Capital budgeting practices: A comparative study of the Netherlands and China

Abstract

This paper compares the use of capital budgeting techniques of Dutch and Chinese firms, using data obtained from a survey among 250 Dutch and 300 Chinese companies. Our main aim is to analyse the use of capital budgeting techniques by companies in both countries from a comparative perspective to see whether economic development matters. The empirical analysis provides evidence that Dutch Chief Financial Officers (CFOs) on average use more sophisticated capital budgeting techniques than Chinese CFOs do. At the same, however, our results suggest that the difference between Dutch and Chinese firms is smaller than might have been expected based upon the differences in the level of economic development between both countries, at least with respect to the use of methods of estimating the cost of capital and the use of CAPM as the method of estimating the cost of equity.

Introduction

This paper reports the results of a survey with respect to the current practice of capital budgeting techniques in two countries at two different levels of economic development: the Netherlands and China. The main aim of this paper is to analyse the use of capital budgeting techniques by companies in a comparative perspective to see whether economic development matters. Whereas several papers in the past have investigated the use of such techniques, this is one of the very few studies that uses such a comparative perspective, comparing a more developed with an emerging economy. We carry out this analysis using standard differences-of-means tests and multivariate regression analysis to see whether there is a so-called “country effect”. This means that we investigate whether capital budgeting practices differ significantly between Dutch and Chinese firms and whether these differences can be explained by differences in levels of economic development. Again, only very few papers have addressed the determinants of capital budgeting practices using these types of analyses, let alone in a comparative economic perspective.¹ China and the Netherlands have been chosen for our comparison for the following reasons. We consider China as an interesting emerging, yet still less-developed economy in many respects, which has received a lot of attention in the economic and financial literature during recent years. Moreover, we consider the Netherlands as a typical example of a developed European economy.

An additional contribution of this paper to the existing empirical literature on capital budgeting practices is in terms of the countries for which we have gathered data. Most studies focus on the United States and the United Kingdom. There are only two studies available for the Netherlands (Brounen et al., 2004; Herst, Poirters, & Spekreijse, 1997). We are not aware of any study that deals with capital budgeting practices in China.

The paper is organised as follows. Section 2 discusses previous studies on capital budgeting practices, whereas in Section 3 we evaluate the reasons why different levels of economic development may have an impact on the use of capital budgeting practices. Moreover, we shortly discuss alternative determinants of capital budgeting practices, focusing on several characteristics of companies and Chief Financial Officers (CFOs) of companies, which according to existing literature may influence capital budgeting practices. This is followed by a discussion of the design of our survey in Section 4. Section 5 then provides the results of the survey and a discussion of the empirical analysis of determinants of capital budgeting practices. The paper ends with a summary and discussion of the results in Section 6.