Capital Budgeting Practices In Emerging Market Economies: Evidence From Listed Ghanaian Firms

Abstract

This study investigates into the application of capital budgeting practices by listed firms on the Ghana Stock Exchange. A sample of listed firms from banking, brewery, manufacturing, distribution and insurance were selected. The key findings from the study show that firms listed on the Ghana Stock Exchange adopt text book capital budgeting techniques in practice. Most of them use NPV, PBP, DPBP and IRR. Though this demonstrates a clear reduction in the theory practice gap, the modified internal rate of return (MIRR), and the Accounting rate of return (ARR) have not attracted much attention compared to the NPV. This study thus confirms the popularity and usage of DCF capital budgeting methods (NPV and IRR) due to their simplicity. The study also finds that most of the firms use weighted average cost of capital (WACC) as the cost of capital in appraising investment projects.

Key words: Capital budgeting techniques, investment decision, listed firms, Ghana