Capital Investment Decision Making and Risk Management Methods: Evidence From Listed Companies on Pakistan Stock Exchange


  • Mirza Nasir Mehdi PhD Scholar (Finance), NUML, Islamabad Pakistan; Lecturer, SZABIST, Islamabad Pakistan
  • Anjum Ihsan Assistant Professor, Faculty of Management Sciences, Islamia College University, Peshawar, Pakistan
  • Shahid Bashir Assistant Professor, Faculty of Management Sciences, SZABIST, Islamabad Pakistan



Pakistan Stock Exchange, Capital Investment Decision Making Criteria, Risk Management Methods, Strategic Appraisal Methods


Capital Investment projects are evaluated and appraised by the corporate managers of business firms listed on PSX through different pragmatic methods, tools and techniques. The complexity of the application of all the methods simultaneously including traditional financial methods, strategic pragmatic methods and risk management methods, urge the corporate managers to apply at least one of the pragmatic methods so that projects’ capital investment decision making criterion or criteria may be reached at to measure the appropriate capital investment decision making. Keeping all this in view, this paper aims to study the risk management techniques rather than studying and measuring all the traditional methods. This paper examines the effect of financial and non-financial factors on risk management methods which are supported by different theories and empirical background with proper references and citations. The responses of the corporate managers of 250 listed business firms on PSX through regression analysis show that almost 80% of the factors have a direct relationship with Risk Management Methods. The maximum significant results of the study point out that the capital investment projects are also evaluated by the corporate managers through risk management methods but the application of the financial and strategic methods cannot be ignored. As many of the project financial experts apply the risk management methods simultaneously with the collaboration of other methods as well. The results also show that effect of firm size as a moderator is also partial significant.


Abdel-Kader, M.G., & Dugdale, D. (2001). Evaluating Investment in Advanced Manufacturing Technology: A Fuzzy Set Theory Approach. British Accounting Review, 33 (4), 455-489.

Afonso, P., & Cunha, J. (2009). Determinants of the use of capital investment appraisal methods: evidence from the field. In The 2009 European Applied Business Research Conference (EABR).

Akalu, M. (2001). Re-examining project appraisal and control: developing a focus on wealth creation. International Journal of Project Management, 19(7), 357-83.

Al-Ajmi, J., Al-Saleh, N., & Hussain, H. A. (2011). Investment appraisal practices: A comparative study of conventional and Islamic financial institutions. Advances in Accounting, 27(1), 111-124.

Arnold, G.C., & Hatzopolous, P.D. (2000). The Theory Practice Gap in Capital Budgeting: Evidence from UK. Journal of Business Finance & Accounting, 27 (5&6), 603-626.

Bhojraj, S., & Sengupta, P. (2003). Effect of corporate governance on bond ratings and yields: The role of institutional investors and outside directors. The Journal of Business, 76(3), 455-475.

Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. The journal of political economy, 637-654.

Black, F., & Scholes, M. (1974). The effects of dividend yield and dividend policy on common stock prices and returns. Journal of financial economics, 1(1), 1-22.

Bottazzi, L., Da Rin, M., & Hellmann, T. (2008). Who are the active investors? Evidence from venture capital. Journal of Financial Economics, 89(3), 488-512.

Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. Tata McGraw-Hill Education.

Bruggen, A., Vergauwen, P., & Dao, M. (2009). Determinants of intellectual capital disclosure: evidence from Australia. Management Decision, 47(2), 233-245.

Butler, R., Davies, L., Pike, R., & Sharp, J. (1991). Strategic Investment Decision-Making: Complexities, Politics and Processes. Journal of Management Studies, 4(28), 395-415.

Caves, R. E., Porter, M. E., & Spence, A. M. (1980). Competition in the open economy: A model applied to Canada (No. 150). Harvard University Press.

Cooper, R., & Slagmulder, R. (1997). Target costing and value engineering. Productivity Press.

Copeland, T., & Howe, K. M. (2002). Real options and strategic decisions. Strategic Finance, 83(10), 8.

Croce, A., Marti, J., &Murtinu, S. (2013). The Impact of Venture Capital on Productivity Growth of European Entrepreneurial firms: ‘Screening’ or ‘Value added’ effect. Journal of Business Venturing, 28, 489-510.

Davila, A., & Foster, G. (2007). Management control systems in early-stage startup companies. The Accounting Review, 82(4), 907-937.

Drury, C., & Tayles, M. (1996). UK capital budgeting practices: some additional survey evidence. The European Journal of Finance, 2(4), 371-388.

Dugdale, D., & Jones, C. (1995). Financial justification of advanced manufacturing technology. Issues in Management Accounting, 2, 191-213.

Fadi, A., & Northcott, D. (2006). Strategic Capital Investment Decision Making: A Role for Emergent analysis tools, A Study of Practice in Large UK Manufacturing Companies. The British Accounting Review, 38, 149-173.

Gerwin, D. (1982). “Do’s Dont’s of computerized Manufacturing”. Harvard Business Review, (March-April), 107-116.

Gitman, L. J., & Forrester Jr, J. R. (1977). A survey of capital budgeting techniques used by major US firms. Financial management, 66-71.

Gitman, L. J., & Vandenberg, P. A. (2000). Cost of capital techniques used by major US firms: 1997 vs. 1980. Financial Practice and Education, 10, 53-68.

Gold, B. (1983). Strengthening Managerial Approaches to improving technological capabilities. Strategic Management Journal, 4, 209-220.

Gompers, P., & Lerner, J. (1998). Venture capital distributions: Short?run and long?run reactions. The Journal of Finance, 53(6), 2161-2183.

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of financial economics, 60(2), 187-243.

Graham, J., & Harvey, C. (2002). How Do CFOs Make Capital Budgeting and Capital Structure Decisions? Journal of Applied Corporate Finance, 15(1), 8-23.

Gul, S., Malik, F., Siddiqui, M.F., &Razzaq, N. (2013). Capital Budgeting: Corporate Governance and Financing of listed firms in Pakistan. European Journal of Business and Management, 5(23).

Hayes, R. H., & Wheelwright, S.C. (1984). Restoring Our Competitive Edge: Competing Through Manufacturing. New York, John Wiley & Sons.

Ho, S. S., & Pike, R. H. (1991). Risk Analysis in Capital Budgeting Contexts Simple or Sophisticated? Accounting and Business Research, 21(83), 227-238.

Hodder, J. E., & Riggs, H.E. (1985). Pitfalls in Evaluating Risky Projects. Harvard Business Review, 1-2, 128-135.

House, R. J., & Wigdor, L. A. (1967). Herzberg's dual?factor theory of job satisfaction and motivation: A review of evidence and a criticism. Personnel psychology, 20(4), 369-390.

Hussain, A., & Shafique, I. (2013). Capital Budgeting Practices in Islamic Banking: Evidence from Pakistan. Euro-Asian Journal of Economics and Finance, 1(1), 9-23.

Jenson, M. (2001). Agency Costs of Free Cashflows, Corporate Finance and Takeovers. American Economic Review, 76, 323-329.

Kotha, S., & Swamidass, P.M. (2000). Strategy, advanced manufacturing technology and performance: Empirical evidence from U.S. manufacturing firms. Journal of Operation Management, 18, 257-277.

Lazaridis, I. T. (2004). Capital budgeting practices: a survey in the firms in Cyprus. Journal of small business management, 42(4), 427-433.

Lefley, F. & Morgan (1998). Accounting Rate of Return: Back to Basics. Management Accounting, 3:52-3.

Mendes-Da-Silva, W., & Saito, R. (2014). Stock exchange listing induces sophistication of capital budgeting. Revista de Administração de Empresas, 54(5), 560-574.

Maquieira, C. P., Preve, L. A., & Sarria-Allende, V. (2012). Theory and practice of corporate finance: Evidence and distinctive features in Latin America. Emerging markets review, 13(2), 118-148.

Miles, R. and C. Snow (1978). Organizational Strategy, Structure and Process. New York, McGraw-Hill.

Parthasarthy, R., & Sethi, S. P. (1993). Relating strategy and structure to flexible automation: a test of fit and performance implications. Strategic Management Journal, 14(7), 529-549.

Pike, R. H., & Ho, S. S. (1991). Risk analysis in capital budgeting: barriers and benefits. Omega, 19(4), 235-245.

Pike, R.H. (1996). A Longitudinal Survey on Capital Budgeting Practices. Journal of Business Finance and Accounting, 23(1), 79-92.

Porter, M. E. (1980). Industry structure and competitive strategy: Keys to profitability. Financial Analysts Journal, 36(4), 30-41.

Reimer, D., & Nieto, A. A. (1995). Compendium and Comparison of 25 Project Evaluation Techniques. International Journal of Production Economics, 42(1), 79-96.

Ryan, P. A., & Ryan, G. P. (2002). Capital budgeting practices of the Fortune 1000: how have things changed? Journal of business and management, 8(4), 355.

Ryon, P., & Ryon, G. (1986). Capital Budgeting Practices of the Fortune 1000: How things have changed? Journal of Business and Management, 8(4), 355-364.

Sangster, A. (1993). Capital investment appraisal techniques: a survey of current usage. Journal of Business Finance & Accounting, 20(3), 307-332.

Sauders, M., Lewis, P., &Thornhill, A. (2004). Research methods for business students. Great Britain: Pitman Publishing.

Slagmulder, R. (1997). Using Management Control Systems to achieve Alignment between Strategic Investment Decisions and Strategy. Management Accounting Research, 8(1), 103-139.

Slagmulder, R., Bruggman, W., &Wassenhove, L.V. (1995). An Empirical Study of Capital Budgeting Practices for Strategic Investments in CIM Technologies. International Journal of Production Economics, 40, 121-152.

Snell, S. A., & Dean, J. W. (1992). Integrated manufacturing and resource management: A human capital perspective. Academy of Management journal, 35(3), 467-504.

Stuart, T. E., & Sorenson, O. (2007). Strategic networks and entrepreneurial ventures. Strategic Entrepreneurship Journal, 1(3?4), 211-227.

Suzette, V., & Howard, C. (2011). Perspectives of Capital Budgeting in South African Motor Manufacturing Industry. Mediatory Accountancy Research, 19(1/2), 75-93.

Verbeeton, F. H. (2006). Do organizations adopt sophisticated capital budgeting practices to deal with uncertainty in the investment decision? A research note. Management accounting research, 17(1), 106-120.




How to Cite

Mirza Nasir Mehdi, Anjum Ihsan, & Shahid Bashir. (2020). Capital Investment Decision Making and Risk Management Methods: Evidence From Listed Companies on Pakistan Stock Exchange. Review of Economics and Development Studies, 5(2), 291-302.