Impact of capital budgeting sophistication on firms’ performance: evidence from Ethiopia

Capital budgeting is one of the core managerial decisions that organizations undertake. Financial management theory advocates that the use of sophisticated capital budgeting system enhances firms’ performance. However, in practice empirical evidence showed mixed result. The purpose of this study is to investigate the impact of using sophisticated capital budgeting methods on firms’ performance using evidence from Ethiopia. To achieve this objective, both primary and secondary data were collected and used from 109 firms in Addis Ababa, Ethiopian. Multiple linear regressions were applied under both normative and process approach of defining capital budgeting sophistication. The finding of the study showed that firm's performance can be improved by adopting sophisticated capital techniques and procedures. Therefore, firms should make capital investment analysis using appropriate sophisticated capital budgeting method before they commit their scare resource in order to improve their performance.