Capital Investment Appraisal
: The Case of Lebanon

  • Ahmed Bakri Bakri

    Student thesis: Doctoral ThesisDoctor of Philosophy


    The goal of this thesis is to investigate the capital budgeting practices of Lebanese companies. In particular, this thesis examines four main research questions: (1) How are capital investment projects appraised in Lebanon?; (2) Is risk incorporated into this process by Lebanese firms?; (3) Do Lebanese companies experience capital rationing and, if so, is it imposed internally or externally?; (4) How important is the impact of political risk on the capital budgeting process? The thesis employs an interpretive approach to investigate these issues, and the results are obtained using the qualitative methods of questionnaires and semi-structured interviews. In particular, a total of 151 questionnaires were completed by firms from across three industrial sectors – 51 firms participated in the first questionnaire and 100 firms took part in the second questionnaire; 12 semi-structured interviews were also conducted with two groups of individuals who were thought to be knowledgeable about the capital budgeting process: ‘insiders’, who work in Lebanese firms, and ‘outsiders’, such as bankers and chartered accountants, who are involved in an advisory capacity with the capital budgeting processes of Lebanese firms.

    The results of this research indicate that Lebanese firms place more emphasis on non-financial factors, such as political priorities and personal experience, than financial factors when analysing potential projects. The study also finds that Lebanese companies tend to employ more than one method of investment appraisal to evaluate projects and that, increasingly, these firms are using more sophisticated discounted cash flow (DCF) techniques. However, the payback method is the most popular method of investment appraisal. In addition, although the use of DCF methods is increasing, they are not used as frequently relative to companies in developed countries. The study also finds that appraisal processes are impacted by the source of funding used, as well as the size and nature of the project being undertaken. In terms of risk evaluation, the most widely using methods include scenario analysis and sensitivity analysis; very few companies use Monte Carlo simulation. Most of the companies surveyed use the weighted average cost of capital as the discount rate in capital budgeting, although a sizeable number use the interest rate. Another key finding to emerge from the study relates to capital rationing. Specifically, a majority of the companies surveyed indicated that they had experienced capital rationing and that this rationing tended to be imposed externally, typically as a result of external constraints in the equity and debt markets. A sizeable number of the companies surveyed indicated that the stock market was currently not a feasible source of firm or project funding due to its small size.

    A key finding that emerged from the study is that political risk plays a very important role in the capital budgeting processes of Lebanese companies. Most of the participants in the study highlighted the high level of political risk in Lebanon, and indicated that it plays a major role in determining which method should be used to evaluate a project.
    Date of Award2019
    Original languageEnglish
    SupervisorSuzanne Fifield (Supervisor) & David Power (Supervisor)

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