Article Review
and Hurdle Rates in Nordic firms
This article is a discussion of a study conducted about the factors that affects the choice of capital budgeting methods among five Nordic countries. It was noted that the Net Present Value method has been considered as the best option in the evaluation of investment decisions. However, some of the complexities associated with the use of NPV in terms of its application in capital budgeting and the setting of discount rates lead to this study, which concentrated on the administration of the survey from firms located in Nordic countries.
The research revealed that the Discounted Cash Flow method, and most especially the NPV, are not popularly used in Nordic as compared to firms in the United States. While the majority of the US firms was reported to have adapted the NPV, it was not the case with firms in the Nordic countries. However, it remains that a larger number of Nordic firms used NPV, with about 41.29 percent of the firms that adopted it as the main method of evaluation, followed by the payback method at about 25.16 percent. The responses from the survey were used to determine the most commonly used capital budgeting technique. It was found that the reason for the adoption of NPV as the main method for evaluation, as well as the use of more sophisticated capital budgeting technique are attributed to several factors, a) firm characteristics, b) variables proxying for real option features in the firm’s investment projects and, c) the age and educational attainment of the Chief Financial Officer.
The use of the Net Present Value is in fact advantageous for firms, not only in the United States, but also in other states such as the Nordic countries. For one, a Chief Executive Officer who has an adequate background in finance would find this method less complex yet helpful in the process. They can easily determine the possibility if investing in a business venture by looking at the positive or negative indicators. The study provided a better insight as to the usefulness of NPV in Nordic firms, and more of the business in the country may opt for this method because it is a straight forward way to aid in the decision making process.
2. Corporate Governance Mechanisms and Capital Structure in UAE
In this article, the effect of corporate leadership on the financial decisions of companies in the United Arab Emirates was taken into a closer study. The focus of the research was in determining the degree of how the internal and external corporate leadership affect the capital structure of UAE firms.
Based on the empirical study, it was found that there are three factors that influenced the financial decisions of UAE firms, a) institutional investors, b) firm size, c) dividend payout. The institutional investors were determined to be the only variable under corporate governance that plays a significant role in terms of the debt-to-equity ratio. The study revealed that the highest percentage of shares held by institutional investors implied that they are not likely to use debt financing as implied by the negative relation. This scenario showed how the firms deemed it preferable to use internal source of financing rather than choose to borrow from outside sources.
Another factor that largely impacts the financial decisions of UAE companies is the firm size. It was found that this factor positively impacts the capital structure, and that larger firms in the country have more in terms of resources compared to the medium and small sized businesses. Consequently, the larger the firm, the more attractive it is for investors and lenders, an indication that large UAE firms are more dynamic in managing their resources. It is also a sign that this firm has lesser tendency to go bankrupt due to the availability of resources.
Further, the study also indicated that the dividend payout ratio has a substantial negative effect on the capital structure of UAE firms. The findings match the theoretical expectation about dividends pay out as a form of discipline in the investment decision of corporate management. On the other hand, it can also be used as way for future investment. It is to be noted that a high payout ratio indicates that the firm is paying out more, which means that the firm has a financial capability to seize reinvestment opportunities for future financial growth.
The negative relationship between the dividend payout ratio and the capital structure is something to be concerned about. While the study revealed about the dynamic financial standing of large UAE firms, the negative payout to capital structure relations showed that the management has a minimal control over the free cash flow. Sound management would indicate that these large firms should not put too much of their retained earnings in dividends. Instead, they should be put in other investment opportunities.
Reference
Bunzell, T, Lijeblon E & Vaihekoski 2013 Determinants of capital budgeting methods and hurdle rates in Nordic firms, Accounting and Finance.
Hussainey, K & Aljifri K 2012, Corporate governance mechanisms and capital structure in UAE, Journal of Applied Accounting Research
