The Effect of Capital Budgeting Decisions on Profitability: Selected Companies from Developed and Developing Countries

The purpose of this study is to determine the impact of capital budgeting decisions on the profitability of listed companies in Germany, Canada, Jordan, and Egypt. Study population is 64 listed companies. The main independent variable is capital expenditure as measured by natural logarithm of fixed assets. In addition to this variable, study has leverage, liquidity and age of the company as control variables. As for dependent variable, profitability is used measured by return on assets. Secondary data was collected for a period of 9 years on an annual basis. The study employed a descriptive panel data analysis with OLS regression and random regression as robustness to analyze the association between the variables. Eviews 10 was used for analyzing the secondary data. ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore, the model was fit to explain the relationship between the selected variables. The study finds that capital expenditure affects financial performance significantly and positively in both developed and developing countries. In addition to this, control variables are also found to be significant and have signs as expected. However, the study also finds that, the magnitude of the impact of capital expenditure on performance is higher in developed countries relative to developing countries. This relatively lower impact may be explained by the fact that firms in developing economies have not adapted proper and effective project appraisal means for capital budgeting decision making. Based on the findings, the study puts forward some recommendations. Keywords: Capital Budgeting, Profitability, Capital Expenditure