The relationship between capital budgeting efficiency and stock return variation at the Nairobi securities exchange

Abstract

The research analysed the relationship between capital budgeting efficiency and firm specific stock returns variation in firms listed in the manufacturing sector of the Nairobi Securities Exchange. The first objective was to determine how efficient firms listed in the manufacturing sector are in capital budgeting. The second objective was to find out if there was any relationship between capital budgeting efficiency and firm specific stock returns variation. Data relating to capital budgeting efficiency was determined from analysis of financial statements. The financial statements were obtained from the Capital Markets Authority library. The data relating to stock returns variations was determined using daily equity price lists obtained from the Nairobi Securities Exchange. Capital budgeting efficiency was determined by the deviation of the Tobin’s marginal q from its optimal while firm specific returns variation was determined by regressing firms returns with market and industry returns and analysing the variances into industry - market and firm specific components. Co-efficient of Correlation was used to determine the degree and nature of the relationship between capital budgeting efficiency variables and stock return variation variables. The results show the margin of deviation of Tobin’s q from optimal being quite high reflecting a mismatch between capital budgeting and market expectations. The market expectations are also captured by the high firm specific return variation which previous research has argued could be a proxy for share price information content. There is a significant positive correlation between variables of capital budgeting efficiency and variables of firm specific stock returns. This implies efficient capital v budgeting decisions have a significant impact in market value enhancement at the securities exchange. The Capital Market Authority may adopt the use of deviation of Tobin’s q from its optimal as an indicator of corporate performance to determine its investor protection intervention strategy. In this regard, where an organization consistently reflects a big deviation of Tobin’s q from its optimal, the regulator may intervene to save the firm from further decline in market value. Alternatively, the regulator may assess the relationship between capital budgeting efficiency variables and firm specific return variation. Further research may be carried out to assess the relationship between capital budgeting efficiency and stock returns variations for all the firms at the Nairobi Securities Exchange.