CAPITAL BUDGETING PRACTICES IN QUOTED BANKS IN NIGERIA: RESULTS

The data for the study is sourced from annual reports of banks listed on the stock exchange as at 31st December, 2012. There are fourteen banks listed on the Nigerian Stock Exchange as at this date. The research design is therefore cross-sectional. Data was gathered from all 14 banks and analysed using ordinary least square regression method. The model for the regression is specified as follows:


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The coefficient determination (R2) from our regression result is given as 0.902. This implies that 90.2% of the variation in Fixed Asset Acquired (FAA) is accounted for by the independent variables (PR, PRT, ROA, RER, SIZE and LEV). Small business

The adjusted coefficient of determination (R2) is given as 0.857. This implies that precisely 85.7% of the variation in the FAA is accounted for by the independent variables. The above coefficients (R2 and R2) suggest the existence of a strong relationship between the dependent variable Fixed assets (FAA) and the independent variables (PR, PRT,ROA, RER, SIZE and LEV).
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Table 1: Regression Results
table1Capital Budgeting Practices in Quoted-4

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From the result above, the coefficient of Profitability ratio (PR) is 95.968, this implies that there is a positive relationship between PR and FAA, such that a unit increase in Profitability ratio (PR) will result in an increase in Fixed asset acquired (FAA) by 95.968 units. This conforms to the a priori expectation which indicates a positive relationship between PR and FAA. This suggests that the relationship is statistically significant at 5% level.

The coefficient of Profitability ratio of t-1 (PRT) is 44.357; this implies that there is a positive relationship between PRT and FAA, such that a unit increase in PRT will result in an increase in FAA by 44.357 units. This conforms to the a priori expectation which indicates a positive relationship between PRT and FAA. This suggests that the relationship is statistically significant at 5% level. From the result above, the coefficient of Return on assets (ROA) is -81.006. This implies that there is a negative relationship existing between ROA and FAA, such that a unit increase in ROA will result in a decrease in FAA by 81.006 units. This does not conform to the a priori expectation which indicates a negative relationship between ROA and FAA. This suggests that the relationship is statistically insignificant at 5% level.

The coefficient of Retention ratio (RER) is -0.352. This implies that there is a negative relationship existing between RER and FAA, such that a unit increase in RER will result in an increase in FAA by 0.352 units. This does not conform to the a priori expectation which indicates a positive relationship between RER and FAA. This suggests that the relationship is statistically insignificant at 5% level.

The coefficient of Firm size (SIZE) is 1.196. This implies that there is a positive relationship existing between SIZE and FAA, such that a unit increase in SIZE will result in an increase in FAA by 1.196 units. This conforms to the apriori expectation which indicates a positive relationship between SIZE and FAA. This suggests that the relationship is statistically significant at 5% level.

The coefficient of Leverage (LEV) is 0.017. This implies that there is a positive relationship existing between LEV and FAA, such that a unit increase in LEV will result in an increase in FAA by 0.017 units. This conforms to the apriori expectation which indicates a positive relationship between LEV and FAA. This suggests that the relationship is statistically significant at 5% level.

The t-values (t-ratios) of Profitability (PR), Profitability of t-1 (PRT), Firm size (SIZE) and Leverage (LEV) which are 1.725, 0.919, 10.258 and 0.771 respectively, supports the existence of a positive relationship between these independent variables and Fixed assets acquired (FAA), which is statistically significant at 5% level. While Return on assets (ROA) and Retention ratio (RER), with t-ratios -1.382 and -0.294 respectively supports the existence of a negative relationship between these variables and Fixed asset acquired (FAA). But only that of PR, PRT, SIZE and LEV are statistically significant in the light of the apriori expectation.

The table above revealed the result of the Fstat as 19.99%, thus indicating that the overall model was statistically significant. This result however suggests that FAA the dependent variable and the independent variables (PR, PRT, ROA, RER, SIZE and LEV) are linearly related. Hence, the model is valid for policy recommendation.

Further confirming the f-test result, the DW -statistics value of 2.847 which indicates a minimal level of autocorrelation in the model, also suggests that the model is valid for policy recommendation.

Banks are central to the Nigerian economy. Capital budgeting is a risky decision which can heighten the already risky nature of banks. Examining the factors that determine the size of capital budgets will help bank regulators and management to manage the associated risks capital investment.

The study is about capital budgeting processes in the quoted banks in Nigeria. A sample of 14 Nigerian quoted banks for the year 2012 was considered. The study found a significant negative relationship between fixed asset acquired and the retention ratio. However, fixed asset acquired was found to have a significant positive relationship with profitability ratio, bank size, and leverage. The analysis revealed that the bank size, leverage, profitability ratio are the determinants of capital budget as far as this study is concern.

Effective and efficient capital budgeting will depend on availability of capital as reflected in positive and significant correlation between fixed asset acquisition on the one hand and bank size, leverage and profitability. This is

also implied by the negative relationship between retention ratio and fixed asset acquisition. There the study recommends that banks should seek funds to finance capital projects as it reflects positively on their profits and hence their size.

Table 2: Model Summaryb
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Table 3: Coefficients11

table3Capital Budgeting Practices in Quoted-7