Effect of Financial Development on the Level of Sophistication of Capital Budgeting Techniques Employed by a Firm
This research study was conducted to determine the impact of financial development on the level of sophistication
of capital budgeting techniques used for evaluating investment opportunities. The independent variable is “financial
development” which comprises of two sub-variables i.e. revenue growth and leverage level. Whereas, the dependent variable
for this study is “level of sophistication” which is categorized in terms of more sophisticated Discounted Cash Flows (DCF)
and less sophisticated Non Discounted Cash Flows (NDCF) capital budgeting techniques. The population for this research
survey is the companies listed on Pakistan stock exchange (PSE) and operating within automobile, food, cement, leather and
petroleum industries. Multiple Regression Model was used. The empirical study concluded that the higher revenue and
leverage level over the years result into more extensive usage of EAA (Equivalent Annualized Annuity) and less extensive
usage of PB (Payback). Whereas, high revenue growth over years results into more extensive usage of NPV (Net Present
Value), IRR (Internal Rate of Return) and EAA and less extensive usage of Payback and ARR (Average accounting rate-ofreturn).
Index Terms - Capital Budgeting Techniques, Financial Development, Investment Opportunities, Sophistication Level.