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Archives of Business Research – Vol. 9, No.2
Publication Date: February 25, 2021
DOI: 10.14738/abr.92.9735. Olulu-Briggs, O. V. (2021). The Fisher Separation Theorem and Capital Budgeting Decisions of Quoted Firms in Nigeria. Archives of Business
Research, 9(2). 231-242.
The Fisher Separation Theorem and Capital Budgeting
Decisions of Quoted Firms in Nigeria
Omiete Victoria Olulu-Briggs
Department of Finance and Banking, University of Port Harcourt, Nigeria
ABSTRACT
This study explored the Fisher separation theorem and capital
budgeting decisions of quoted firms on the Nigerian stock
exchange. A sample of 60 questionnaires were filled and
returned by staffs from particular sectors like manufacturing,
health and agriculture. Descriptive statistics was employed to
illustrate the data while the Spearman rank order correlation
test was used to determine if a significant relationship exist
among the variables. From the estimates, the Net Present Value
and Modified Internal Rate of Return are regularly employed by
firms in making capital budgeting decisions. Also, when firms
employ capital budgeting tools, it creates wealth for both
managers and shareholders, providing support for the Fisher’s
separation theorem. Finally, a correlation coefficient of 0.827
reflect a positive and linear relationship between capital
budgeting decision and Shareholders’ value creation. Thus, an
increase in capital budgeting decisions result to an increase in
value creation. This outcome is consistent with findings from
other economies and previous studies. It thus recommends that
firms in the Nigerian environment should ensure they play
down on shareholders’ desire for dividends and instead
redirect their funds to more investments by employing suitable
capital budgeting decisions.
Key words: Fisher’s Theorem, Capital Budgeting, Investment
decisions, Performance.
INTRODUCTION
The Fisher Separation theorem was propounded by a neoclassical economist, Professor
Irving Fisher [1] who emphasized that supply and demand factors are the prime forces
steering an economic environment. Fisher’s theorem presupposes that shareholders of
corporations not only have diverse intentions from management but that they are deficient
in the deep-seated knowledge of the enterprise needs and prospects required to make
effective choices to generate ground-breaking long-term prosperity to the corporation. As
such, management should disregard the wishes of shareholders and focus on productive
opportunities by making sound investment choices by way of a satisfactory capital
budgeting outcomes. Thus, they should explore various means of funding their projects
such as taking on debt or bond, issuing ordinary or preference shares or going into lease
contracts; in order to generate more value for their shareholders.
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Olulu-Briggs, O. V. (2021). The Fisher Separation Theorem and Capital Budgeting Decisions of Quoted Firms in Nigeria. Archives of Business
Research, 9(2). 231-242.
URL: http://dx.doi.org/10.14738/abr.9735. 232
The Fisher's proposition is of the opinion that the principal obligation of a company's
executive is to maximize the enterprise's worth. This priority is at variance with the
primary assurance of shareholders which is to secure the returns on dividends and capital
gains. Fisher [1] insist that a thriving establishment will disregard shareholders and go all
out for determined value creation. Hence, value can be created by making good capital
budgeting decisions regarding the variety of investments that the firm intends to
undertake. Accordingly, capital budgeting supports a firm in making precise investment
assessments that ensures business expansion and profitability, healthy financial structure;
as such, it is of utmost importance to enterprise decisions.
Capital budgeting decision is a firm’s decision to invest its current funds most efficiently in
the long-term assets in anticipation of an expected flow of benefits over a series of years.
Investment decisions require special attention because of the following reasons: they
influence the organization’s growth and profitability in the long run; they modify its risk
level; they entail earmarking of large amount of capitals; they are unalterable, or revocable
at substantial cost; and they are amongst the most challenging decisions to arrive at. It is a
process of long range planning involving the investment of funds in long term activities
whose benefits are expected over series of years [2]. Capital budgeting is considered a vital
financial board decision. It implies buying high-priced resources to be utilized for a long
period of time and this impinge on the future achievements of the firm. Choosing the right
investing decision in the course of capital budgeting, helps management and the enterprise
in augmenting shareholders wealth. Thus, distinguishing the right blueprints is an
exceptionally important function of the capital budgeting system [3]. It is a planning
machinery employed by a company to make for a better evaluation as regards how limited
resources are to be allocated. Capital budgeting practices assist in ascertaining how feasible
a project is. According to the Chartered Professional Accountants of Canada [4], the
significance of capital budgeting is portrayed in its nature as being quantifiable and
accountable. O’Sullivan and Sheffrin [5] are of the view that participating in an erroneous
project means earmarking corporate resources to a plan that does not take into cognizance
its risks and returns, in so doing negatively altering the wealth of shareholders.
Furthermore, failure to evaluate diverse techniques effectively will adversely affect
corporate earnings and competitiveness, and as such jeopardize its existence [6-8]. In
another development, Fakhfakh [9] argue that in order to uphold a strong economy that
tends towards sustainable growth, it is pertinent to embrace a methodical, analytical and
detailed investment appraisal style that makes for sound judgment. Consequently, capital
budgeting has been a focus of growing theoretic and experimental investigations in
economic literature.
The separation theorem and the capital budgeting decisions of management goes to
support the fact that if firms insist on carrying out a proper budgeting of their capital and
apply appropriate techniques on projects to derive a positive net present value, then they
will secure long term profits that will be continually enjoyed by management and
shareholders. That means, if adequate decisions are employed, firms will bring to the
marketplace products that will create more value by way of customer satisfaction; which
will spur customers to demand more for such products, and in the long run, result in
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Archives of Business Research (ABR) Vol 9, Issue 2, February-2021
business expansion and the subsequent appreciation of the firm’s shares in the capital
market.
The global economic emergencies, wavering oil prices, changes in buyers preferences and
consumer lifestyles, increasing need for making things easier, as well as the substantial
progress in information know-how have presented new challenges for both corporate
financial managers and investment advisors. As a result, companies are required to insist
on carrying out a proper investment appraisal before embarking on any project. Hence, the
need to empirically explore the fisher’s separation theorem and capital budgeting decision
of the firms in the Nigerian economic environment to know if their performance increased
or declined. This report is a deviation from previous findings as it covers diverse aspects of
investment evaluation techniques utilized by corporations operating in various sectors of
the Nigerian economy. Also, previous research were primarily on the dynamics of
operating a certain investment appraisal system or classifying the frequently used
techniques in about one or two commercial sectors. For this reason, this study is envisaged
to make valuable contribution to literature that benefits both seasoned practitioners,
administrators, regulatory bodies and academicians. It would assist to generate apt
investment choices by using the best capital budgeting assessment technique as well as
provide understanding about the employment of real options; thus, assisting firms in
carrying out further enquiries in a bid to enhancing their decisions. Moreover, the study is
undertaken in the Nigerian economy where firms go into huge industrial/productive
activities due to the availability of funding by government agencies and parastatals like the
Bank of Industry, Bank of Agriculture etc. As such, results of this study are anticipated to
add a novel dimension to the investment literature and be part of the incomplete body of
experiential studies on capital budgeting review systems exercised by quoted firms in
Nigeria.
The rest of the report is structured as follows: a concise review of past literature; data and
methods adopted to analyze it; summary of results; conclusion and suggestions.
LITERATURE REVIEW
Previous studies have investigate on the Fisher’s separation theorem and the capital
budgeting decision link and have produced differing results. An in-depth understanding of
these literatures will make for better generalizations in the present study. Klammer [10]
looked into the connection of capital budgeting practices with firm’s performance. 369
questionnaires were sent to industrial firms in the US. Regression analysis was conducted
and the result prove that when firms decide on an appropriate technique to adopt, it leads
to future growth and stability. Haka, Gordon and Pinches [11] argued if firms employ high- tech capital budgeting systems that considers for risk and present value; then they should
perform better. They controlled for changes in systematic risk, size, and industry effects,
returns were performed. Their time series regression analysis concludes that the
implementation of such complex capital budgeting selection procedures do not in any way
lead to better firm performance. Liberatore, Monahan and Stout [12] broadened the
analysis framework instituted by the Saaty's Analytic Hierarchy Process; by concentrating
on basic structural decision making processes such that capital budgeting can be
implemented effectively. Their study conclude that the basic framework for a more efficient