What is it about?
Companies must decide which long-term investment projects to undertake and how to evaluate the risks and returns of those investments. This study surveys CFOs of major Korean firms to examine how they make capital budgeting decisions and estimate their cost of capital. We compare their practices with those of firms in the United States and Europe. We find that many Korean firms use widely accepted techniques such as net present value (NPV), internal rate of return (IRR), and the capital asset pricing model (CAPM).
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Why is it important?
Capital budgeting decisions determine how companies allocate resources to long-term investments and can have significant effects on their future performance. This study provides the first comprehensive examination of capital budgeting practices among Korean firms. The results show that their practices are generally as strong as, and in some respects stronger than, those reported for firms in developed markets. We also find that capital budgeting practices vary with characteristics such as company size, leverage, CEO age, and CEO education. In addition, affiliation with a Korean business group, or chaebol, is associated with somewhat stronger capital budgeting practices. These findings provide useful insights into how corporate and managerial characteristics influence long-term investment decision-making.
Perspectives
The motivation for this study came from recognizing the lack of comprehensive evidence on how Korean companies make capital budgeting decisions. Although capital budgeting practices had been extensively studied in the United States and other developed markets, much less was known about the practices of Korean firms. We wanted to examine how major Korean companies evaluate investment projects and estimate their cost of capital and to compare their practices with those used in developed markets. Our findings show that Korean firms make extensive use of established capital budgeting techniques and that their practices are influenced by both company and managerial characteristics. I hope this study contributes to a better understanding of capital budgeting practices in Korea and provides useful evidence for comparing corporate investment decisions across countries.
Dr. Hongbok Lee
Western Illinois University
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This page is a summary of: Capital budgeting practices: evidence from Korea, Managerial Finance, September 2020, Emerald,
DOI: 10.1108/mf-05-2020-0238.
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