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Corporate Finance Practices in Canada: Where Do We Stand?

Author

Listed:
  • Kent Baker

    (American University, USA)

  • Shantanu Dutta

    (University of Ontario Institute of Technology, Canada Samir Saadi)

  • Samir Saadi

    (Queen's University, Canada)

Abstract

This study investigates the financial practices of Canadian firms involving capital budgeting, cost of capital estimation, capital structure, and real options. Survey respondents express a strong preference for net present value followed by internal rate of return and payback methods. The least popular capital budgeting technique is real options. Unlike their U.S. and European counterparts, Canadian firms rely more on subjective risk assessments in adjusting their discount rate. The use of subjective judgment by Canadian managers also applies to risk analysis, forecasting project cash flows, and estimating the cost of equity capital. This finding differs markedly from the widespread use of the capital asset pricing model by U.S. and European firms. In examining capital structure choice, the results show support for trade-off theory relative to pecking order theory. Finally, firm size and the education of the chief executive officer influence corporate finance decisions.

Suggested Citation

  • Kent Baker & Shantanu Dutta & Samir Saadi, 2011. "Corporate Finance Practices in Canada: Where Do We Stand?," Multinational Finance Journal, Multinational Finance Journal, vol. 15(3-4), pages 157-192, September.
    • Handle: RePEc:mfj:journl:v:15:y:2011:i:3-4:p:157-192
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    References listed on IDEAS

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    Cited by:

    1. William Boulding & Abhijit Guha & Richard Staelin, 2017. "Do We Really Need to Change the Decision Maker? Counterintuitive Escalation of Commitment Results in Real Options Contexts," Management Science, INFORMS, vol. 63(10), pages 3459-3472, October.
    2. de Andrés, Pablo & de la Fuente, Gabriel & Velasco, Pilar, 2016. "Are real options a missing piece in the diversification-value puzzle?," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 261-271.
    3. Abdul-Rahman Khokhar, 2019. "Working Capital Investment: A Comparative Study - Canada Versus the United States," Multinational Finance Journal, Multinational Finance Journal, vol. 23(1-2), pages 65-102, March - J.

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    More about this item

    Keywords

    Capital budgeting; cost of capital; risk analysis; real options;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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