Capital budgeting practices: evidence from Korea

What is it about?

In this paper, we survey CFOs of major Korean firms on their capital budgeting practices. We then compare the results against U.S. and European firms and best practices of leading firms and financial advisors. Our results show that the capital budgeting practices of Korean firms are as strong as or even stronger than firms in developed markets. A majority of Korean firms are using best practices techniques such as NPV, IRR, and the CAPM for project evaluation and cost of equity estimation. Chaebol affiliation, far from being a negative factor, actually results in somewhat stronger capital budgeting practices. We also find that other factors, such as company size, leverage, CEO age, and CEO education, impact capital budgeting practices.

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