Capital markets, corporate governance and capital budgeting: implications for firm value

Baliira Kalyebara, Abdullahi Ahmed

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)


    The conventional discounting capital budgeting techniques have been widely criticised for being inappropriate in incorporating multi-criteria interactions and for focussing on one-off single objective of maximizing net present value. This paper modifies a Multiple Objective Linear Programming (MOLP) optimization model of Levary and Seitz (1990). It adds to the objective function the mitigation of agency costs as a proxy of good corporate governance principles and capital market interactions. The goal of the study is to examine the impact of agency costs on the present value of a long term capital project and investment appraisal decision making in the airline industry to support better capital investment decision making in the future. Recent collapses of high profile companies in airline industry and other industries such as Flyglobespan Airline (in the year 2009) in Scotland, Ansett Airline (in the year 2001)in Australia, Enron(in the year 2001)and Lehman Brothers (in 2008)in the U.S whose impact is still being experienced today provide us with evidence of how important the minimization of agency costs is for the survival and success of organisations and the huge amounts involved as a result of poor corporate governance. The results reveal that debt financing which is often provided by capital markets plays an influential role in shaping the investment appraisal decisions through interest rates and debt covenants embedded in the debt contracts. The results show that mitigation of agency costs improves the firm’s cash flow, financial management and corporate governance. It discourages illegal earnings management practices, enhances investment decisions, investors’ confidence and reliability in the firm’s investment decisions and hence enhances the firm value.

    Original languageEnglish
    Pages (from-to)9-26
    Number of pages18
    JournalCorporate Ownership and Control
    Issue number3
    Publication statusPublished - 1 Mar 2012


    • Agency costs
    • Capital markets
    • Cash flow
    • Corporate governance
    • Firm value and capital budgeting
    • MOLP


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