the study employed a census survey because NSE had only 11 commercial Banks that were listed hence the whole population was included in this study. The study employed both primary and secondary data on the entire population and no sampling procedure was employed. The data was collected through questionnaires which were administered by the researcher using drop and pick later method. The secondary data was collected from the published accounts of the companies. The published accounts were obtained from Capital Markets Authority (CMA) and NSE library as well as the Central Bank’s annual supervision reports shared on the Central Bank of Kenya (CBK) website. Regression analysis was used to test the relationship between capital investment appraisal techniques and financial performance. The study established that all factors used i.e. capital budgeting techniques, size of the firm and age of the company were affecting return on assets and profitability either positively or negatively depending on the specific technique used. The findings presented also show that taking all other independent variables at zero, a unit increase in capital investment appraisal techniques will lead to an increase in the rate of return on assets. A unit increase in size of the firm will lead to an increase in return on assets. On the other hand, a unit increase in age of the company will lead to an increase in the scores of return on assets. This deduces that age of the company influences return on assets mostly followed by capital budgeting techniques and size of the firm. The study also established a significant relationship between return on assets and the independent variables; capital appraisal techniques and age of the company. The results of the regression analysis show that the capital appraisal techniques significantly affect firm performance, measured by return on assets. Ranking of the individual independent variables, it shows that, age of the company is highly related with return on assets, followed by capital budgeting techniques and size of the firm respectively. Theoretically, the use of sophisticated capital appraisal techniques should increase the effectiveness of the firms’ performance as justified by an increase in return on assets. Thus, the results of this study concurred with the four theories that underpin the study. Based on the findings the study recommends that in carrying out capital investment appraisal, it is important to plan for the monitoring and post-evaluation. It is equally important that managers of commercial banks listed and the banks willing to be listed in the NSE make sound investment appraisal technique decisions that enhance financial performance so as to maximise the value of the firm.