Journal of Finance and Investment Analysis

Factors Determining the Selection of Capital Budgeting Techniques

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  • Abstract

    Many studies explore only use or non-use of capital budgeting methods, and not the factors that determine the selection of the method used in UAE or the region. The relationships between use and independent variables that affect the selection of the method have been studied. The study attempts to fill a gap in the existing literature of capital budgeting practice in the developed and developing economies. The study analyzes the questionnaire collected from 35 companies out of the 61 listed in DFM. The study found a sizable number of UAE companies that use capital budgeting techniques in their capital investment decisions. The widely used methods are: PB, NPV, and IRR by most of the UAE companies. The study also revealed that many financial and nonfinancial factors influence the selection of capital budgeting technique such as the size of the company, revenues, profitability, leverage level, expenditure, familiarity with the project, availability of cash, and the level of education of decision makers. Significant differences were found between the methods selected and the factors influencing the selection of the technique. It has been found that there is a positive association between most of the financial factors and the methods but negative with majority of the nonfinancial variables.