Capital budgeting practices and firm performance : A comparative study of Australia and Sri Lanka

This thesis disentangles two elements from the complex interdependent suite of key drivers of firm sophistication in capital-budgeting. Specifically, the relative sophistication of a firm (i.e. its nature) and the development level of the nation in which a firm is embedded (i.e. the nurture experienced by the firm). This research should enhance the development focus and process of nations (e.g., to what degree should national development be about raising the ability of individual firms or will raising national development act as a rising tide [that] raises all boats). The comparative data used in this study comes from 150 Australian (ASX200-index-listed) firms and 150 Sri Lankan (Colombo-stock-exchange-listed firms). The research questions are answered via a quantitative research design that uses primary and secondary data. The response rate to the questionnaire survey of firms was, 45 and 73 completed questionnaires from, respectively, Australia and Sri Lanka (an effective response rate of, respectively, 31.5 and 48.7 percent). Secondary data for 2003-12 are obtained from the ASX, CSE’s and SIRCA databases and are used to calculate return on assets, return on equity, Tobin Q, and earnings per share for the sampled firms. It was found that Australian firms tend to rely heavily on sophisticated capital-budgeting practices, but Sri Lankan relatively small firms prefer simple analysis methods and the larger firms tend to be as adept at sophisticated capital budgeting as their Australian counterparts. The choice of whether to use more sophisticated practices or simpler alternatives varies with a firm’s attributes as well as the level of economic and financial market development in its environment. Also, Australian firms tend to use capital-budget models with good-to-strong predictive power (except for ROE) and Sri Lankan firms tend to use capital-budget models with fair-to-poor predictive power. Further, the analysis of Australian firms tends to yield stronger and more statistically-significant results, than those generated by Sri Lankan firms.Doctor of Philosoph