Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

CORPORATE INVESTMENT PRACTICES IN NEPAL

Background
Investment decision is one of the crucial functions of finance as has been recognized by the ample literatures and books of
financial theories. The governing factors at making investment decisions ranges too far from more subjective factors like
overconfidence or ego of managers, to specific objective factors such as project profitability, cost of capital etc. of new
investment project. By far, the most popular factors affecting investment decisions as recognized by the literatures of finance
more or less seems closer to objective aspects of investment project like cash flow, profitability, cost of capital etc. Hence, this
survey intends to obtain information regarding the preferences, views and opinions of finance practitioners over different
factors affecting investment decision to their firms. Sources of fund and financing mix are other important determinants of
investment decision. Whether, there is any preferred source of finance over other sources to finance the investment projects
for the Nepalese managers? This study also intends to insight these facts by presenting and analyzing the results of survey.

This survey has been designed primarily to describe, analyze and interpret the preferences, views and opinions of Nepalese
finance practitioners regarding the different aspects of investment decision in their respective firms. One hundred closed end
questionnaire (shown in appendix) covering nineteen different questions had been distributed to managers, Board of Directors
and other finance practitioners from the different line of business. The nature of questions included the yes/no answer type,
single and multiple answers/ response type, Likert-scale and ranking answer type. Out of hundred questionnaires distributed,
sixty-seven usable responses were obtained which have been presented in the following two sections. The first section
uncovers the respondents' profile and background information following the other sections including the details of qualitative
information, views, opinions and preferences of Nepalese managers into the different facets of investment decisions. The
statistical tools widely applied to analyze the primary data are the frequencies, percentages, means, medians, mean rankings,
standard deviation and rank correlation coefficients. The testing procedures include the F test (ANOVA), and x 2 –test for
determining the level of significance.

Profile of Respondents
In the second half of 2006, a survey was conducted on different types of firms in Nepal to identify key investment
determinants, and the strengths and weaknesses of the country's capital markets. The survey was based on a questionnaire
distributed to 22 firms, primarily in the manufacturing and services sectors. 100 questionnaires were distributed to the sample
firms. The response rate was around 70 per cent.

The first part of the questionnaire considered collecting background information of enterprises surveyed. The questionnaire
contained the questions relating to the positions of respondents in their organization, respondents qualification, line of
business, and age of the sample enterprises. As regards to the positions of respondents in their organization portfolio, 31 (i.e.
46 %) respondents held the managerial positions i.e. chief executives, account officers, finance officers, marketing and
administrative officers, 26 respondents (i.e.38.8%) were from the Board of Directors including the chairman of the Board.
However 15 percent of the respondents did not like to respond this question so they were categorized as others in this study.

Manufacturing firms accounted for eight firms covering 32 out of the 67 respondents. Five respondents were paper
manufacturers, which employed as many as 1000 people; and the others included manufacturers of plastics, paint, bricks, and
beverages products such as beers, Coca-Cola, and poultry products. Service firms included five in banking, and finance, two
in tourism i.e. hotels, three in health services and the remainder in transport, education and retail trading.

Most firms were small, with the majority employing fewer than 50 people, and almost one third employing fewer than 25
people. There were, however, three large firms in the sample, including a paper manufacturer that employed 1000 people. Out
of the firms that provided information about employment numbers, manufacturing accounted for 39 percent of total responses,
services for 34 per cent. More specifically, the business concerned for the survey were plastics and papers, hotels, feed,
beverage, trading, education, banking, finance and other service sectors.

The survey questionnaire also contained the question related to the age of the sample enterprises. Theoretically the age factor
is considered more important for making investment decisions regarding expansion, replacement and diversification of the
respective business. This study however does not consider classifying the business investment decisions into expansion,
replacement and diversification activities but it is well known that the enterprises having lower age are in favor of expansion
and replacement project in comparison of the enterprises having older age. The age of enterprises were categorized into three
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

parts. 39 percent of sample enterprises covered by this study were of less than six years old, about 50 percent of enterprises
were of six to ten years, 19 percent of enterprises were of more than 10 years.

The survey questionnaire also contained the question requiring information relating to the qualification of the respondents.
The maximum numbers of the respondents (i.e. 43 percent) were graduates, 12 percent were below the graduate, 19 percent
earned the master degree and the rest of the respondents (25 percent) did not respond at all.

Analysis of survey opinions

Objective and obstacles to firm investment:
One of the salient features of Nepalese business sector is the low investment rate (Biggs et al; 2000). The present survey also
rarely observed that in any given year, most firms do invest in plant and equipment and for those that do net investment is
unexciting. Most investment in the sample was to increase capacity or improve the production process. Since most investment
is made to increase output and not to improve quality or change products, it is not surprising that investment is low. Most
investment by Nepalese businesses goes to increase output (30%) or replace existing capacity (22%) using the same
technologies as is shown in Table 6-1. Very few firms are induced to invest in improving production techniques (11%) or
improving quality of product (16%). Less than 20 percent of the sample reported using their most recent investment to
introduce a new product.
Insert table-1 here
The average level of capacity utilization for the majority of sample was below 75 percent and no sector or size group was
above 100 percent. The rate of capacity utilization implicitly influences the growth of investment in plant and equipment.
However in this survey, almost 100 percent of the firms were running below the normal capacity. 81 percent respondents
reported that the average capacity utilization in their firms during last three years was below 75 percent. Given the low
capacity utilization and lack of demand there is no reason for firms to add capacity or even maintain the capacity that they
have.
The lack of or too low investment in plant and equipment might have a series of limitations, which have also been attempted
to excavate in this survey. The major factors contributing to the limitations of investment were identified as the finance,
market and labor related problems. Managers that we surveyed felt that a lack of demand for their products was a significant
obstacle; in fact 24 percent of firms in the sample cited uncertainty of demand as among their major obstacles to investment in
plant and equipment. Inadequate rate of return on proposed investment was another obstacle to business investment for 21
percent of respondents. Another major factor in explaining investment is imperfections in the capital markets that prevent
firms from obtaining funds to finance desired level of investment. As noticed in the Table-1, a significant factor in the low
rate of investment may be inadequate access to finance, in fact 18 percent of firms in the sample cited shortage of internal
funds and 14 percent of firms cited inability to raise finance as among their major obstacles to investment in plant and
equipment especially for smaller firms. High cost of external funds was also reported by 11 percent of total respondents as the
obstacle to their business investment. In addressing these issues it is necessary to look at how firms in Nepal finance their
investment, they are shown in Table -3. Less than 10 percent of respondents reported that shortages of skilled labour are
likely to limit their investment in plant and equipment over next twelve months.

Priority of investment decision

Theoretically, different textbooks on finance consider the three important finance function to be accomplished by each and
every enterprise. The functions considered are finance, dividend and investment decisions. The survey questionnaire tried to
capture the preferences and views of finance practitioners whether they consider these three decisions to prefer one more
important over others. The results of ranking of these three-finance decisions according to their priority are presented in Table
– 2 In their overall ranks for the importance of major decisions of finance, the highest percentage of respondents (40.29%)
gave the first priority to investment decision; second priority to finance decision (40%) and third priority was given to
dividend decision (65.67%)

Insert table-2 here

These results also support the conclusions regarding the priority for dividend decisions on the survey conducted by Pradhan
and Adhikari (2002) as regards to "dividend policy and practices of Nepalese Enterprises." In this respect when the responses
of private sector respondents are compared with those of public sector respondents, the priority given to these three decisions
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

were similar to both groups. To test whether the views of the private and public sector respondent is significant across the
groups, F test is employed. The significance level of F statistic shows that there is no difference in views of public and private
sector respondents across the investment, dividend and financing decisions.

Preferred source of finance at firm investment decision

Theoretically a number of textbooks on finance reveal several financing sources to finance new investment project. Among
them internal funds (retained earnings), Bank loans, Owners Contributions, suppliers / trade credits are the major sources for
financing new projects. Selection of one source of finance over others is irrelevant for real investment decision in a world of
perfect capital market (Modigliani and Miller, 1958). However source of financing is relevant to the investment decision of a
firm operating in incomplete capital markets where the cost of external capital exceeds that of internal funds. A large body of
finance literatures (for example Myers and Majluf, 1984; Bernanke and Gertler, 1989 etc.) provides a foundation for these
market imperfections by appealing to asymmetric information problems and agency cost which cause a premium on external
finance. The investment decisions of firms operating in such environment are sensitive to the availability of internal funds
because they possess a cost advantage over external funds.

In this context, the respondents were asked to rank several financing sources in terms of their importance and the results are
presented in Table – 6.3 considering the eight major sources of finance, the respondents were asked whether they prefer one
source of funds over others to finance new investment project in their respective enterprises. They were asked to rank different
sources of funds on a scale of 1(most important) to 9 (least important) and the responses obtained are shown in Table-3
Insert table-3 here
As is evident from the Table, the majority of the respondents ranked first (mean rank 1.88) to internal source of funds to
finance their new project. Bank loans were considered the second (mean rank 2.43) most preferred source of finance by the
majority of respondents. Finance companies, suppliers/ trade credits, insurance companies, owners' contributions, private
outside sources, and cooperatives were the other preferred sources of finance in diminishing order respectively among the
Nepalese practitioners. This finding more or less follows the pecking order hypothesis as suggested by Mayers and Majluf
(1984) and suggests that Nepalese managers rely heavily on internal source of funds. The reason to use this fund might be the
cost advantage of this fund and asymmetric information problems in Nepalese capital market. However, the finding seemingly
contradicts for public and private sectors respondents when it is compared as regards to the owners' contributions, suppliers/
trade credits, private outside sources and insurance companies. For public sectors respondents' insurance companies and
suppliers trade credits are more significant source of finance over owners' contributions and private outside source but the
finding is just overturning in the case of private sectors respondents. These results are tested by F statistics (ANOVA) at 1
percent level of significance. The differences in views of public and private sectors' respondents as regards to owners'
contributions, suppliers/ trade credits, private outside sources and insurance companies are significant at 1 percent level of
significance. But as noticed in the Table-3, retained earnings and banks loans are the first and second preferred source of
finance for both the private and public sectors respondent however the differences are not significant as tested by F statistics.
The present findings are consistent with the findings of the study made by Pinegar and Wilbricht (1989)

In order to establish the degree of relationship between the responses of or the ranks assigned by the private and public sector
respondents, rank correlation coefficient was computed. The rank correlation thus computed was revealed to be +0.845, which
shows the high degree of relationship between the ranks assigned by the public and private sector. P-value for the said rank
correlation coefficient was 0.004, which indicates that the said rank correlation coefficient is significant at 0.01 level of
significance.

It was also attempted to assess the rank correlations of different sources of funds employed by the Nepalese enterprises to
finance their new projects. The correlations of responses to the respondents' preference in sources of finance are presented in
Table-4.

As is noticed from the Table, the retained earning is negatively correlated with bank loans, finance from insurance companies,
private outside source suppliers/ or trade credits and co-operatives but it is noticed the positive correlations of retained earning
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

with the funds from finance companies and owners contributions

The correlation coefficients between bank loans and retained earnings are negative and significant at 5 percent level of
significance. This result suggests that as the level of retained earning increases, the enterprises tend to decrease their bank
loans to finance their new investment projects. The result in the Table also suggests that the firms having good relations with
the suppliers and financing their investment through trade credits tends to decrease their bank loans, private outside sources
and owners contributions. Informal sources like private outside source are positively correlated with the owner's contribution
(another informal source) but it is negatively associated with the bank loans, finance companies, insurance companies,
supplier/ trade credits and other formal sources. Overall the rank correlations coefficients in the table do a good job of
measuring the relationship of variables for different sources of finance in Nepalese enterprises.
Insert table-4 here
When the correlation coefficients of private sectors and public sector responses are computed separately (as shown in
appendix), the results are somewhat different. For private sectors respondents, the correlation coefficients of retained earning
is negative with the bank loans and private outside sources significantly and the strength of negative relationship is very
strong but the same is not true for public sectors respondents. Retained earning is negatively correlated with the bank loans
but the strength of relationship is not so strong as is in the case of private sector and the coefficients are not significant also.
However in the case of public sectors respondents, the correlations coefficients of retained earning is negatively correlated
with the cooperative finance and the insurance companies finance and they are significant at 5 and 1 percent level of
significance respectively. In sum, the conclusion can be derived that there is the significant difference between the correlation
among the financing source variables in public and private sector of Nepalese firms.
Relationships with bank
Access to credit is usually a major problem for firms in developing countries and the situation is no different in Nepal (Biggs
et al; 2000). Though the majority of firms in Nepal have access to at least some external finance, high formal procedures,
large collateral requirements and other factors makes reluctant to firms from obtaining as much finance, as they need as is
depicted in Table- 5. Despite the presence of a wide variety of lending institutions, finance companies, aid agencies and
informal sources, the majority of finance is short-term bank credit and most firms are unable to access long-term credit. The
Table 5 presents the respondents' opinion regarding Nepalese firms' relationship with banks.
Insert table-5 here
What is remarkable to the study result, is that most firms, even among the smallest, deal with multiple banks — the average
firm deals with more than three banks. The majority of respondents i.e. 81 percent reported that they deal with more than one
bank. Less than 20 percent respondents do borrow mostly from one bank. The enterprises seem to have selective upon banks
about their borrowing terms and conditions.

The majority of enterprises switch between the banks which ever offers the best interest rate and other formal terms and
conditions. The majority of respondents believed that there is a limit on what they can borrow. Out of which 68 percent
respondents reported that they are at or near the loan limit. 65 percent of respondents believed that the managers are unwilling
to further invest in fixed assets if they have excessive debt burden at their firm but the 35 percent respondents rejected this
opinion.

While loans may be expensive and hard to obtain, banking services appear to be available to even the smallest enterprises. In
case of shortage of cash in their respective firms, 21 percent of respondents believe that the bank will stop providing loan, and
79 percent believe that the bank will provide loan but they will be tight in negotiating the interest rate (19%), will be rigid in
negotiating covenants (27%), and the bank will automatically extend the loan (18%). correspondingly. In the period of tight
money, 30 percent respondents believed that the bank will treat all companies equally but 28 percent believe the bank favor
other companies. Twenty four percent respondents opine that the bank restrict their companies from borrowing in periods of
tight money.

Though the vast majority of firms in Nepal have access to at least some external finance, rigid formal terms, large collateral
requirements and other factors prevent firms from obtaining as much finance, as they need. A large collateral requirement is
the major problem of obtaining loan from bank and financial institution for the 29 percent of respondents. For twenty five
percent of respondents high interest rate has been considered as an obstacle to obtaining loan. Unlimited liability of owner,
small size of domestic banking, and banks internal rules and regulations are minimally considered as other obstacles to
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

obtaining loan from banks and financial institutions. This finding is consistent with the findings of past studies made by Ang
and Pradhan (1994)

Reasons on the preference of internal funds

Pecking order hypothesis suggests that aggregate investment outlays are predominantly financed by internally generated
funds. New stock issues play a relatively small part. Moreover, as Donaldson (1961) has observed, this is what many
managers say they are trying to do. Asymmetric information and agency problems are the most observed causes to
prefer retained earning by the managers to finance their investment projects. Berle, Berle and Means and Donaldson
have interpreted firms' reliance on internal finance as a byproduct of the separation of the ownership and control:
professional managers avoid relying on external finance because it would subject them to the discipline of the capital
market. Another argument could be made for internal financing to avoid issue costs, and bankruptcy cost. Considering
the major reasons of using internal funds as observed by the different theory of modern finance, the respondents were
asked to rank them in order of preference. The results of rankings are presented in Table-6

The information asymmetry is taken as the first and most significant reason for using retained earning to finance their
investment by Nepalese managers. The statement 'it is hard to convince outsiders on profitability of new investment' has been
taken as a most significant observation and had given it as the first rank by the majority of respondents.
Insert table-6 here
The mean rank value for this statement is 2.36. This statement is also the first priority to both the public and private sector
respondents. 'Cost of retained earning is less than cost of new equity' is another reason to use internal funds by the majority of
respondents and it has been ranked as second priority. The respondents placed the statement 'Firm does not want to dilute
control from selling stock (shares) to outsiders' as third important reason and the observation 'The banks may have too much
voice in the management' has been taken as the fourth important reason for using retained earning. These both reasons more or
less emanate from the "managerial views" of corporate finance indicating that a central theme in much of the corporate-
finance literature–with a lineage going back to Berle and Means (1932), and including the influential work of Jensen and
Meckling (1976), that the managers of publicly-traded firms pursue their own private objectives, which need not coincide with
those of outside stockholders. So there are many possible manifestations of the manager-stockholder agency conflict.
'Company does not want to pay too much dividend' has been taken as least preferred reason for the use of retained earning by
the Nepalese finance practitioners and it has been placed as the fifth rank.

It was also attempted to test whether the opinions of the private and public sector respondents is significantly different across
the groups, by employing F test .The significance level of F statistic shows that there is no difference in views of public and
private sector respondents across the reasons for using the retained earning. This finding is inconsistent with the findings of
past studies made by Ang and Pradhan (1994)

Relative preference for the application of internal fund

A survey of literature reveals several activities that the enterprises tend to use their available internal funds. The prominent
activities among them are: investment in positive NPV project, payment of dividend, maintaining internal liquidity, payment
of debt and repurchase of stock. In this context, respondents' relative preference towards the use of internal funds to different
financial activities of a firm is presented in their rankings of five financial activities summarized in Table – 7

The financial activities selected for the use of internal funds are widely prevalent and pervasive in nature for each and every
type of firms. The respondents were asked the question to rank those five activities according to their preference, if they had
sufficient internal funds to finance in either of the given activities.

Insert table-7 here

Given the sufficient amount of internal liquidity, the majority of respondents preferred to make new investment in positive
NPV project as a first rank. Payment of debt, Maintaining internal liquidity, Payment of dividend and Refund of equity had
been ranked as second, third, fourth and fifth priority by the majority of respondents. This result suggests that internal fund is
the dominant source for financing new investment, which implies that investment decisions of majority of firms are sensitive
to current liquidity. It was also attempted to test whether the opinions of the private and public sector respondents is
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

significantly different across the groups, by employing F test. The significance level of F statistic shows that there is no
difference in views of public and private sector respondents across the areas for application of retained earnings.
Factors affecting investment decisions
A survey of literatures reveals several factors affecting investment decisions. The prominent among them are availability of
financing source, projected cash flow and profitability of new project, availability or ability to borrow by the company, market
growth potential of project, and risk factor in investing new project. In this context, respondents were asked to rank these five
factors on a scale of 1(most important) to 5 (least important) and the result are presented in Table – 8
Table – 8 shows the majority of respondents ranked the projected cash flow and profitability of new project as the most
important factors affecting investment decision. The risk factor in investing new project, the availability of financing source,
and market growth potential of the new project were ranked as the second, third and fourth important factors by the majority
of respondents. Ability to borrow by the company has been considered as the least important factor governing the investment
decision and the respondents placed it as the fifth rank in comparison to others factors.
Insert table-8 here
This result suggests that the investment decisions in the majority of the Nepalese enterprise are affected by projected cash
flow and profitability of the new project. Virtually, the availability of funding source also affects and explains the investment
behavior of Nepalese enterprises. However, if the separate mean ranking is computed for public and private sectors, the results
are contradictory for the first and second priority. For the private sector respondents, the riskiness of assets to be financed is
more important factor for making an investment than the projected cashflow or earning of the assets to be financed. But the
same is not true for public sectors respondents. For them, if the projected cashflow or profitability of the project is good then it
becomes the first and most important determinant for making any new investment. Only after it they consider the riskiness of
the project as another determinant of the investment decision. But there are no any significant differences in public and private
sector responses across the different factors affecting investment decisions. F –statistics shows that there is a not significant
difference in views of public and private sector respondents. The standard deviation of responses ranges from 1 to 1.558 to
their mean ranking indicating the higher consistency in responses among the respondents. The first and second mean ranking
score of these two factors is tentatively equal to each other. Hence, it seems that the riskiness of the assets to be financed is
equally important factor affecting investment decisions in new project with respect to its projected cash flow and its expected
future profitability. In aggregate the mean ranking lies between the 2.42 to 3.87 score. It indicates that the factors considered
are the central and equally important determinants for the investment decisions.
Observations on corporate investment practices in Nepal

At the end of questionnaire, the respondents were provided with a list of eleven different statements of observations on
corporate investment practices in Nepal and they were asked to rank them in order of importance.

In order to highlight the significance of the selected statements of observations, mean and standard deviation values of
responses for each statement of observation have been computed. The first criterion applied is the value of mean. The higher
value of mean indicates that the observation is highly important to majority of respondents. To assess the variability of
responses, standard deviations are computed. The higher the value of standard deviation indicates the higher variability in
responses among the respondents. Applying these criteria, the statements of observations with their mean and standard
deviation value have been presented in order of importance in Table- 9

Insert table-9 here

The mean values of observations statements varied from 3.90 to 2.73. Among the statements,' Managers prefer running large
firms as opposed to simply profitable ones’ has been regarded as the most significant observation. The statement ‘Managers
have better information than outside investors about the most aspects of firm's investment.' carries the mean value of 3.87 and
it indicates that the majority of respondents agree the asymmetric information problems in Nepalese capital markets. The least
significant observation for the majority of the respondents is ' Investment in fixed assets will decrease with high debt ratio'.

These results imply that there are many possible manifestations of the manager-stockholder agency conflict in Nepalese
enterprises. The conclusion that can be derived from this table is that a firm’s cash position may contain information about its
investment opportunities and access or availability of finance significantly influences the investment decisions of Nepalese
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

enterprises. The conclusion is that even firms that are extremely in need of external finance (external equity and debt)–say
because they have good investment opportunities but scarce internal resources–may even be unable or unwilling to raise it.

Discussion
The present survey described and analyzed the views, preferences and opinions of Nepalese finance practitioners in the
different facets of corporate investment behavior of Nepalese enterprises. The major findings drawn from this survey can be
presented as below.
• For the importance of major decisions of finance, the investment decision is considered the most important decisions
for Nepalese finance practitioners. Finance and dividend decisions are taken as second ad third important decisions
for finance.
• Among the different sources of fund, the Nepalese managers preferred to use internal funds (retained earning) as the
most preferred source of fund to finance their investment. At the same time, the managers equally ranked the bank
loan as another important source of finance for their investment. It is note worthy to present here that the internal
funds and bank loans are equally important sources of funds for both the public and private sector's respondents. As
regards to other sources of finance, the preferences and rankings are different for public and private sector's
respondents.
• As regards to the reasons of preferences for the use of retained earnings, the private as well as public sectors
respondents indicated the high cost of external finance and asymmetric information problem as the most remarking
causes to their preferences for internal funds.
• The respondents' relative preference towards the use of internal funds indicates that the ‘investment in positive NPV
project’ is the first choice and ‘payment of debt’ is another activity to be accomplished by the Nepalese managers,
provided they have enough internal funds.
• The respondents were given the different alternative factors influencing investment decisions to rank in order of
importance. Among them the cash flow streams and profitability of the project most attracted to the managers to
undertake their investment decisions. Simultaneously, the availability of financing source also plays the prominent
role to influence the investment decisions for the majority of respondents.
• Uncertainties of demand, low rate of return, inability to raise adequate finance are the major factors that discourage
further investment in Nepalese enterprises. The Nepalese enterprises even the smaller ones seem to have the approach
with banks and they are selective upon the banks and finance institutions to their terms and covenants.

References:

Bernanke, B. S. and M. Gertler, 1989, Agency costs, net worth, and business fluctuations American Economic Review 79, 14–
31.
Cleary, Sean, 1999, The relationship between firm investment and financial status, Journal of Finance 54, 673-92.
Copeland Thomas E., and J. Fred Weston, 1992, Financial Theory and Corporate Policy, Addison-Wesley publishing
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Fazzari, S., Hubbard, R.G. and B. Petersen, 1988, Financing constraints and corporate investment, Brookings Papers on
Economic Activity 1, 141-195.
Hoshi, T., A. K. Kashyap and D. Scharfstein, 1990, The role of banks in reducing the costs of financial distress in Japan,
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Journal of Economics 112, 169-215.
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not have, Journal of Financial Economics 13, 187-221.
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and Geneva
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

Table-1 Determinants of investment

S.No. Questions No. %
1 What is the average level of capacity utilization in your firm during last three years? (Make a
tick mark)
a. Below 50 percent 22 33
b. 51 to 75 percent 30 48
c. 76 to 100 percent 15 19
d. More than 100 percent - -
2 What is the major objective of investment in plant and equipment in your firm? (Multiple
answer/ response)
a. To improve production process 14 11
b. To improve quality of product 21 16
c. To increase output 39 30
d. To increase plant capacity 30 23
e. To introduce new product 25 19
3 What factors are likely to limit your investment in plant & equipment over the next twelve
months? (Multiple answer/ response)
a. Inability to raise finance 17 14
b. Uncertainty of demand 28 24
c. Inadequate rate of return on proposed investment 25 21
d. Shortage of internal funds 21 18
e. High cost of external funds 13 11
g. Shortage of skilled labor 9 8
h. Others 8 7

Table-2 Finance Functions in Nepalese public and private company

Std.
1 2 3 N Mean F Sig.
Finance Decisions/ Rank Deviation
Investment decision Private 15 18 3 36 1.67 .632 .426 .517
Public 12 14 5 31 1.77 .717
Total 27 32 8 67 1.72 .670
Financing decision Private 16 12 8 36 1.78 .797 .672 .415
Public 10 13 8 31 1.94 .772
Total 26 25 16 67 1.85 .783
Dividend decision Private 5 6 25 36 2.56 .735 1.346 .250
Public 9 3 19 31 2.32 .909
Total 14 9 44 67 2.45 .822

Table-3 Preference rankings of source of funds for financing investment in Nepal

N Mean Std. Deviation F Sig.

Retained earning Private 36 1.86 1.175 .018 .894
Public 31 1.90 1.399
Total 67 1.88 1.274
Bank loans Private 36 2.31 .856 1.897 .173
Public 31 2.58 .765
Total 67 2.43 .821
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

Finance company Private 36 2.61 1.293 .009 .926

Public 31 2.58 1.361
Total 67 2.60 1.315
Owners contribution Private 36 3.97 .810 80.02 .000
Public 31 6.84 1.715
Total 67 5.30 1.939
Insurance companies Private 36 5.97 1.612 21.70 .000
Public 31 4.19 1.493
Total 67 5.15 1.786
Private outside source Private 36 4.94 1.472 9.643 .003
Public 31 6.03 1.378
Total 67 5.45 1.520
Co- operatives Private 36 7.69 .624 .313 .578
Public 31 7.61 .558
Total 67 7.66 .592
Supplier/ trade credit Private 36 7.17 .811 53.58 .000
Public 31 4.87 1.668
Total 67 6.10 1.716
Others Private 36 8.47 1.108 .098 .756
Public 31 8.39 1.116
Total 67 8.43 1.104

Table-4 Spearman's Rank Correlations for sources of finance (variables)

Private Supplier/
Retained Finance Owners Insurance outside Co- trade
earnings Bank company contribution company source operative credit
Retained earning
1.000

Bank loans -.268* 1.000

Finance company .053 -.331** 1.000

Owners
contribution .032 .047 .026 1.000

Insurance
-.230 -.097 -.088 -.597** 1.000
companies

Private outside
-.104 -.056 -.060 .354** -.646** 1.000
source

Co- operatives -.206 .170 -.199 -.143 .005 .192 1.000

Supplier/ trade
-.005 -.315** -.051 -.679** .509** -.520** -.162 1.000
credit
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

Table 5 Relationship with Bank and firm investment

S.No Questions No %
1 How many banks do you deal with?
a. One bank 13 19
b. Two banks 16 24
c. Three banks 24 36
d. More than three banks 14 21
2 Do you switch between banks; whichever offers the best interest rate and other formal terms?
c. Yes 34 51
d. No 33 49
3 Is there any loan limit on what you can borrow?
a. Yes 37 55
b. No 30 45
4 Are you at or very near the loan limit?
c. Yes 25 68
d. No 12 32
5 Do you think that the managers are unwilling to invest in fixed assets when they have excessive
debt burdens at their firms?
a. Yes 42 65
b. No 22 35
6 In case of shortage of cash, which of the following events is likely to occur
a. Banks will automatically extend loan 12 18
b. Banks will be tight in negotiating interest rate 13 19
c. It is hard to convince banks on profitability of new investment 10 15
d. Banks will be rigid in negotiating covenants 18 27
e. Banks stop providing loan 14 21
7 In periods of tight money, do you think that banks will
a. Restrict your firm from borrowing 16 24
b. Treat all companies equally 20 30
c. Favor your company 12 18
d. Favor other companies over yours 19 28
8 What are the major obstacles to obtaining loan from banks and finance institutions? (Multiple
answer/ response)
a. High interest rate 38 25
b. Unlimited liability of owner 22 14
c. Banks internal rules and regulation 18 12
d. Large collateral requirement 45 29
e. Small size of domestic banking system 12 8
f. Others 18 12

Table-6 Reasons to use retained earning for new investment

Std. Mean
Sig.
Reasons for using retained earnings N Mean Dev. F Rank
It is hard to convince outsiders on profitability Private 36 2.44 1.594 .228 .634 1
of new investment Public 31 2.26 1.591
Total 67 2.36 1.583
Cost of retained earning is less than cost of new Private 36 2.56 1.297 1.132 .291 2
equity Public 31 2.90 1.375
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

Total 67 2.72 1.335

Firm does not want to dilute control from Private 36 2.61 1.271 1.969 .165 3
selling stock (shares) to outsiders Public 31 3.03 1.169
Total 67 2.81 1.234
The banks may have too much voice in the Private 36 3.69 1.167 .905 .345 4
management Public 31 3.39 1.476
Total 67 3.55 1.318
Company does not want to pay too much Private 36 3.78 1.098 1.622 .207 5
dividend Public 31 3.42 1.205
Total 67 3.61 1.154

Table-7 Priority for uses of internal funds a

Std. Mean
N Mean F Sig.
Deviation Rank
Investing in new projects Private 36 2.36 1.659 .427 .516 1
Public 31 2.10 1.640
Total 67 2.24 1.643
Payment of debts Private 36 2.89 1.116 2.71 .104 2
Public 31 3.35 1.199
Total 67 3.10 1.169
Maintaining internal liquidity Private 36 3.17 1.276 .119 .731 3
Public 31 3.06 1.124
Total 67 3.12 1.200
Payment of dividends Private 36 3.36 1.417 .456 .502 4
Public 31 3.13 1.384
Total 67 3.25 1.396
Refund of shares Private 36 3.22 1.416 .150 .700 5
Public 31 3.35 1.380
Total 67 3.28 1.391
a. Means are calculated by assigning scores of 1 through 5 for rankings for most preferred to least preferred respectively
and by multiplying each score by the fraction of responses within each rank.
Table – 8 Respondent's priority on factors affecting investment decision
Mean
N Mean Std. Dev. F Sig.
Rank
Projected cash flow or earning of assets to be Private 36 2.53 1.558 .426 .516 1
financed Public 31 2.29 1.395
Total 67 2.42 1.479
Riskiness of the assets to be financed Private 36 2.36 1.222 .380 .540 2
Public 31 2.55 1.261
Total 67 2.45 1.234
Availability of financing source Private 36 2.53 1.207 1.531 .220 3
Public 31 2.90 1.274
Kapil Deb Subedi, Head -Research Committee, Saptagandaki Multiple Campus, Chitwan, Nepal

Total 67 2.70 1.243

Market growth potential of the Project Private 36 3.47 1.341 .104 .748 4
Public 31 3.58 1.409
Total 67 3.52 1.364
Ability to borrow by the company Private 36 4.03 1.000 1.587 .212 5
Public 31 3.68 1.275
Total 67 3.87 1.140

Table 9 Observations on corporate investment practices as viewed by all respondents

SN Observations N Mean Std. Dev.
1
Managers prefer running large firms as opposed to simply profitable ones. 67 3.90 1.075
Managers have better information than outside investors about the most aspects of
2 67 3.87 1.127
firm's investment.
3 Company should not pay dividends when profitable investments are on hand. 67 3.85 1.118

4 Good financial health of a firm encourages to further Investment in fixed assets 67 3.84 1.123

5 Equity (external) issues generally carry bad news in the market 67 3.76 1.156

6 Firms with more cash on hand and less debt generally invest more in fixed assets. 67 3.51 1.364

7 Firms with better access to banks have higher investment ratio. 66 3.21 1.504
8 The access to credit is the major problem for investment in Nepal 67 3.12 1.482
9 Raising equity externally is more expensive than internal fund 67 3.09 1.311

10 Uncertainty of future earning discourages the further investment in fixed assets. 67 3.06 1.434

11 Investment in fixed assets will decrease with high debt ratio. 67 2.73 1.366