*Article* **CSR, Risk Management Practices, and Performance Outcomes: An Empirical Investigation of Firms in Different Industries**

**Nitya Singh <sup>1</sup> and Paul Hong 2,\***


**Abstract:** This article presents a research model that defines how external drivers impact financial performance outcomes, and the role played by strategic practices (especially CSR) in reducing the negative impact of such external influences. Applying strategic orientation theory, risk management theory, and CSR theory as the encompassing theoretical rationale, the conceptual framework defines the research idea and the research model provides the empirically testable model that identifies key variables with valid instrument measures. The results indicate that although external supply chain risk drivers do negatively impact a firm's financial performance, the influence of these risk events can be mitigated if firms adopt focused strategic practices. The results highlight the significant role played by CSR strategic practices in enabling firms to develop resilience from disruption events. In our research model, CSR, as an organizational linkage practice, is positioned in between upfront strategic flow and back-end performance flow. It suggests that CSR success is only possible when CSR is implemented broadly throughout organizational processes. Based on the empirical results, lessons and implications are presented for theoretical and managerial insights and future research.

**Keywords:** corporate social responsibility; risk management practices; performance outcome; strategy; supply chain

#### **1. Introduction**

In recent years there has been an increased research attention on environmental, social, and governance (ESG)-focused investing, wherein socially conscious investors are identifying companies based on their behaviors within the ESG categories (Avramov et al. 2022; Gillan et al. 2021; Zhao et al. 2019). Organizations have accordingly responded to such changes in investor behaviors and stakeholder expectations with a renewed emphasis on corporate social responsibility (CSR) to fulfill ESG requirements (Roberts and Dowling 2002). Corporate social responsibility aims to create and deliver value for firms to a larger world beyond customers who purchase their products and services (Lindgreen and Swaen 2010; Matten and Moon 2004). Naturally, the debate on CSR business practices centers on "doing what is right" and "achieving the right results" (Matten and Moon 2004; Latapí Agudelo et al. 2019). Successful CSR implementation requires effective translation of CSR intention (e.g., social and environmental goals), business processes, and comprehensive performance outcomes (Singh and Hong 2020; Wang et al. 2016; Bozos et al. 2022).

As firms try to integrate CSR goals into expanded shareholder expectations (e.g., environmental, equity, and governance issues), the scope of risk management is naturally enlarged (Baker et al. 2021; Shakil 2021; Singh 2021). CSR is a positive flow to build up and support a business reputation, whereas risk management is a proactive business flow to mitigate potentially harmful and damaging effects of business (Parajuli et al. 2017; Sawik 2017; Kim et al. 2021). In this sense, both CSR and risk management are very closely related. Consequently, firms increasingly regard CSR as an important element of their

**Citation:** Singh, Nitya, and Paul Hong. 2023. CSR, Risk Management Practices, and Performance Outcomes: An Empirical Investigation of Firms in Different Industries. *Journal of Risk and Financial Management* 16: 69. https://doi.org/10.3390/jrfm16020069

Academic Editor: ¸Stefan Cristian Gherghina

Received: 3 January 2023 Revised: 20 January 2023 Accepted: 21 January 2023 Published: 25 January 2023

**Copyright:** © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

strategic and operational business processes to fulfill ESG goals (Brower and Rowe 2017; Liu et al. 2021; Zhao et al. 2019). Porter and Kramer (2006) therefore suggest that the role of CSR within an organization should now be considered within more innovative frameworks than it traditionally has been. Accordingly, scholars have started to focus on identifying how CSR can enable firms to achieve superior customer satisfaction, improved financial performance, and empower an organization to develop a sustainable competitive advantage (Roberts and Dowling 2002; Roehrich et al. 2014).

Emerging research on supply chain risk management (SCRM) considers how firms plan to reduce the impacts of supply chain disruptions on business processes and overall performance outcomes (Choudhary and Sangwan 2019; Nooraie and Parast 2016; Parajuli et al. 2017). In the context of rising complex and uncertain supply chain risks, firms find it quite challenging to integrate CSR and risk management into their strategic and operational processes, with empirical research in this area still rare (Baker et al. 2021; Kim et al. 2021; Shakil 2021; Singh and Hong 2020). Furthermore, research on the impact of CSR on organizational outcomes, such as reputation and financial performance, has been inconclusive (Aguilera-Caracuel and Guerrero-Villegas 2018). As more firms operate using their global production and marketing network, more research is called for in relation to supply chain risk management practices (Albuquerque et al. 2019; Bhattacharya et al. 2021; Singh 2021).

In response to such a current research trend, this article aims to examine how firms effectively implement CSR (1) to mitigate supply chain disruption events, (2) to achieve competitive performance outcomes, and (3) to fulfill socially desirable goals. We first develop a conceptual framework that provides the theoretical rationale of this study. This paper is organized in the following sequence. A research model presents key variables that interact through business processes to achieve desirable performance outcomes. For an empirical investigation, this study uses an original benchmark instrument that tests the key relationships and reports the findings of firms of different industries from Asia, North America, Latin America, and Europe. Based on the empirical results, lessons and implications are presented for theoretical and managerial insights and future research. The main contribution of this article is how firms use CSR as a critical linkage mechanism between strategic planning processes and operational implementation practices. The results are to achieve multiple organizational goals—economic, environmental, and social dimensions.

#### **2. Conceptual Framework**

A conceptual framework describes how key ideas are related. Conceptual frameworks are developed based on theoretical rationale and thus provide the basis for a further literature review and analysis (Hong et al. 2019; Nader et al. 2022; Flaig et al. 2021; Zhang 2013). Figure 1 presents three theoretical bases and key concepts such as drivers, risk-mitigating practices, CSR practices, and performance outcomes. Three theory streams provide the research context and research design. First, strategic orientation theory (SOT) explains how firms choose their long-term business direction which provides their overall purpose and business principle (Day and Wensley 1983; Chaganti and Sambharya 1987). SOT is useful in understanding how firms choose their set of principles to guide their organization-wide activities in the long term to aim for a competitive advantage in their target markets (Saebi et al. 2017; Brower and Rowe 2017). Second, risk management theory (RMT) suggests how firms adopt their proactive approaches to anticipate and prepare for the potential risk factors in prudent and realistic business action programs (Aven 2016; Ho et al. 2015). RMT explains how firms choose their practices related to utility, regression, and diversification to mitigate the negative impacts of risk drivers on organizational outcomes (Bolton et al. 2011; Hoyt and Liebenberg 2011; Tang and Musa 2011).

**Figure 1.** Conceptual Framework.

Third, CSR theory explains the role of CSR in relation to other business practices that are critical to achieving desirable organizational outcomes (Matten and Moon 2004). CSR considers how firms make a concerted effort to integrate societal expectations into their business processes and promote a positive brand value of companies (Singh and Hong 2020; Wang et al. 2016; Latapí Agudelo et al. 2019). In summary, a conceptual framework (Figure 1) shows a general model of how firms incorporate strategic intent, risk management requirements, and corporate social responsibility dimensions into their overall business practices. In the next two sections, we conduct a literature review to identify gaps within the literature and follow it up by developing a specific research model that shows how firms pursue their value propositions into viable practices and desirable performance outcomes.

#### **3. Literature Review**

Recent supply chain literature has examined how firms manage diverse risks within their supply chain through their risk-resilient capabilities (Khan and Burnes 2007; Kwak et al. 2018; Nader et al. 2022; Parker and Ameen 2018; Zimon and Madzík 2020). The numerous types of risks are classified into different categories in the form of offshoring risk, quality risk, safety performance risk, managerial performance risk, and product risk, and firms considered and devised systematic responses (Baryannis et al. 2019; Brusset and Teller 2017; Zimon and Madzík 2020; Fan and Stevenson 2018).

The earlier discussion suggests that scholars have not only attempted to characterize the term SCRM but also assessed how these risks impact firm performance, and consequently attempted to develop strategies to mitigate supply chain risk (Parajuli et al. 2017; Sawik 2017; Bradley 2014; Nooraie and Parast 2016). Scholars further argue that it is important to identify the negative impact of disruption events on a firm's supply chain, as well as identify strategies adopted by these firms to mitigate the negative influences of such disruption events (Shen and Li 2017; Revilla and Saenz 2017). They ultimately suggest that a supply chain disruption orientation by itself does not necessarily translate into supply chain risk resilience. It is also important for firms to identify capabilities and strategies that

are sustainable and can proactively enable them to mitigate the negative influences of these disruption risks.

Although numerous perspectives have been developed on how firms can develop risk resilience, a research area that has garnered significant attention is how organizations integrate their strategic intent with operational practices to adopt CSR as a vital mechanism to mitigate the impacts of supply chain disruptions and sustain their reputation (Gillan et al. 2021; Kim et al. 2021; Liu et al. 2021; Singh 2021). The core argument is that CSR can be a strategic orientation that promotes vibrant innovation and flexible responsiveness to market changes and thus sustain competitive advantage (Cannon et al. 2020; Du et al. 2011; Nyuur et al. 2019; Porter and Kramer 2006). However, the lack of credible and conclusive evidence about the vigorous roles of CSR on broad organizational outcomes calls for more empirical research in this area (Aguilera-Caracuel and Guerrero-Villegas 2018; Cannon et al. 2020; Dupire and M'Zali 2018). In response to such research needs, this article aims to provide a sound research model that defines relevant variables and examines how firms effectively adopt CSR to achieve desirable organizational outcomes with empirical tests.

#### **4. Research Model and Hypothesis Development**

*4.1. Supply Chain Risk and Organizational Impact*

As organizations function in an increasingly globalized and uncertain business environment, supply chain disruptions have started to emerge as one of the most significant factors impacting firm performance, reputation, and profitability (Singh and Singh 2019; Dubey et al. 2019; Punniyamoorthy et al. 2013). Supply chain disruption can therefore be categorized as supply chain risk events that negatively impact organizational performance at several levels. Such disruptions can occur both upstream and downstream of the organizational value chain (Park and Singh 2022). "From the point of view of a buying firm, the upstream supply chain can be viewed as an organization" (Bode and Wagner 2015). Choi and Hong (2002) reframed this concept into a supply chain context and suggested that an upstream supply chain comprises several suppliers, several tiers of suppliers, and the extent of the dispersion among members within the network. Scholars have therefore argued that from a supply chain disruption perspective, it is important to identify the role played by suppliers, and how small failures at their end may magnify supply chain risk factors for the buyer firm (Kim et al. 2019; MacKenzie et al. 2014).

Risk incidences emanating from disruption at the supplier end are therefore conceptualized in this article as supply chain risk drivers that have a negative impact on a firm. The ability of firms to manage resources and reconfigure them according to the environmental setting is extremely important for a firm's survival and long-term financial performance (Sirmon et al. 2007; Davis et al. 2009; Singh and Hong 2020). Therefore, scholars have argued that due to these factors, network-based supply chain disruptions negatively impact a firm's financial performance (FO) (Zsidisin et al. 2016). Such supply chain risk events also have a tangible and direct impact on the strategic activities that firms undertake as part of their regular operations (Singh and Hong 2020). Kaplan (2008) further suggests that the cognitive behavior of decision-makers is influenced by the frames that individuals operate in, and hence it can be argued that these frames are impacted by the organizational environment. Supply chain risk drivers (SCRD) therefore also negatively impact firms' practices, including strategic innovative practices (SIP). Thus, the following hypotheses are stated as:

#### **H1a.** *Supply chain risk drivers are negatively related to financial outcomes.*

#### **H1b.** *Supply chain risk drivers are negatively related to strategic innovative practices.*

Supply chain risk drivers may also divert the attention of organizational members to focus more on the detrimental risk events rather than societal concerns, and therefore they also negatively impact organizational CSR activities (Singh 2021; Lim 2020; Zhou and Ki 2018). Furthermore, as organizations witness incidences of supply chain disruption events, they develop an institutional memory that enables them to effectively respond to such

disruption activities (Maitland and Sammartino 2015; Osiyevskyy and Dewald 2015; Khatri and Ng 2000). Therefore, as firms encounter incidences of supply chain disruption events, they not only improve upon their existing risk management practices but also develop new risk management practices. Hence, it can be argued that supply chain risk drivers positively impact risk management practices (RMP). Thus, the following hypotheses are stated as:

#### **H1c.** *Supply chain risk drivers are negatively related to CSR organizational practices.*

#### **H1d.** *Supply chain risk drivers are positively related to risk management practices.*

#### *4.2. Strategic Innovative Practices and Their Impact on Organizational Practices*

Within the strategic management literature, scholars have long argued that strategic practices have a direct impact on organizational performance. Child (1972) suggested that organizations do not simply react to their environment, but dynamically interact with it through the actions of top managers. Therefore, firms may develop a competitive advantage by developing competencies that are incrementally innovative relative to other organizations but in aggregate play an important role in enabling firms to develop dynamic capability (Golgeci and Ponomarov 2013; Barney 1991). Hence, in pursuit of competitive advantage, firms focus on developing strategic practices that aim to develop capabilities within the organization that can help reduce business risk, and enhance corporate reputation, while simultaneously achieving superior financial performance. Long-term innovative strategic practices thus consider how the organization can prepare for current and future risk events, and therefore play an important role in enabling the firm to develop risk management capabilities (Hussy 1999; Agarwal and Ansell 2016). Furthermore, such innovative strategic practices also aim to ensure that organizations are able to develop and enhance their reputation among customers, who as a result of positive firm perception are willing to continue to purchase products and services from these firms (Louro and Cunha 2001; Saeidi et al. 2015). Strategic innovation practices are therefore more likely to engage in socially respectful activities which are closely related to the goals of CSR practices (Lin-Hi and Blumberg 2018; Ham and Kim 2019; Carroll 1979; Hou 2019). Strategic practices also intend to bring value to organizations through constructive changes within the organization by enabling the firm to improve various aspects of its value chain that enhance productivity, reduce costs, and effectively develop and retail products that result in positive financial outcomes (Certo et al. 2006; Seifzadeh and Rowe 2019; Lestari et al. 2020). Thus, the following hypotheses are stated as:

**H2a.** *Strategic innovative practices are positively related to risk management practices.*

**H2b.** *Strategic innovative practices are positively related to CSR organizational practices.*

**H2c.** *Strategic innovative practices are positively related to financial outcomes.*

#### *4.3. Impact of Risk Management Practices*

As firms function in a dynamic business environment, the high uncertainty resulting from business disruptions creates ambiguity about the value and utility of existing resources to generate capabilities that aid in recovering from disruption. A firm that is able to effectively utilize its resources in a dynamic environment will have a better chance of developing capabilities to reduce the impact of disruption events (Craighead et al. 2007; Scheibe and Blackhurst 2018). Such strategic practices assist decision-makers within an organization to mount an effective and rapid response to manage the adverse impact of business disruption events that have both reputational and financial impacts on a firm.

From an organization's perspective, corporate reputation represents the stakeholders' overall evaluation of a company (Kim et al. 2019), and particularly demonstrates the extent to which organizational stakeholders identify the company as being good or bad (Lin-Hi and Blumberg 2018). When attributing a positive or negative reputation to a company, stakeholders look at several aspects such as the firm's past corporate activities,

and extrapolate from these activities their assumption of the company's future behavior (Lin-Hi and Blumberg 2018). One aspect of corporate activity that has steadily gained in relevance as having a positive impact is CSR practices. Carroll (1979) defined CSR as "the social responsibility of a business which includes the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time". This idea was further extended by Snider et al. (2003) who argued that "CSR implies that companies have a moral obligation to the society in which they operate to behave ethically, beyond the limits of legal requirements, and beyond their obligations to traditional stakeholders, such as employees, consumers, vendors, and the local community" (Snider et al. 2003, p. 175). Thus, the following hypothesis is stated as:

#### **H3a.** *Risk management practices are positively related to CSR organizational practices.*

The ability of firms to manage resources and reconfigure them according to the environmental setting is extremely important for organizational growth and long-term financial performance (Sapienza et al. 2006; Sirmon et al. 2007; Davis et al. 2009). As the environment under which firms operate cannot be controlled, organizations must contend with various risks during the normal course of business operations. Risk management practices are therefore strategic initiatives adopted by companies to reduce the negative influence of broad, rare, and adverse supply chain events that have a negative impact on the organization's operational and business capability (Ho et al. 2015). Risk management practices are therefore strategic initiatives adopted by firms to reduce the negative impact of environmental uncertainty on firm performance, thereby reducing costly errors and preventing damaging wastes of organizational resources, and ultimately have a positive impact on organizational financial outcomes. Thus, the following hypothesis is stated as:

#### **H3b.** *Risk management practices are positively related to financial outcomes.*

#### *4.4. Influence of CSR Practices on Firm Financial Performance*

In recent years the role of CSR as a strategic business tool to achieve tangible business outcomes has become better understood by both practitioners and academics alike (Zhao et al. 2019). A common consensus that has emerged among scholars is that by adopting and effectively implementing CSR practices, firms can exhibit increased customer satisfaction, improved reputation, and develop a sustainable competitive advantage (Roberts and Dowling 2002). Scholars have further identified that the adoption of CSR practices has a direct impact on corporate reputation. Research shows that when customers are provided an option of choosing between two competing products with similar price points and quality levels, they tend to prefer products from organizations that have made the strategic choice of adopting CSR practices (Saeidi et al. 2015). These arguments lead us to suggest that CSR practices adopted by organizations enable the company to achieve tangible benefits, and therefore assist the firm in mitigating the negative impact of business disruption events on corporate reputation.

As firms have expanded the scope of their CSR initiatives, academic research focusing on the wide-ranging impact of CSR practices on business organizations has also increased. Significant work on this topic was performed by Cruz and Matsypura (2009) and Cruz (2013), when they attempted to bridge the theoretical gap between CSR practices, supply chain risk, and SCRM practices. These scholarly works suggest that organizations with CSR practices can decrease operational inefficiencies, production costs, and business risk, while simultaneously enabling the firm to increase sales, enter new markets, and improve brand value. A direct impact of these benefits is the organizational ability to decrease costs, lower risk, and improve profitability (Cruz 2013). Therefore, it can be argued that CSR organizational practices enable the creation of a positive environment for the organization, allowing it to offsets risks from potential supply chain disruption events and therefore exhibit positive financial outcomes. Thus, the following hypothesis is stated as:

**H4.** *CSR organizational practices are positively related to financial outcomes.*

#### **5. Methodology**

#### *5.1. Research Methodology*

The study adopts quantitative methodology which involves the development of a survey instrument and the use of covariance-based structural equation modeling (CB-SEM) to examine the hypothesized relationships. The first step that we adopted in this study was to develop the relevant constructs through a comprehensive literature review. We used the existing literature base to develop the model identified in Figure 2 and create the survey instrument (Moore and Benbasat 1991; Bagozzi et al. 1991; Churchill 1979). We adopted a questionnaire-based survey method as it allows us to increase the generalizability of the results by testing the relationships between various constructs on a large sample base (Miller 1992; Straub et al. 2004). The unit of analysis in our study is the firm level.

**Figure 2.** Theoretical Model.

#### *5.2. Data Collection and Sample Characteristics*

Items for the constructs were developed from established scales altered to the context of our study (Singh and Hong 2020; Singh 2021). The survey adopted a 5-point Likert scale to capture respondent feedback on various constructs ranging from 1 (strongly disagree) to 5 (strongly agree). The starting point for data collection was Lexis-Nexis Academic. SSIC codes were used to identify managers from the target industry and develop a database of 1728 managers. For key informants criteria, the selected survey respondents were senior and middle management professionals who had experience in supply chain management, risk management, and strategy development for their respective organizations (Kumar et al. 1993). We then contacted all the managers, shared with them the topic of our research, and solicited their willingness to participate in our research. To test the quality of the model and ensure the reliability and validity of measurement scales, we also conducted a pilot study with 40 executives from the industry. After obtaining adequate respondents from the pilot study, we tested for reliability and validity. The scale exhibited acceptable accuracy as the observed corrected item total correlation (CITC) scores were greater than 0.3, and the Cronbach alpha values were greater than 0.7. We also assessed the scores of factor loadings (Hair et al. 2010).

Having refined the survey instrument, we proceeded toward the final data collection. We uploaded the survey onto Qualtrics and shared the survey link with all the potential respondents. To ensure a high response rate, continuous communication was maintained with all likely respondents during the data collection time period (Dillman 2007). Such continuous engagement resulted in us receiving feedback from 328 managers, giving us a response rate of 18.98%. To check the distribution of missing responses, Little's MCAR test was applied (Little 1988) and the analysis showed that values in the database were missing completely at random (*p > 0.05*). This study followed Lin and Wu (2014) in checking for normality of the data distribution and outliers. Using the currently acceptable methodological practices (Hair et al. 2010; Li 2013), responses that had missing data were removed from the final database. Mahalanobis distance was used to check for outliers within the data. The Mahalanobis distance scores were between 0 and 1 for the majority of the observations, indicating that the data conformed to normality and that the dataset included only a few outliers (Lin and Wu 2014). The final database, after deleting missing variables and outliers, comprised 271 usable responses. Hair et al. (2010, p. 175) suggested that to ensure reliability, validity, and generalizability of results, the sample size should be in the ratio of 50:1 (50 observations per variable). In our study, the sample size is above this threshold level and therefore signifies a high level of data representativeness and reliability to the research questions. The final tests focused on assessing reliability and validity. Each scale (Appendix A) demonstrated acceptable levels of convergent validity and reliability. The demographic profile of the organizations in the final database is shown in Table 1.


**Table 1.** Demographic Profile of Companies.

To ensure the robustness of the model, we also include firm size as a control variable in our model. We measure firm size by considering two parameters: (1) the number of employees within an organization and (2) the annual turnover of the firm (Saeed et al. 2019). The consideration of these control variables is justified as the circumstances under which supply chain disruption events negatively impact a firm's financial performance are contingent on the size of the firm (Pleshko et al. 2014). The inclusion of these control variables in the

model helps extract the associated variance. As the survey respondents had self-identified the organization that they were working for, secondary data related to the total number of employees and annual revenue of the firm were collected through COMPUSTAT, and in some cases directly from the company's website. As the data range was extremely broad, we used log values (base 10) for standardizing the values of both variables. In addition to the survey data, such use of secondary data further adds to the robustness of the model and the validity of the empirical investigation.

#### *5.3. Data Analysis and Results*

We used AMOS covariance-based structural equation modeling to test our research hypotheses (AMOS 25.0). Scholars have argued that a CB-SEM approach is a superior approach and is better suited when dealing with complex models (Rönkkö et al. 2016). The complete sample of 271 respondents was used for the estimation. For testing potential response bias, we followed the suggestions of Armstrong and Overton (1977). We compared the findings of early respondents and late respondents. Using the late respondents as a proxy for non-responders, we randomly selected a sub-sample of 50 respondents from the initial contact list and statistically tested for response bias (Choudhary and Sangwan 2019). The result of the Student's t-test showed no significant difference between early and late respondents, implying that response bias was not a source of concern in our findings.

#### *5.4. Assessing Potential Common Method Bias*

To ensure the robustness of the study, detailed tests were conducted to examine potential common method bias (CMB) within the dataset (Podsakoff et al. 2003). We followed the most widely accepted methodological approaches to deal with common method bias, both ex-ante and ex-post (Chang et al. 2010; Tourangeau et al. 2000; Hu et al. 2019). First, during the item construction phase, we involved two academics and two practitioners well versed in supply chain risk management and strategy development and used their feedback to refine the survey instrument. Second, during the data collection process, respondents were assured of anonymity and confidentiality of their responses. Third, several scholars (Pavlou et al. 2007; Hu et al. 2019) have suggested that common method bias would exist if the correlations between the constructs were higher than *0.90*. In our study (Table 2), the highest correlation coefficient was *0.73*. Harman's single factor test (Shen et al. 2019; Podsakoff et al. 2003) also indicates that no single component accounts for most of the variance.



Note: CR = Composite Reliability; AVE = Average Variance Extracted; *n* = 271.

#### *5.5. Measurement Model*

The measurement model was evaluated prior to the structural model to ascertain whether we have construct reliability, discriminant validity, convergent validity, and unidimensionality. As factor loadings for almost all items in the scale were found to be above *0.4*, all scale items were used for confirmatory factor analysis (CFA). Unidimensionality was reflected through high internal loadings and high Cronbach's α (CA), which exceeded 0.8 for all constructs (Nunnally 1978), and high (*>0.7*) composite reliability for each construct (Segars 1997; Hair et al. 2010). We also tested the model for multicollinearity using variance inflation factors (VIF). The constructs' VIFs ranged from *1.14 to 2.81*, which is lower than the threshold of *3.33* (Hu et al. 2019). These estimates indicate that no multicollinearity exists within the model.

We evaluated the measurement model using CFA (Anderson and Gerbing 1988). CFA was operationalized in two stages—first through a measurement model and second through a structural model (James et al. 1982). Values were calculated for composite reliability (CR), average variance extracted (AVE), Cronbach's alpha (α), and item loadings to assess the internal reliability and convergent validity. The values for CR and AVE, along with the standardized CFA loadings in Appendix A, provide evidence of convergent validity. Almost all the factor loadings in the measurement model are greater than *0.6*, showing convergent validity (Bagozzi et al. 1991). For an additional test of the model fit, we used the chi-square goodness-of-fit test. The chi-square test value in our analysis was *1.286*, further showing excellent fit (Hair et al. 2010). Another important index used for assessing model fit is the root mean square error of approximation (RMSEA), which provides a mechanism for adjusting for sample size, where chi-square statistics are used (Byrne 2016). The RMSEA of our measurement model came to *0.033*, providing further evidence of an excellent model fit (Browne and Cudeck 1992; Kline 2011; Byrne 2016). In our measurement model, the comparative fit index (CFI) was observed to be *0.979* and PClose was observed to be *0.987*, providing further evidence for an excellent model fit (Hair et al. 2010). Therefore, an analysis of the measurement statistics suggests that the model displays excellent fit along with high reliability and validity. Since all the measurement criteria were satisfied, we further tested the structural model.

#### **6. Structural Model Results and Discussion**

#### *6.1. Structural Model Test Results*

The structural model was examined using AMOS covariance-based SEM to test our hypotheses. The results of the analysis are outlined in Figure 3 and Table 3. Hypothesis 1a (H1a) states that supply chain risk drivers (SCRD) negatively impact a firm's financial outcomes (FO). The effect is observed to be negative and significant (*β =* −*0.139*, *p < 0.001*). This result was expected and is in keeping with the current literature that had identified the negative impact that supply chain risk has on a firm's financial performance (Zsidisin et al. 2016; Dubey et al. 2019). This result provides support for the previous study that supply chain risk drivers (SCRD) directly and negatively impact a firm's financial performance. The result of H1b (*β =* −*0.201*, *p < 0.001*) supports that SCRD negatively impacts strategic innovative practices (SIP). This confirms that supply chain disruptions motivate firms to devise new and different responses in their strategic level planning practices (Singh and Hong 2020; Kaplan 2008; Nader et al. 2022).

**Figure 3.** Analysis of Empirical Results. Notes: \* 90% significance level; \*\*\* 99% significance level; t: statistically insignificant.


**Table 3.** Structural Model Results.

The result of H1c (*β =* −*0.150*, *p < 0.001*) also supports that SCRD negatively impacts CSR organizational practices (CSR). This suggests that various supply chain risk drivers become the source of added pressures and stresses and they are quite disruptive for normal CSR routines (Singh 2021; Lim 2020; Zhou and Ki 2018). The result of H1d (*β =* −*0.001*, *p > 0.05*) indicates that SCRD negatively impacts risk management practices (RMP) but it is not statistically significant. This means that risk management practices by nature anticipate disruptive events and thus they are better prepared to deal with these external disruptions without a huge impact on risk management practices across organizational boundaries. The results of H2a *(β = 0.312*, *p < 0.001*), H2b (*β = 0.334*, *p < 0.001*), and H2c (*β = 0.037*, *p > 0.05*) show that strategic innovative practices (SIP) positively impact RMP and CSR but not financial outcomes (FO). This explains that firms that formulate strategic innovative practices through proactive and systematic processes involving organizational members are more likely to implement effective RMP and CSR (Agarwal and Ansell 2016; Dupire and M'Zali 2018; Nyuur et al. 2019). The result of H2c indicates that strategic planning practices alone do not directly impact financial performance. The financial performance outcomes require the implementation of mediating organizational practices that support strategic planning goals (Certo et al. 2006; Seifzadeh and Rowe 2019; Lestari et al. 2020; Hong et al. 2019).

The results of H3a (*β = 0.250*, *p < 0.001*) and H3b *(β = 0.457*, *p < 0.001*) suggest that RMP positively impacts both CSR and FO. This indicates the powerful synergy when organizations implement both RMP and CSR in their normal organizational processes (Craighead et al. 2007; Scheibe and Blackhurst 2018; Kim et al. 2019; Singh and Hong 2020). Organizations can achieve positive financial performance if they use RMP and CSR to support strategic goal practices (Davis et al. 2009; Ho et al. 2015; Hong et al. 2019). The results of H4 (*β = 0.507*, *p < 0.001*) report that CSR positively impacts FO. This suggests that as CSR is positioned in the back-end (as an operational implementation mechanism), and not in the front-end (as a strategic planning tool), it has a much more direct impact on financial performance (Cruz 2013; Roberts and Dowling 2002; Saeidi et al. 2015; Zhao et al. 2019).

#### *6.2. Theoretical Rationale and Empirical Tests*

Hypotheses state the relationships between key variables with theoretical support and logical rationale. In this study, the original survey items of each variable clearly reflect what each theoretical rationale suggests, and the adequate sample size allowed us to empirically test the validity of the relationships between these key variables.

Items of strategic risk drivers and strategic innovation practices represent external environmental challenges and pressures, whereas strategic innovation practices reflect the organizational intent and strategic aims and goals of firms according to the emphasis of strategic orientation theory (Chaganti and Sambharya 1987; Day and Wensley 1983; Saebi et al. 2017; Tourky et al. 2020). Items of strategic risk management practices consider both practical and timely organizational risk management approaches according to what risk management theory suggests. Items of CSR organizational practices measure key CSR practices that benefit both internal (e.g., employees) and external stakeholders (e.g., direct customers and societal members).

#### **7. Limitations and Implications**

As with all empirical research, our study also has certain limitations. First, most respondents were primarily senior managers working in either the manufacturing sector or the logistics sector. However, this research does not include a representation of firms from the service and hospitality sectors, where the experience of organizations in managing and reacting to supply chain disruptions might be different. Second, this study was primarily empirical in nature and therefore aimed at quantitatively identifying strategic practices that are relevant to both the manufacturing and logistics sectors. Therefore, the study does not identify specific strategic innovative, risk management, and CSR practices that firms can adopt to manage incidences of supply chain disruption. Third, the study takes a macro

perspective of the role played by CSR practices in managing corporate reputation when firms are faced with a supply chain crisis situation. The study, however, does not identify how much CSR practices differ across sub-sectors. Despite these limitations, the findings of this study provide meaningful insights on theoretical and practical aspects.

#### *7.1. Theoretical Implications*

First, this study clarifies theoretical ambiguity about the role of CSR in relation to organizational processes and performance outcomes. The debate on CSR was not about the value of CSR purpose and intent but on the process and outcomes (Ginder et al. 2021; Liu et al. 2021). To test the role of CSR, the research model defines key variables that highlight three theoretical perspectives. All the key variables in this research are further measured by the original benchmark instrument, which is the result of rigorous instrument development procedures (Churchill 1979; Hair et al. 2010). The empirical tests results suggest that firms that position CSR as a vital organizational process beyond a strategic intent indicator are more likely to achieve better performance results. In this sense, this study clarifies the theoretical rationale on how firms can formulate and implement CSR for achieving desirable performance results.

Second, this study suggests that confirmation of theoretical relationships requires using both perceptive and actual performance measures. This study uses both perceptive organizational variables and actual financial statements from annual reports. Distinctively different from prior CSR empirical research articles, this research does not use self-reported perceptive financial measures. The credibility of empirical investigation is often debated because of the heavy usage of self-reported perceptual measures without the actual financial performance outcomes (Broadbent et al. 2015; Maestrini et al. 2017; Moore and Benbasat 1991). In contrast, this research validates the trustworthiness of self-assessed practices through actual financial performance outcomes. In this sense, an important theoretical implication is that a useful benchmark survey instrument should use hybrid measures in terms of self-reported perceptive measures and objectively reported actual outcomes measures (Byrne 2016; Gligor et al. 2015; Hu et al. 2019).

Third, the effective role of CSR requires the corresponding right configuration of relevant variables. This study suggests that CSR alone does not generate desirable outcomes. Rather, CSR, with the combination of other congruent variables, provides synergistic effects on performance outcomes (Lee and Kwon 2019; Ben Brik et al. 2011). In this study, CSR organizational practices are positioned as a crucial mediating linkage mechanism that directly impacts financial performance outcomes. In prior CSR research, CSR practices were positioned as the front-end practices. CSR is envisioned at the corporate level and CSR practices are implemented as mandates of overall corporate mandates (Ham and Kim 2019; Snider et al. 2003). Therefore, CSR is too often not so visible and relevant in mid-level business practices. On the other hand, in our research model, CSR, as a center of organizational practices, is positioned between upfront strategic flow and backend performance flow (Wang et al. 2016; Singh 2021; Zhao et al. 2019). This research suggests that CSR success is only possible when CSR is implemented broadly throughout organizational processes along with other relevant variables. The theoretical implication of this study is that CSR can become a critical linkage between corporate missional intent and competitive performance results through risk management practices.

#### *7.2. Managerial Implications*

First, outstanding firms adopt CSR beyond promotional and demonstration effects. Although all firms operate in their unique contexts, business practices with staying power adopt practices that are sensible (i.e., theoretically explainable) (Albuquerque et al. 2019; Day and Wensley 1983) and credible (i.e., broadly tested in diverse contexts) (Nader et al. 2022; Saeed et al. 2019; Singh and Hong 2020). This study's findings suggest that effective CSR implementation requires strategic motivation through supply chain risk drivers and process routinization through broad acceptance by large organizational members. A unique

aspect of this study is that CSR management practices are not outlier practices, but they interact with strategic innovative practices and risk management practices as a part of important organizational routines (Mehralian et al. 2016; Wu et al. 2015). This suggests that firms that treat CSR as an indispensable element of organizational practices are more likely to succeed in achieving superior and sustainable performance outcomes in their organizational contexts. It is imperative for senior leadership to communicate the positive role of CSR practices and use them as a critical linkage between front-end strategic flow and back-end performance flow. CSR success is not merely CSR program achievements but an organization's enduring success. In this sense, CSR is no longer a marketing tool but an organizational culture that defines organizational character (Pan et al. 2022; Schaefer et al. 2019; Wang et al. 2016). Just as the soul is the actual content of the body, CSR defines the soul of the company.

Second, business leadership achieves competitive financial performance outcomes as the result of pursuing a something bigger purpose. Organizational viability is sustained through steady and consistent financial outcomes. Without financial success, no business can survive regardless of its noble intent. CSR is important to the extent that it is supported by other relevant business practices and demonstrates their sound impact on financial performance (Lestari et al. 2020; Seifzadeh and Rowe 2019; Zsidisin et al. 2016). Any corporate initiatives and even government mandates cannot ignore the importance of financial performance. However, outstanding leaders motivate their organizational members to achieve not merely tangible financial goals but to help strive for something with a deeper meaning. In this sense, CSR is a part of defining what such bigger and larger goals of business firms are. The more CSR efforts are conceived as a concrete element of a purposedriven organization, the more its broad impacts are reaped in the form of diverse and sustainable business outcomes including financial performance (Hong et al. 2021; Levillain and Segrestin 2019; Malnight et al. 2019; Muñoz et al. 2018).

#### **8. Summary and Conclusions**

This article examines the role of CSR in the context of supply chain risk drivers. CSR practices are also related to risk management practices and performance outcomes. This research provides a conceptual framework that highlights the role of three theoretical rationales as a general model. The research model highlights the relevance of strategic orientation theory and risk management theory in that risk drivers require top management to formulate vigilant oversight for front-line practices in the form of strategic innovation practices, risk management practices, and CSR practices to achieve performance outcomes. This study focused on the critical linkage role of CSR in relation to strategic innovation practices and risk management practices.

Future studies may further examine how firms implement CSR in response to other risk drivers such as geo-political and trade tensions, national interest-driven industrial policy implementations, and increasing disruptive technology effects (e.g., AI, robotics, IoT, and the Fifth Industrial Revolution) and broad expectations of environment–sustainability– governance (ESG) (Avramov et al. 2022; Du and Xie 2021; García-Sánchez et al. 2021; Hong and Park 2020; Li et al. 2021; Shakil 2021). In addition to survey-based benchmark instruments, future studies may conduct in-depth case studies of firms from a wide range of business sectors. Future studies may conduct an extensive literature review on diverse patterns of CSR and use multiple databases (e.g., primary, secondary, online research, panel, and platform data) to examine the changing roles of CSR as a part of complex strategic, cultural, psychological, operational business dynamics that are being adapted in the turbulent, uncertain, and competitive market environments (Antwi and Hamza 2015; Fielding et al. 2016; Khan et al. 2021; Pratt et al. 2020; Smith 2015; Snyder 2019).

**Author Contributions:** Conceptualization, P.H.; Methodology, N.S.; Writing, N.S. and P.H.; Reviewing and Editing, N.S. and P.H. All authors have read and agreed to the published version of the manuscript.

**Funding:** This research received no external funding.

**Data Availability Statement:** Data used in this article are privately owned (survey respondents) and publicly available data sources (financial data).

**Conflicts of Interest:** The authors declare no conflict of interest.

**Appendix A. Survey Instrument: Items, Mean, Standard Deviation, and Factor Loadings**


#### **References**

Agarwal, Ruchi, and Jake Ansell. 2016. Strategic Change in Enterprise Risk Management. *Strategic Change* 25: 427–39. [CrossRef]


Dillman, Don A. 2007. *Mail and Internet Surveys: The Tailored Design Method*, 2nd ed. Hoboken: John & Wiley Sons.


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### *Article* **Capital Budgeting Practices: A Survey of Two Industries**

**Jorge Mota 1,2,3,\* and António Carrizo Moreira 1,2,4,5**


**Abstract:** This research examines the capital budgeting practices used by small and medium-sized firms (SMEs) in two Portuguese industries, footwear and metalworking, aiming at answering the following research questions: How much knowledge do managers have about capital budgeting practices? What are the most used practices? How much importance do they attribute to applying them? The research was conducted through an online survey with a response rate of 14.9%. The results document that most companies in both industries are familiar with capital budgeting practices, despite differences between the two. The footwear industry recognizes the importance of these indicators but makes little use of them, and many companies prefer using payback period (PBP). The metalworking industry, on the other hand, makes greater use of capital budgeting practices, with net present value being the favored indicator and PBP being used as supplementary. This study contributes to the capital budgeting literature in two ways: first, by focusing on SMEs instead of only large firms, and second, by exploring data from two industries rather than multiple, heterogeneous industries.

**Keywords:** capital budgeting; capital budgeting practices; footwear industry; metalworking industry; manufacturing; SMEs

#### **1. Introduction**

Capital budgeting (CB) practices have been widely studied, with the literature concentrating on identifying companies' most commonly applied capital budgeting indicators and reasons for using some rather than others. Most studies are based on large listed companies in big countries with developed economies, such as the USA (e.g., Graham and Harvey 2001), the UK, Germany, the Netherlands, France, Sweden, Italy, Spain (e.g., Brounen et al. 2004; Daunfeldt and Hartwig 2014; Rossi 2014), Brazil (e.g., de Souza and Lunkes 2016), Canada (e.g., Bennouna et al. 2010), Australia (e.g., Truong et al. 2008), and Korea (e.g., Kim et al. 2021). There are also studies in other countries such as Croatia (e.g., Dedi and Orsag 2008), Sri Lanka (e.g., Nurullah and Kengatharan 2015), Kuwait (e.g., AlKulaib et al. 2016), Barbados (e.g., Alleyne et al. 2018), and Portugal (e.g., João et al. 2007). As a country whose business is based on small and medium-sized firms (SMEs), Portugal depends heavily on their development and growth to become more competitive in the face of major European and global economies. According to Sureka et al. (2022), there is a lack of studies investigating the capital budgeting (CB) process and the factors affecting the CB efficiency of SMEs.

Wealth maximization is the primary objective of large publicly listed firms, whereas SME owners want utility from the business, such as "contentment" or "happiness", along

**Citation:** Mota, Jorge, and António Carrizo Moreira. 2023. Capital Budgeting Practices: A Survey of Two Industries. *Journal of Risk and Financial Management* 16: 191. https://doi.org/10.3390/jrfm 16030191

Academic Editors: Stefan Cristian Gherghina and Robert Brooks

Received: 1 February 2023 Revised: 3 March 2023 Accepted: 8 March 2023 Published: 11 March 2023

**Copyright:** © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

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with financial gains (Vos et al. 2007), which results in SME owners being very emotionally involved in the business. SMEs tend to over- or underinvest and suffer from agency costs (e.g., Vos et al. 2007). Compared with large firms, SMEs have fewer managerial levels and a simpler organizational structure (Ling et al. 2008), as their owners are reluctant to share control of the firm (Matias and Serrasqueiro 2017). This establishes strong ground for an expected difference between CB practices in large and small firms. It is therefore important to study SMEs' CB to understand their practices, processes, and issues.

Capital investment, corporate goals, and profitability objectives, among others, are characteristics that differ between industries (e.g., Arena et al. 2015; Gurnani 1984). When exploring CB practices, most studies have used samples from various industries and tend to generalize their outcomes. This approach might not produce robust results. It is thus desirable to study CB in specific industries to investigate the possibility of adopting CB models specific to each industry (e.g., Sureka et al. 2022).

Given these gaps, and to improve knowledge in this field, this study aims to answer the following research questions for SMEs in the Portuguese industries of footwear and metalworking: How much knowledge do managers have about capital budgeting practices? What are the most used practices? How much importance do they attribute to applying them? These two industries play a central role in Portugal's competitiveness and in its standing abroad, in the European and world context. The footwear industry exports 66.29% of its production, and the return on assets is 6.6%, while the metalworking industry exports 55.74%, and the return on assets is 10.6%. For the whole Portuguese economy, exports on sales represent 22.17%, all at 2021 values, which gives a picture of the importance of the two industries for the economy (data drawn from the Sector Tables published by the Portuguese Central Bank, https://www.bportugal.pt/QS/qsweb/Dashboards (accessed on 22 February 2023)).

To answer the research questions, online questionnaires were used, divided into three groups of questions: first, about the company; second, about the manager/owner/CEO of the company; and finally, about investments.

The main findings show that most companies know about capital budgeting practices, despite differences regarding their importance in the two industries analyzed. In the footwear industry, their nonuse stands out, which is the result of a lack of specialized human resources, while in the metalworking industry, the net present value (NPV) is preferred, contrary to what is practiced in Europe.

This paper makes a twofold contribution to the literature on capital budgeting practices. Firstly, our empirical focus is on SMEs, while most of the literature has focused predominantly on large firms. Secondly, we test data from two industries, whereas most of the literature uses data drawn from heterogeneous industries (e.g., Graham and Harvey 2001; Brounen et al. 2004; Truong et al. 2008).

The study yields significant managerial insights, indicating a low adoption rate of capital budgeting practices among companies in Portugal, particularly in the two analyzed industries consisting mainly of SMEs that hold strategic significance for the country's growth. This underscores the importance of raising awareness among decision makers and users that increased use of CB techniques may be tied to education on their importance in management and business schools, as greater use appears to be correlated with knowledge gained through education.

The paper is structured as follows: After this introduction, Section 2 presents the literature review. Section 3 presents the research design. Section 4 presents the empirical findings. Finally, Section 5 presents the conclusions and limitations of the study.

#### **2. Literature Review**

Capital budgeting (CB), a planning tool, aims to aid the proper distribution of financial resources among investment projects to make sound investment decisions and assess project viability. Capital budgeting broadly covers the entire process from identification to selection and realization of investment projects, aiming to maximize company and

shareholder value (Megginson et al. 2008; Keršyte 2011 ˙ ; Andor et al. 2015). This theme incorporates subtopics, e.g., capital budgeting practices, cost of capital estimation, and capital structure (e.g., Graham and Harvey 2001; Brounen et al. 2004; Dedi and Orsag 2008). This study focuses on the subtopic of capital budgeting practices.

Capital budgeting has aroused academics' interest, particularly the practices and actual rates of use in companies. At a later stage, some academics also wanted to identify the factors leading to choosing some indicators over others (e.g., Graham and Harvey 2001; Brounen et al. 2004; Daunfeldt and Hartwig 2014; Bennouna et al. 2010).

These studies began in the USA, first based on the analysis of large companies (LCs) and later expanding to studies in Europe and the whole world. As for the literature investigating LCs, trends diverge. Firms in the USA report a preference for the payback period (PBP) in the 1970s (e.g., Mao 1970), but other studies indicate greater use of the internal rate of return (IRR) and net present value (NPV) (e.g., Farragher et al. 1999; Graham and Harvey 2001; Ryan and Ryan 2002; Schall et al. 1978). In Europe, the indicator of choice is the PBP, with the exception of Croatia (e.g., Andrés et al. 2015; Daunfeldt and Hartwig 2014; Brounen et al. 2004; Dedi and Orsag 2008; Sandahl and Sjögren 2003).

In more detail, Schall et al. (1978) investigated three subthemes of capital budgeting: capital budgeting practices, calculation of the cost of capital, and the risk associated with projects. They applied a questionnaire to 424 USA LCs (achieving a 46.8 percent response rate). They conclude that most companies only apply capital budgeting practices for some investments, and the most used one is the PBP, together with other indicators. However, in their study of 379 CFOs of American LCs, Farragher et al. (1999) reveal IRR as their favorite indicator.

Graham and Harvey (2001) and Ryan and Ryan (2002) found that NPV is the most used indicator by American LCs, followed by IRR and then PBP. Graham and Harvey (2001) also identified some factors that would justify the choice of some indicators instead of others and presented the following ones: factors related to managers' characteristics (age, experience, and level of education) and company-related characteristics (size and number of acquisitions made). Ryan and Ryan (2002) distinguish their study by revealing that the amount of capital available for investments is an important factor in the choice of indicator.

Unlike in the USA, the trend in Europe—Europe (Rossi 2014; Brounen et al. 2004), Sweden (Daunfeldt and Hartwig 2014; Sandahl and Sjögren 2003), Spain (Andrés et al. 2015), and Croatia (Dedi and Orsag 2008)—has remained homogeneous, and companies choose PBP, except for Croatia, which chooses IRR as the preferred indicator.

Brounen et al. (2004) analyzed and compared four major European countries—the UK, Germany, the Netherlands, and France—on the topic of capital budgeting. To do so, they applied a questionnaire to LCs, obtaining 313 responses. Their results differ from those of Graham and Harvey (2001), since European countries choose PBP to evaluate their investment projects, while the USA chooses NPV. Brounen et al. (2004) justify this difference due to the size of firms, i.e., large European companies are relatively smaller than those in the USA. Both studies conclude that NPV is used more by managers who hold an MBA, with the exception of the UK.

Andrés et al. (2015) identified PBP as the most consensual indicator in Spanish LCs, followed by IRR, NPV, and real options (see also Rossi 2014). They also analyzed different industries, finding that PBP is more usual in the manufacturing industry and IRR is more frequently adopted in the consumer industry. As in previous studies, they claim that NPV is more commonly used among public firms than private firms (e.g., Graham and Harvey 2001). These authors reveal that the frequency of using capital budgeting practices does not depend on the CFO's characteristics, except for real options.

Analyzing large Croatian companies, Dedi and Orsag (2008) identified different trends from those in other European countries and concluded that the most commonly used capital budgeting practice is IRR, followed by the nonupdated PBP and NPV. They differentiate their study by asking about the existence of a department to frame and analyze projects and conclude that 50 percent of the companies did have that department, whereas the other 50 percent did not.

A study conducted in Canada discloses NPV as the preferred indicator among large companies, followed by IRR, and 8 percent of companies claim to use real options (Bennouna et al. 2010).

The above literature on LCs shows that capital budgeting practices differ between countries but present a more homogeneous trend in Europe. These differences may also exist for SMEs, and even between LCs and SMEs.

Therefore, regarding SMEs, and according to, e.g., Block (1997) and Danielson and Scott (2006), PBP is the main indicator used. Block (1997) justifies the choice of PBP by its simplicity of implementation and analysis and also investigates the average PBP of the 233 USA SMEs analyzed: 2.81 years. When analyzing SMEs' capital allocation categories, 57.6 percent of the companies admit that they use the indicators mainly for maintenance and replacement investments, and only 8.1 percent claim that it is for expansion into new areas (Block 1997).

Danielson and Scott (2006), surveying 250 American SMEs, tried to understand the type of investment made, presenting similar conclusions to Block (1997): 50 percent of companies choose the replacement investment class, and investment in new production lines is also considered by 25 percent. They also conclude that 26 percent of companies use the "gut feel" factor as a capital budgeting practice. The causes for not using capital budgeting practices may differ between the need to replace equipment, the fact that they are SMEs and have limited sources of finance, and also the owner's financial situation. However, as Graham and Harvey (2001) claim, the cause for using some indicators over others is the result of the manager's age and level of education, as well as the number of employees.

Lazaridis (2004) investigates the trend in the use of capital budgeting practices in Cyprus, and his findings are similar to the previous authors. The author finds that much of the investment by SMEs in Cyprus, as noted by Block (1997) and Danielson and Scott (2006), is for expanding production, replacing old equipment, and/or creating new product lines. However, Lazaridis (2004) also discloses that 17.19 percent of the companies surveyed invest in new markets, and there is a small percentage that invests in energy-saving projects. He also identifies that 18.99 percent of companies do not use capital budgeting practices to evaluate their projects. The main reasons are not knowing them, not believing that they bring benefits to the company, and not having specialized human resources, experience, and/or time to apply and analyze them. Of those that admit to using them, they prefer PBP.

Some authors have conducted studies comparing the use of capital budgeting practices between LCs and SMEs (e.g., Andor et al. 2015; Graham and Harvey 2001; Truong et al. 2008; Vecino et al. 2015). Graham and Harvey (2001) identified factors such as manager characteristics (age, experience, and education) and firm-level characteristics (size, number of acquisitions made, export, industry, and dividend distribution policy) that are associated with the use of some indicators. NPV and IRR are more used by managers with MBAs, by dividend-paying LCs, and by public companies. PBP is more usual among SMEs and applied by managers without MBA degrees (e.g., Block 1997; Ryan and Ryan 2002).

Based on the analysis of 87 responses from 356 companies in 9 industries, Truong et al. (2008) claim that Australian LCs prefer indicators such as NPV, IRR, and lastly, PBP. For medium-sized companies, the preferred indicator is IRR, followed by NPV and PBP. Small firms choose PBP (Graham and Harvey 2001). When questioned about how many indicators the companies applied, 26 percent of the surveyed companies revealed the use of four indicators.

Vecino et al. (2015) analyzed the knowledge and correct application of capital budgeting practices in Colombia. Their sample included 54 percent LCs and 46 percent SMEs, with most managers holding university degrees. Their findings show that 68 percent of the companies employ capital budgeting practices. The most used indicators are NPV, cost/benefit ratio, and IRR. They justify the use of these choices because they are easy to

apply and take into consideration the principle of value for money. Regarding the correct use of indicators, although LCs apply them correctly, SMEs present a higher rate of error in their application. Vecino et al. (2015) identify company size and level of education as conditioning factors for the choice of capital budgeting practices, as previously mentioned by Graham and Harvey (2001).

Andor et al. (2015) analyze Central and Eastern Europe countries. This study differs from others by utilizing countries' level of development. Like Graham and Harvey (2001) and Vecino et al. (2015), their findings reveal that LCs employ NPV and IRR, unlike SMEs, which indicates that their choice is influenced by firm size. They also identify other factors, such as the presence of ethical codes, the country and company culture, the company objectives, and the number of projects analyzed. They also conclude that LCs, compared with SMEs, have better specialized human resources with knowledge and experience, as well as greater financial availability, which influences the use of more sophisticated capital budgeting practices.

Hermes et al. (2007) compared capital budgeting between companies in China and the Netherlands, having as their main argument the differences in the countries' level of development and to what extent this factor affects the choice of capital budgeting practices. Their most important conclusions are that Dutch companies prefer to opt for NPV, particularly LCs. PBP is the preferred choice among SMEs. As far as Chinese firms are concerned, they opt to use PBP. Regarding the use of IRR, both countries use it in a similar way.

According to the literature, there are differences between LCs and SMEs, and these differences may extend more specifically to different industries. Some studies focus on single industries. For example, Ross (1986), Hasan (2013), and Nurullah and Kengatharan (2015) analyzed the manufacturing industry. Ross (1986) analyzed the differences between theory and practice in implementing capital budgeting practices that take into account the cost of capital. To do so, he held interviews in which he proposed project cases and checked how managers solved them. His findings revealed that indicators are selected according to the size of the project firms are involved with. However, for smaller projects, PBP is the preferred indicator (Ross 1986).

Hasan (2013) investigates how Australian manufacturing SMEs use capital budgeting practices and risk analysis. Like Block (1997), Lazaridis (2004), and Danielson and Scott (2006), Hasan (2013) examined the areas of investment, and the answers are similar to those already mentioned: replacement of machinery, the extension of new production lines, and investment in new business areas and/or new markets. However, 7 percent of the companies invest in research and development. PBP continues to be the most used indicator, utilized by about 48.8 percent of the companies analyzed, and these results are explained by its simplicity of use and not requiring much financial expertise. Hasan (2013) also asked what the average number of years for which the project would be accepted was, and most companies presented a PBP between 3 and 5 years.

When studying the most used capital budgeting practices in companies in manufacturing and trading industries in Sri Lanka, Nurullah and Kengatharan (2015) show different results from previous authors, identifying NPV as the most used indicator, followed by PBP, and finally, IRR. When relating the selection of capital budgeting practices to the variables of (1) budget size, (2) managers' education, and (3) managers' experience, Nurullah and Kengatharan (2015) claim that (1) only NPV, PBP, and IRR are important indicators regarding budget size, rejecting the others; (2) managers' education is rejected by the lack of sufficient evidence to support it; and (3) managers' experience shows some evidence, but only for IRR, being rejected for the other indicators.

Finally, the conclusions of a small study of the Algarve, Portugal differ from the European trend, as IRR is the most used capital budgeting practice in that region, followed by NPV and PBP. However, the choice of these indicators depends on the size and purpose of the project, and industry type may have some influence (João et al. 2007).

#### **3. Research Design**

Data were collected by applying an online questionnaire due to the simplicity of collection and analysis of the information obtained. After placing the questionnaire on the platform developed and managed by the University of Aveiro, emails were sent, and subsequent telephone contacts were made with the sample of both industries.

The sample for the footwear industry was based on a universe of 370 companies whose contacts were provided by the Portuguese Association of Footwear, Components, Leather Goods, and Leather Goods Manufacturers, obtaining 45 valid responses. Regarding the metalwork industry, the sample was drawn from a universe of 131 companies, of which 30 responded. The general response rate was 14.9 percent, with 12 percent for the footwear industry and 22 percent for the metalworking industry. When compared with previous studies, these rates are average, since Block (1997) had a response rate of 27.29 percent, Hasan (2013) had a 17 percent response rate, and Graham and Harvey (2001) had a 9 percent response rate.

The two industries were defined by company size (SMEs), with most being family businesses and geographically close, which ensures homogeneity in terms of characteristics in the decision process and that differences in capital budgeting practices are mainly due to differences between the two industries.

The construction and structuring of the instrument took into account previous studies (Hristov et al. 2022a, 2022b; Evans III et al. 2015; Block 1997; Danielson and Scott 2006; Graham and Harvey 2001; Lazaridis 2004), duly adapted to the Portuguese context. Although many authors analyze SMEs, the Portuguese situation was taken into account as it presents different characteristics from other studies, being based on small family companies, which may interfere with knowledge and application of capital budgeting practices.

The questionnaire uses multiple choice questions (in order to be quick to answer and to increase the response rate) and is divided into three groups:


The first and second groups of questions support the third one, i.e., knowledge of capital budgeting practices and their use are combined with the variants of the first two groups of questions to identify causes.

#### **4. Results**

Analysis of the results begins by presenting the descriptive characteristics of the companies in our sample, in Table 1. Most companies in the sample are family-owned, with more than 50 percent of them having this characteristic in both industries.

The age of the companies in the sample shows that 40 percent in the footwear industry are between 11 and 20 years old. In contrast, metalworking has a greater spread of ages, with similar values among all categories.

With regard to the number of employees, the footwear industry is primarily made up of companies with 10 to 50 employees, while the metalworking industry has 2 predominant categories: from 10 to 50 and from 50 to 250 employees.

In terms of sales in Portugal, 51 percent of the companies surveyed in the footwear industry had sales ranging from EUR 2 M to EUR 10 M. In contrast, most of the sales in the metalworking industry are below EUR 2 M.


**Table 1.** Descriptive characteristics of the companies.

The size of the companies in the sample can be determined by combining the number of employees with sales in Portugal. They are categorized as micro or small businesses as they do not exceed EUR 10 M in annual sales and typically have fewer than 50 employees.

Regarding sales abroad, the footwear industry has a higher rate, with over 70 percent of companies having this characteristic. In comparison, the metalworking industry has an inferior amount; the footwear industry has higher export rates than the metalworking industry.

In the first group of characteristics defining the companies, there are differences between the industries, particularly in terms of internal and external sales. The remaining variables are similar in both industries.

The following data were collected about the manager/owner/director, shown in Table 2. Concerning respondents' age, most respondents in the footwear industry are older, most being in the 40–50 age group. In contrast, 47 percent of respondents in metalworking are 40 years old or younger. It is worth mentioning that respondents older than 66 years only account for 2 percent in the footwear industry and 0 percent in metalworking.


**Table 2.** Descriptive characteristics of the owners/managers/directors.

In terms of education, most respondents have a bachelor's degree, with 10 respondents indicating a master's degree. Nonetheless, 20 percent and 23 percent of respondents in the footwear and metalworking industries, respectively, reported having completed up to the 12th year of secondary education.

As for job positions, there are differences between the industries. The footwear industry has 25 administrators, compared with 10 in metalworking. On the other hand, metalworking has 13 percent of respondents identified as CEO, while the footwear industry only has 2 percent of respondents in this position. The footwear industry has 64 percent of respondents who own the company, which is not the case in the metalworking industry, where most respondents do not own the company.

In this group of questions, there are differences in the variables—in terms of respondents' age, the metalworking industry has younger managers/owners/directors than the footwear industry. With regard to company ownership, there is a greater tendency for respondents in the footwear industry to own the company than in metalworking.

In the group of investment-related issues, shown in Table 3, it was found that the majority of companies made an investment in the past year: 73 percent in the footwear industry and 67 percent in the metalworking industry. Additionally, the metalworking industry made more frequent investments, with a periodicity greater than 5 years when compared with the footwear industry.


**Table 3.** Descriptive characteristics of the investment-related issues.

The types of investment made by both industries include the replacement of equipment, participation in fairs, expansion of facilities, acquisition of new equipment and/or tools, modernization of equipment, land purchases, and investment in e-commerce.

Evaluation of the potential return on investment was based on the need to replace equipment, which was reported by 40 percent of companies in the footwear industry and 37 percent of companies in the metalworking industry. It was also observed that 4 percent of footwear companies mentioned intuition as a factor, while none of the metalworking companies referred to this. The use of capital budgeting practices was mentioned by 7 percent of metalworking companies and 2 percent of footwear companies.

With regard to understanding capital budgeting practices in the footwear and metalworking industries, there are rates above 50 percent of knowledge in both industries: 60 percent in footwear and 80 percent in metalworking. There is no distinct preference for a specific capital budgeting practice among the companies surveyed.

As for the use of capital budgeting practices, 44 percent in the footwear industry reported nonuse, compared with 42 percent in the metalworking industry that selected NPV. Most footwear companies favored PBP, while NPV and IRR were more commonly used in the metalworking industry.

Five companies were excluded from the study as they reported using the same complementary indicator. For the remaining companies, the trend of using a complementary indicator was similar in both industries, with PBP being the most common choice. EBITA and financial autonomy were also reported as complementary indicators.

The nonuse of capital budgeting practices, in the companies that were aware of them, was primarily attributed to a lack of specialized HR in both industries. Only one company reported not using the indicators due to difficulties in calculating cash flows.

The study sample was comprised mostly of family-owned micro or small enterprises that have been in the market for up to 40 years. These companies were managed by administrators who were mostly aged 50 years or younger and held an academic degree. Most companies in both industries had knowledge of capital budgeting practices, with higher application rates in the metalworking industry. The last investment made by companies in both industries was due to the need to replace equipment.

The aim of this study was to determine the knowledge and importance of capital budgeting practices among Portuguese companies in the footwear and metalworking industries. The study was limited to companies that reported having knowledge of the indicators. The results indicate that above 70 percent of family-owned companies had knowledge of capital budgeting practices, with higher rates in footwear (81 percent) than metalworking (71 percent).

As for companies' characteristics, the results indicate the following: In the footwear industry, the majority of companies that report being knowledgeable about capital budgeting practices have been in the market for 11 to 20 years, accounting for 26 percent of all companies that are aware of capital budgeting practices. Eighty-nine percent of the companies report domestic sales of up to 10 million euros.

In the metalworking industry, 25 percent of the companies that are aware of capital budgeting practices have been in the market for less than 10 years, while another 25 percent have been in the market for 31 to 40 years. Most companies report internal sales of up to 2 million euros.

Regarding external sales, the results reveal that in the footwear industry, 74 percent of the companies surveyed that are aware of capital budgeting practices export more than 70 percent of their footwear, while only 15 percent export up to 50 percent. In the metalworking industry, 54 percent of the companies that are aware of capital budgeting practices report exporting up to 50 percent, while only 8 percent export more than 70 percent.

The results regarding the manager/owner/director indicate that those who are knowledgeable about capital budgeting practices are relatively young, with a younger demographic in metalworking than in footwear. The 40 to 50 age group is most knowledgeable about capital budgeting practices in the footwear industry, while in the metalworking industry, this group is the under-40s. No respondents were over the age of 66.

Level of education is consistent in both industries. Among those knowledgeable about capital budgeting practices, graduates have higher rates in both industries: 59 percent in footwear and 46 percent in metalworking.

The study found a lack of uniformity in the use of capital budgeting practices in different industries. In the footwear industry, the tendency is to be both owner and administrator, while in the metalworking industry, respondents reported not being the owners and serving as the CFO.

Although the majority of respondents reported having knowledge of capital budgeting practices, they had not evaluated the possible return on investment and had made the investment due to the need to replace equipment.

A complementary analysis was conducted to understand which capital budgeting practices are preferred by companies that are familiar with and apply them. Family-owned companies in the footwear industry tend not to use capital budgeting practices, and if they do, they prefer NPV or PBP. In the metalworking industry, 33 percent of family-owned companies elected NPV as their preferred indicator.

For non-family-owned companies in the footwear industry, the trend remains not to use capital budgeting practices, and those that do use either IRR or PBP. In the metalworking industry, there is no clear trend, with options including NPV, IRR, and nonuse, with only one company referring to PBP.

Regardless of the category, the footwear industry tends not to use capital budgeting practices. If they do use them, they prefer NPV or PBP. In the metalworking industry, the preference is for NPV.

NPV is used in similar proportions by both industries for companies that have been in the market for up to 10 years. For other categories, the rate is higher in the metalworking industry. IRR is more commonly used in metalworking, especially by companies that have been in the market for up to 10 years. The use of PBP is similar in both industries, except in the category of 21 to 30 years, where the footwear industry has twice as many companies using PBP as the metalworking industry.

The study found variation in the preferred capital budgeting practices in footwear companies based on the size of the company and their sales to the domestic market. Companies with higher invoicing (between EUR 2 M and EUR 10 M) tend not to use capital budgeting practices, while those billing up to EUR 2 M prefer NPV or PBP. In the metalworking industry, the preferred indicator is NPV for most companies. However, those with sales between EUR 10 M and EUR 50 M prefer IRR.

Among footwear companies that export more than 70 percent of their products abroad, 37 percent do not use capital budgeting practices, and those that do use either IRR or PBP. In the metalworking industry, the preferred indicator is NPV, although companies that export more than 70 percent prefer IRR.

#### *Discussion of Results*

Most companies in both industries claim to have knowledge about capital budgeting practices, with licensed administrators in their management. As mentioned by Vecino et al. (2015) in their study in Colombia, most companies say they have knowledge of the indicators, but in this country there is a higher rate of application than in Portugal, particularly in the footwear industry (where knowledge is claimed, but use is reduced, opting for PBP).

The metalworking industry has a higher rate of use of capital budgeting practices than footwear, with a preference for NPV, as mentioned by Vecino et al. (2015) and Nurullah and Kengatharan (2015) in their study of manufacturing and trading in Sri Lanka. However, the present study contradicts Hasan (2013) and Andrés et al. (2015) regarding Spanish companies, which refer to the use of PBP in the manufacturing industry.

NPV was also described as the preferred indicator of GEs in the USA in the study by Graham and Harvey (2001), in the Netherlands when compared with China in the study by Hermes et al. (2007), and also in the study by Andor et al. (2015) of the GEs of Central and Eastern Europe.

PBP is mentioned by scholars as a preferred indicator of SMEs in the USA, Australia, and Europe by companies in general (Block 1997; Sandahl and Sjögren 2003; Brounen et al. 2004; Danielson and Scott 2006; Dedi and Orsag 2008; Andrés et al. 2015).

When we compare the study conducted in the Algarve region with these two industries, both of which analyze Portuguese companies, there are discrepancies. The Algarve region has IRR as a preferred indicator, related to the size and purpose of projects, suggesting there may be some tendency for industries.

In this study, the reasons for the choice of capital budgeting practices are consistent across authors and can be attributed to the characteristics of both the company and the manager/administrator (Graham and Harvey 2001; Danielson and Scott 2006). Investigating the impact of family ownership on knowledge of capital budgeting practices is novel and not previously explored in the literature. Results indicate that this variable does not significantly impact their knowledge, which is in contrast with the Portuguese cultural context.

Regarding the selection of indicators, the results reveal that the metalworking industry predominantly chooses NPV, while the footwear industry prefers PBP. This finding contradicts the results of Sandahl and Sjögren (2003), who observed that PBP was the most commonly used indicator in Swedish companies, regardless of their size.

In terms of external sales, the results show a stark difference between the two industries. The footwear industry has a high proportion of companies with exports exceeding 70 percent, of which 20 percent have knowledge of capital budgeting practices. However, only half of these companies reveal their usage, opting for PBP and IRR as complementary indicators. The nonuse of these indicators is attributed to the lack of specialized HR.

In the metalworking industry, 17 out of 30 companies export up to 50 percent of their products, with fewer companies in the remaining categories. Out of these 17 companies, 13 reported knowledge of capital budgeting practices and favored the use of NPV, with PBP as a complementary measure. The nonuse of capital budgeting practices by companies in this industry was attributed to a lack of specialized HR.

In the current study, respondents' age was found to have an impact on knowledge of capital budgeting practices, with younger respondents having more knowledge than their older counterparts, despite the limited sample size. This trend may reflect the recent shift towards higher levels of education among younger administrators in Portugal.

However, age was not found to be a determining factor in the selection of capital budgeting practices. The metalworking industry favored NPV, while the footwear industry did not use capital budgeting practices, and those who did choose PBP, as previously discussed. This result differs from the conclusions of Graham and Harvey (2001) and Danielson and Scott (2006), who suggested that age was a critical factor in the selection of capital budgeting practices.

Regarding level of education, the results show that higher educational attainment was positively associated with greater knowledge of capital budgeting practices, which is in line with the findings of Vecino et al. (2015) in Colombia. However, the results do not support the conclusion of Graham and Harvey (2001) and Brounen et al. (2004) that higher levels of education lead to a preference for more sophisticated indicators, as no such relationship was observed here. An academic degree was found to be fundamental for knowledge of capital budgeting practices, but the differentiation between industries remained, with the footwear industry opting for nonuse and the metalworking industry favoring NPV.

In previous studies, the CEO or CFO was usually the position questioned. However, in the context of Portugal and the prevalence of SMEs in the country, this study examined the management position held by the respondents and its impact on their knowledge and practice of capital budgeting practices (Graham and Harvey 2001; Brounen et al. 2004; Hermes et al. 2007; Truong et al. 2008; Nurullah and Kengatharan 2015).

The results of the present study indicate that the respondent's position is not a significant factor in determining their knowledge or usage of capital budgeting practices. Instead, the majority of respondents reported having knowledge of these indicators, regardless of their position. This was particularly evident in the footwear industry, where most respondents reported not using any indicators, regardless of their position. On the other hand, in the metalworking industry, administrators and CFOs were found to be the primary users of the NPV and IRR indicators.

An innovative aspect of this study was examination of the respondent's ownership status and its relationship with their knowledge and usage of capital budgeting practices. The results show that knowledge of these indicators was relatively consistent regardless of ownership, although application of these indicators was more evident among nonowners in the metalworking industry.

Both industries were found to invest primarily in equipment replacement and production line expansion, as previously noted by Block (1997), Lazaridis (2004), and Danielson and Scott (2006). The lack of specialized HR and perceived low benefits were identified as key factors contributing to the limited knowledge and usage of capital budgeting practices (Lazaridis 2004). Additionally, the limited financial availability often associated with SMEs (Andor et al. 2015) was considered a potential contributing factor.

In terms of complementary indicators, their use in the footwear industry was even more limited, with most respondents using PBP. Similarly, in the metalworking industry, PBP was the most commonly used complementary indicator.

#### **5. Implications, Limitations, Conclusions, and Future Research Perspectives**

#### *5.1. Academic Implications*

The results of the study suggest that most companies in both industries are aware of capital budgeting practices. However, the level of importance attached to these indicators varies between industries. The footwear industry acknowledges the importance of these indicators, but their usage is low, and many companies prefer to use PBP, in line with the trend observed in European countries. The high rate of nonusage of capital budgeting practices among footwear companies can be attributed to their owners' focus on their businesses' annual financial results, rather than on capital budgeting practices.

In contrast, companies in the metalworking industry use capital budgeting practices more, with NPV being the preferred indicator and PBP being used as a complementary indicator. This result contrasts with the results of previous studies conducted in the USA, Australia, and the Algarve region, where IRR was favored over other indicators.

Most of the administrators surveyed in this study stated that they are knowledgeable about capital budgeting practices, but the biggest challenge to their usage was a lack of specialized human resources. Only 3 out of the 75 respondents reported using capital budgeting practices in their latest investment, which contradicts the claims of 29 respondents that they use these practices. Additionally, this research shows a connection between formal educational achievement and the use of capital budgeting tools, since over time more company managers have attended business schools where capital budgeting techniques are presented and taught.

#### *5.2. Practical Implications*

This study provides valuable insights into the capital budgeting practices of SMEs in Portugal, a country comprised mostly of SMEs that are of strategic importance for the country's growth and position in the global economy. The study's uniqueness lies in comparing two central industries in the Portuguese context. The number of companies applying capital budgeting practices is still very low in Portugal, specifically in these two industries, and the increased use of CB may be related to teaching the importance of these techniques in management and business schools, since knowledge through education seems to be related to greater use.

#### *5.3. Policy Recommendations*

As a policy recommendation, this research suggests that teaching programs should focus more on the importance of using capital budgeting tools for better decision making on investments by companies to maximize their wealth.

#### *5.4. Limitations of the Study*

It should be noted that the conclusions of this study are limited by, on one hand, the comparative and qualitative nature of the research design of the study and, on the other hand, by the limited size of the sample collected, which jeopardizes the generalization of the conclusions to the population. One of the biggest limitations was the lack of collaboration from the companies approached, which confirms the stereotype of SMEs' reluctance to participate in academic research.

#### *5.5. Conclusion and Future Research Perspectives*

This study concludes that managers possess knowledge of CB practices but do not apply them, mainly due to a lack of resources. Additionally, the use of CB tools differs between SMEs in different industries, even within manufacturing. Industries with lower plasticity of assets, such as metalworking compared with footwear, use CB practices more. This research also concludes on the importance of the knowledge of CB practices obtained through higher education for their use.

Future studies should address the shortage of specialized human resources as a cause of the nonusage of capital budgeting practices. Additionally, it would be interesting to examine the proper usage and updating of cash flows, the impact of financial constraints on the usage of capital budgeting practices, and the relationship between loan requirements and the use of capital budgeting practices. Furthermore, an enlarged sample size supported by econometric-based studies covering LC and SMEs of several industries would give future research more reliability and generalizability.

**Author Contributions:** Conceptualization, J.M. and A.C.M.; methodology, J.M. and A.C.M.; investigation, J.M. and A.C.M.; resources, J.M. and A.C.M.; writing—review and editing, J.M. and A.C.M.; supervision, J.M. and A.C.M. All authors have read and agreed to the published version of the manuscript.

**Funding:** This work was financially supported by the Research Unit on Governance, Competitiveness and Public Policies (UIDB/04058/2020) + (UIDP/04058/2020), funded by national funds through FCT—Fundação para a Ciência e a Tecnologia.

**Data Availability Statement:** Data is unavailable due to privacy and ethical restrictions.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **References**


Danielson, Morris, and Jonathan Scott. 2006. The capital budgeting decisions of small businesses. *Journal of Applied Finance* 16: 45–56.

Daunfeldt, Sven-Olof, and Fredrik Hartwig. 2014. What determines the use of capital budgeting methods? Evidence from Swedish listed companies. *Journal of Finance and Economics* 2: 101–12. [CrossRef]


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