Capital Budgeting Sophistication and

The academic community has tried to convince corporate business managersthat the capital budgeting decision-making process can be made more effectiveby using more sophisticated capital budgeting techniques. There are differentcapital budgeting tools and techniques available. The question that needs to beanswered is whether using sophisticated capital budgeting techniques will givebusiness a competitive edge?The study investigates the relationship between a firm’s capital budgetingsophistication and its long term operating performance. The study firstlyinvestigates the use of different capital budgeting techniques. Using thisinformation, a capital budgeting sophistication score is calculated.Secondly, financial information of the firm is used to calculate the firm’s averageoperating rate of return for the firm, relative to the average operating rate ofreturn for the industry. The study takes into account firm size, capital intensity,operating risk and the degree of focus.Thirdly, the capital budgeting sophistication of companies and operatingperformance are compared to investigate a possible statistical relationship.It is concluded that there is a statistically significant, positive relationship betweenthe degree of capital budgeting sophistication of a company and its operatingperformance.It would therefore be beneficial to industry to increase capital budgetingsophistication. This would lead to increase in return to shareholders, increasingthe value of the company