International Journal of Accounting and Financial Reporting

ISSN 2162-3082
2017, Vol. 7, No. 2

Moderating Effect of Social Uncertainty between

Capital Budgeting Practices and Performance
Lingesiya Kengatharan
Department of Financial Management, University of Jaffna, Sri Lanka
E-mail: [email protected]

Received: October 2, 2017 Accepted: October 25, 2017 Published: November 12, 2017
doi:10.5296/ijafr.v7i2.11936 URL: https://doi.org/10.5296/ijafr.v7i2.11936

Abstract
Capital budgeting is crucial in order for companies to sustain themselves, survive and flourish
in markets and to increase shareholders‟ wealth. The performance of a firm depends on its
effective investment decisions. Investing in the 'right' project has an influence on the success of
the firm and its future growth. Even though risk and uncertainty factors carefully considered in
investment decision making. Therefore, aim of this study was to evaluate the moderating effect
of uncertainty between capital budgeting practices and performance based on Sri Lankan
emerging market. The data were garnered from primary data and secondary data sources. The
primary data were collected from 186 CFOs working in companies in Sri Lanka using
self-administered questionnaires. The questionnaire was piloted with a sample of five CFOs.
The secondary data were mainly collected from CSE via the Bloomberg website/annual
reports for the 5 years period. In order to evaluate the moderating effect of uncertainty
between capital budgeting practices and performance, social uncertainty has been considered
in this study. Performance was measured by Tobin_q. Data were analysed using descriptive,
inferential and multivariate analysis. Findings of the study revealed that an increased level of
social uncertainty weakens the positive relationship between sophisticated capital budgeting
practices and Tobin_q. In a similar way, an increased level of social uncertainty weakens the
positive relationship between advanced capital budgeting practices and Tobin_q and vice
versa. Overall, this study has made contribution as identified the moderating effect of
uncertainty between the relationship of capital budgeting practices and performances. In a
nutshell, beyond its valuable contribution, this study serves as a springboard for future
research in many ways.
Keywords: uncertainty, capital budgeting practices and performance

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 International Journal of Accounting and Financial Reporting
ISSN 2162-3082
2017, Vol. 7, No. 2

1. Introduction
The survival and vitality of a company is determined by its ability to regenerate itself through
the allocation of capital into productive use (Arnold and Hatzopoulos, 2000). Allocating
resources among competing investment projects is one of the most critical decisions made by
the top management and is of strategic importance, and it invariably involve large sums of
money and have a long-term economic life cycle. These decisions are critical to managing
strategic change and sustaining long term corporate performance. Nonetheless, current
investment markets are evolving within an increasingly volatile and intertwined global
network and investments are strongly exposed to uncertainties (Bock and Truck, 2011).
Uncertainties could lead to failure of a good investment decision and thus integration of
uncertainty with capital budgeting techniques is overarching, on the other hand, often complex
(Ghahremani, Aghare and Abedzadeh, 2012). This study focusing to evaluate the moderating
effect of uncertainty between capital budgeting practices and performance in Sri Lankan
emerging market, where, to the best of the researcher‟s knowledge, no studies have been
conducted to evaluate the moderating effect of uncertainty between capital budgeting practices
and performance.
1.1 Practical Relevance of the Study
Capital investment decisions are vital at both firm level and national level (Northcott, 1995): at
the firm level, capital investment decisions would have implications for many aspects of
company operations and the results have a crucial effect on survival, profitability and growth.
At the national level, healthy planning and allocation of capital investment are crucial for an
efficient use of other resources; on the other hand, poor investment negatively affects the
productivity of labour, materials and the economy‟s potential output. Therefore, this study
receives significant attention.
Over the last decades, there has been a dramatic change observed in the environment milieu,
where the organisation operates on presenting new opportunities as well as threats to
practitioners and managers (Verbeeten, 2006). Uncertainties such as unpredictable changes in
exchange rates, interest rates, and prices of goods cannot be ignored. Increased volatility in
unpredictable changes would create more cut-throat competition than ever before (Smith,
Smithson and Wilford, 1989). In some countries, the increase in lawsuits for liability on
products can adversely affect the organisation by the increasing cost of liability insurance. In
addition, Prahalad (1994) expressed that „corporate governance‟ creates new uncertainties in
large organisations. The concept of governance includes many interlinked aspects of corporate
control, corporate policy, and corporate structure, the distribution of income among
shareholders and specifically, the goals of companies. However, it is important to recognise the
interest of stakeholders other than shareholders (such as suppliers, customers, employees and
the wider community) or there may be serious financial consequences (Verbeeten, 2006). All
of these developments and changes nurture a new financial environment, markets and
governance structures in the way that organisations work. Therefore, change in use of capital
budgeting methods is challenging but also vital for competition with other organisations. There
is a strong believe in finance literature that effective investment decision making leads to

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higher performance to the respective companies (e.g., Kim, 1981; Haka, Gordon and Pinches,
1985; Ho, 1992; Chen, 1995; Dardanne, 1998, Farragher, Kleiman and Sahu, 2001; Gomes,
Yasin and Lisboa, 2011; Jiang, Chen and Huang, 2006). But specifically political, policy and
social uncertainties are the dominant aspects which change the use of capital budgeting
practices. Political uncertainties including Terrorism, War, Changes in Government, Political
instability are interacting the relationship between the capital budgeting decisions and
performance (Verbeeten, 2006). Due to this reasons, the evaluating moderating effect of
uncertainties between capital budgeting practice and performance is examined in this study.
2. Theoretical View on Ccorporate Finance Theory and Corporate Performance
Capital budgeting is a major terrain of the sphere of financial management. Although capital
budgeting involves the investment of a present sum of funds in an efficient and effective way
to generate future fund flows in the long term (Quirin, 1967), different authors define capital
budgeting in different ways. Gitman, Juchau and Flanagan (2010) define capital budgeting as
“the process of evaluating and selecting long term investment consistent with the firm
owners‟ goal of wealth maximization” (p.344). Traditional financial theory states that the
application of sophisticated capital budgeting techniques will result in improved corporate
performance (e.g., Copeland, 1979). Capital budgeting decisions are among the most critical
for a firm‟s performance and future prospects (Rigopoulos, 2014). Capital budgeting is derived
from the concept of maximizing a firm‟s value because capital investment projects are
supposed to maximize the value added to the stockholders (Hermes, Smid and Yao, 2007). The
performance of a firm depends on its investment decisions. Investing in the 'right' project has
an influence on the success of the firm and its future growth.
Organisations have many goals and objectives, such as survival and sustainability, profit
maximisation, shareholder value growth, sales growth, quality, innovation and social
responsibility (Emmanuel, Otley and Merchant, 1995). Many studies have found that
sophisticated capital budgeting practices positively influence firms‟ performance (e.g., Kim,
1981; Haka, Gordon and Pinches, 1985; Ho, 1992; Chen, 1995; Dardanne, 1998, Farragher,
Kleiman and Sahu, 2001; Jiang, Chen and Huang, 2006; Gomes, Yasin and Lisboa, 2011).
Capital budgeting investment of firms involved large sums of money over the long periods are
crucial for the sustaining, surviving and flourishing in markets (Emmanuel, Harris and
Komakech, 2010; Ghahremani, Aghaie and Abedzadeh, 2012), decisions on capital budgeting
investments are critical owing to the influence of uncertainty factors (e.g., Peterson and
Fabozzi, 2002, Cooper et al., 2002; Dayananda et al., 2002; Ghahremani, Aghaie and
Abedzadeh, 2012). The global financial crisis epitomised this truth. The sources of uncertainty
range from the mundane (such as cash flow estimation, number and sources of estimation error)
to the more esoteric (such as complementarities among investments, options presented by
investment opportunities, opportunity cost of investments) (Haka, 2006). One of the most
intractable issues confronted by researchers is how to identify, capture, and evaluate
uncertainties associated with long term investment projects (Haka, 2006). Considering the
importance of investment decisions nowadays, complex methods are used for making capital
budgeting decisions rather than purely depending on theories of capital budgeting to mitigate

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 International Journal of Accounting and Financial Reporting
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the effect of uncertainty and other contingency factors (Arnold and Hatzopoulos, 2000; Cooper
et al., 2002; Byrne and Davis, 2005; Verbeeten, 2006; Zhang, Huang and Tang, 2011; Kersyte,
2011; Bock and Truck, 2011; Singh, Jain and Yadav, 2012). Therefore aim of the study is to
evaluate the interacting effect of uncertainty between capital budgeting practices and
performance. There is only flimsy evidence in extant literature to support the impact of capital
budgeting techniques on firm performance (e.g., Kim, 1981; Pike, 1988; Farragher, Kleiman
and Sahu, 2001; Jiang, Chen and Huang, 2006; Vadeei et al., 2012)
Therefore this study evaluates the moderating effect of uncertainty between capital
budgeting practices and performance. So, study is an endeavour to build on earlier findings
examining the factors influencing capital budgeting practices (Aggarwal, 1980; Schall and
Sundem, 1980; Scapens and Sale, 1981; Kim, 1981; Mukherjee and Henderson, 1987; Haka,
1987; Klammer,Koch and Wilner,1991; Staw, 1991;Ho and Pike, 1992; Nutt, 1993; Sangster,
1993; Chen, 1995; Slagmulder, 1997; Bowman and Moskowitz, 2001; Zhu and Weyant, 2003;
McGrath and Nerkar, 2004; Verbeeten, 2006; Donker, Santen, Zahir (2009); Brown and
Sarma, 2007; Glaser, Schafers, and Weber, 2008, Daunfeldt and Hartwig,2011).
Uncertainty takes different forms: business uncertainty and project uncertainty (Townsend,
1969); market uncertainty and company uncertainty (Seidler and Carmichael, 1981); static
and dynamic uncertainty (Fanning, 1983); strategic, operational and financial uncertainty
(Vojta, 1992); general, industry and firm uncertainty (Miller, 1992); direct and indirect
uncertainty (Pringle and Cannolly, 1993); aggregate uncertainty and firm-specific or
idiosyncratic uncertainty (Dixit and Pindyck,1994); business and financial uncertainty (Baril,
Benke and Buetow, 1996); endogenous and exogenous uncertainty (Folta, 1998); market,
industry and firm specific uncertainty (Bulan, 2005); input uncertainty, financial uncertainty,
social uncertainty and market uncertainty (Verbeeten, 2006).
2.1 Social Uncertainty
According to Verbeeten in 2006, social uncertainty includes political (Terrorism, War,
Changes in Government, Political instability) policy uncertainty (Fiscal and monetary
policies, Trade restrictions, regulations affecting the business sector, Tax policy) and Social
unrest, Shift in social concerns, beliefs, values and attitudes reflected in current government
policy or business practice. Political uncertainty is especially detrimental for attracting
foreign direct investment that is vital for the country's economic growth. Foreign investors
prefer a stable political environment, with less policy uncertainty and assurance of property
rights. A high degree of political uncertainty created by possibilities of changes of
government that may bring drastic economic policy changes is detrimental to investment.
Of these different types of uncertainty, social uncertainty has been considered in this study to
evaluate the moderating effect of uncertainty between capital budgeting and performance
which leads to research question:
Do uncertainties moderate the relationship between capital budgeting practices and
performance?

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Thus, it can be hypothesised that (H1): Uncertainties moderate the relationship between
capital budgeting practices and firms’ performance i.e., the relationship between capital
budgeting practices and firms’ performance will be weakened for firms that experience
higher levels of uncertainty than those that experience low levels of uncertainty. As explained
in the literature above, only sophisticated and advanced capital budgeting practices will be
considered to evaluate the moderating effect as those are leading to the firm performances.
3. Materials and Methods
3.1 Participants
Companies operating more than five years would be congenial and strongly represent capital
budgeting practice in terms of uncertainty factors. Thus, rather than selecting few companies
and generalizing findings to other companies, it is better to select population since it has just
287 companies listed on Colombo Stock Exchange (CSE) in Sri Lanka as in June 2013, of
which 186 companies‟ CFOS were responded to this survey.
3.2 Data Collection
Field work was carried to collect the primary data using different ways from June to
November 2013. The self-reporting structured questionnaire was used to collect the data from
all listed companies and questionnaire included the straight forward cover letter to the Chief
Financial Officers of companies to emphasize confidentiality, reason for conducting survey
and beneficial nature of research to practitioners and academics.
3.3 Measurement Variables
3.3.1 Uncertainty
Miller (1992) uncertainty framework and Verbeeten (2006) uncertainty factors have been
considered to measure the social uncertainty factors in this study to evaluate the moderating
effect of uncertainty between capital budgeting practices and performance. As indicated in
the Table 1, following uncertainty factors treated as social uncertainty in the literature
(Verbeeten, 2006)

Table 1. Uncertainty and its components

Social Description Verbeeten’s (2006)

uncertainty model
Political Terrorism, War, Changes in Government,
Political instability Social uncertainties
Government Fiscal and monetary policies, Trade include
policy restrictions, regulations affecting the business Political uncertainty
sector, Tax policy Society uncertainty
Social Social unrest, Shift in social concerns, beliefs, Policy uncertainty
values and attitudes reflected in current
government policy or business practice.

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Participants was asked to indicate on a 5-point Likert scale (ranging from 1= not at all
important, to 5 = very important) to what extent they consider social uncertainties relevant for
their company within the time frame of an investment decision.
3.3.2 Capital Budgeting Practices
Capital budgeting practices was measured with questionnaire originally developed and
validated by (Graham and Harvey, 2001; Brounen, deJong and Koedijk., 2004; Verma,Gupta
and Batra, 2009). Respondents was asked to indicate on a 5-point Likert scale (ranging from
1 = never, to 5 = always) to what extent they consider several capital budgeting techniques
useful or important in the investment process.
3.3.3 Performance
Performance has been measured by Tobin_Q measure. Tobin‟s q confines the essence of the
application of sophisticated capital budgeting techniques (Perfect and Wiles, 1994). In order
to get the maximum value out of the input, this ratio was applied as a measure of performance
in line with Axelsson, Jakovicka, and Kheddache (2002).
Tobin‟s q is in this model defined (Perfect and Wiles, 1994) as:

q = Maket Value of Equity + DEBT

Total Assets

3.4 Testing the Reliability

A reliability analysis of the item-scales was performed using SPSS. Cronbach‟s alpha (α)
values were assessed for each variable with item-scales. The reliability of the test is reported
in Table 2. The reliability of the measures was well above the minimum threshold of 0.60 in
every case (Gliner and Morgan, 2000). Thus, it can be concluded that all of the measures
were generally reliable.

Table 2. Testing the reliability

Dimensions of variables No. of Cronbach’s

dimensions Alpha (α)

Capital budgeting methods (capital budgeting methods 28 0.636

and supplementary capital budgeting methods)

Social uncertainty factors (political, policy and social 6 0.668

uncertainties)

Source: survey data

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4. Data Analysis

4.1 Principal Component Analysis (PCA) for Capital Budgeting Practices

PCA was carried out to extract the capital budgeting practice as grouped in the literature.
After some rounds of removing the unsuitable variables from anti image matrix the results
that the remaining variables are grouped into three factors. Here KMO and Bartlett‟s test of
Sphericity measure of sampling adequacy (George and Mallery, 2003) was used. A measure
of sampling adequacy of 0.888 with a value of Bartlett‟s test of Sphericity (1221.845) with a
high significant level (P <0.01), indicates the suitability of factor analysis. Table 3 illustrate
the PCA's summarised output and all the variables' factor loadings were greater than 0.65.

Table 3. Total variance explained for factors indicating to the capital budgeting practices
Component
Variables Advanced / NPV Sophisticated Simple/ Naïve
Based Capital Capital Capital
Budgeting Practices Budgeting Budgeting
Practices Practices
Eigen Value 5.822 2.108 1.365
Proportion of Variance Explained 38.815% 14.052% 9.101%
Cumulative Percentage Explained 38.815% 52.867% 61.968%
Cronbach‟s Alpha – Reliability of 0.890 0.809 0.744
factors

As shown in the Table 3, the variables of capital budgeting practices grouped into related
factor. The result illustrates that the variables that are grouped in three factors as the reviewed
literature: Advanced/ NPV based capital budgeting practices including the variables of
probability analysis, IRR, scenario analysis, breakeven analysis, uncertainty absorption in
cash flows, sensitivity analysis and NPV, sophisticated capital budgeting practices covering
the variables of real option, CAPM/B analysis, game theory decisions and decision trees and
simple / NAÏVE capital budgeting practices including DPB, ARR and PB. Findings of this
study underpinning with the theoretical base and consisting with study of Verbeeten (2006)
and Wolffsen (2012).
4.2 Descriptive Analysis
The Table 4 shows descriptive statistics of the variables which consists values of minimum,
maximum, mean and standard deviation of the independent, dependent variables. As
indicated that the measure of uncertainty (ranging from 1= not at all important, to 5 = very
important) and capital budgeting variables (ranging from 1 = never to 5= always) were
measured by 5 point Likert scale ranging from 1-5.

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Table 4. Descriptive analysis of the variables

N Minimum Maximum Mean Std.
Deviation
Sophisticated capital budgeting practices 186 1.00 3.25 1.3091 .47916
Advanced/NPVBased capital budgeting 186 1.57 5.00 3.9209 .64694
practices
Simple/NAÏVE capital budgeting practices 186 1.67 4.67 3.1900 .63131
Social uncertainty 186 1.00 4.00 3.5627 .80908
Tobin_q 186 0.27 32.19 2.1383 2.7403

As per the result of descriptive analysis reported in the table 4, advanced/NPV based capital
budgeting practices have highest value of 5 which consist of mean value is 3.9209. Social
uncertainty has mean value of 3.5627 and mean value of Tobin_q is 2.1383.
4.3 Correlations between Capital Budgeting Practices and Firm Performance
A correlation analysis was performed between capital budgeting practices (sophisticated,
advanced and naive capital budgeting practices) and firm performance (effectiveness, and
Tobin_q). Table 5 presents the results of the correlation analysis.

Table 5. Correlation analysis between capital budgeting practices and performance

1 2 3 4
1.Sophisticated_CBP 1.000
2.Advanced_CBP .402*** 1.000
3.Naive_CBP -.448*** -.433*** 1.000
4.Tobin_q .376*** .289*** -.196*** 1.000

As shown in Table 5, sophisticated capital budgeting practices are significantly positively

associated with Tobin_q (r =.376, p < 0.01). Advanced capital budgeting practices are
significantly positively associated with Tobin_q (r =.289, p < 0.01). There is a negative
significant association between naive capital budgeting practices and Tobin_q (r = -.196, p <
0.01).
4.4 Analysis of Moderating Effect
An additional analysis on the moderating effect was employed by dint of Andrew Hayes‟
“process.spd”, as suggested by Hayes (2013) and Field (2013). Moderation is a combined
effect of two variables (interaction effect) and thus the model includes at least one predictor,
a moderator and predictor x moderator (interaction term). If the interaction term is significant,
the variable is said to be a moderator.

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4.4.1 Social Uncertainty as a Moderator of the Relationship between Sophisticated Capital

Budgeting Practices and Tobin_q
This section examines whether social uncertainty will moderate the relationship between
sophisticated capital budgeting practices and Tobin-q (firms‟ performance) i.e., the
relationship between sophisticated capital budgeting practices and Tobin-q will be weakened
for firms that experience higher levels of social uncertainty than those that experience lower
levels of social uncertainty. The result of the moderator analysis is presented in Table 6.

Table 6. Social uncertainty as a moderator between sophisticated capital budgeting practices

and Tobin_q
b SE B t P
Constant -.01(-.12,.12) .0612 -.0196 p = .9844
Social Uncertainty (centred) -.40(-.60,-.20) .1021 -3.8853 p = .0001
Sophisticated CBP (centred) .41(.24,.58) .0869 4.7519 p = .0000
Sophisticated CBP X Social uncertainty -.32(-.60,-.04) .1428 -2.2184 p = .0278

As can be seen in Table 6, the interaction term (Sophisticated CBP X Social uncertainty) is
significant, b = -.32, t = -2.2184, p = 0.0278 indicating that the relationship between
sophisticated capital budgeting practices and Tobin-q is moderated by social uncertainty i.e.,
social uncertainty weakens the positive relationship between sophisticated capital budgeting
practices and Tobin-q. Furthermore, the results of the slope analysis and the nature of
moderating effect are depicted in Figure 1.

Figure 1. Graphical presentation of social uncertainty as a moderator between sophisticated

capita budgeting practices and Tobin_q

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The result of the conditional effect of sophisticated capital budgeting practices on Tobin_q
for the different levels of social uncertainty is presented at the bottom of figure 1. According
to the figure, there are three different regressions: the regression for sophisticated capital
budgeting practices as a predictor of Tobin-q (1) when social uncertainty is low (value of
social uncertainty is -1.000); (2) at the mean value of social uncertainty (the value is zero
because of centred traits); and (3) when the value of social uncertainty is high (value of traits
is .5405). When social uncertainty is low, there is a significant positive relationship between
sophisticated capital budgeting practices and Tobin-q, b = .73, 95% CI (0.32, 1.14), t =
3.5048, p < 0.05, whilst at the mean value of social uncertainty the relationship between
sophisticated capital budgeting practices and Tobin-q is significantly positive. However, this
relationship is weaker than at a low level of social uncertainty, b = .41,95% CI (0.24, .58), t =
4.7519, p < 0.05. Similarly, when social uncertainty is high there is still a significant positive
relationship between sophisticated capital budgeting practices and Tobin-q. However, this
relationship is weaker than at the mean level of social uncertainty, b = .24, 95% CI (.10, 0.38),
t = 3.3552, p < 0.05. Overall, the results reveal that there is a significant positive relationship
between sophisticated capital budgeting practices and Tobin-q at all three levels of social
uncertainty; nonetheless, this positive relationship is weakened when the level of social
uncertainty increases. It is shown in Figure 1 that the positive relationship between
sophisticated capital budgeting practices and Tobin-q is stronger at low levels of social
uncertainty than at average or higher levels of social uncertainty.
4.4.2 Social Uncertainty as a Moderator of the Relationship between Advanced Capital
Budgeting Practices and Tobin_q
The section examines whether the social uncertainty will moderate the relationship between
advanced capital budgeting practices and Tobin_q (firms‟ performance) i.e., the relationship
between advanced capital budgeting practices and Tobin_q will be weakened for firms that
experience higher levels of social uncertainty than those that experience low levels of social
uncertainty. The result of the moderator analysis is presented in Table 7.

Table 7. Social uncertainty as a moderator between advanced capital budgeting practices and
Tobin_q

b SE B t p

Constant .01(-.12,.13) .0641 .0243 p = .9806

Social Uncertainty (centred) -.39(-.57,-.20) .0956 -4.0288 p = .0001

Advanced CBP (centred) .27(.15,.39) .0628 4.2831 p = .0000

Advanced CBP X Social uncertainty -.25(-.49,-0.01) .1219 -2.0307 p = .0437

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As can be seen in Table 7, the interaction term (Advanced CBP X Social uncertainty) is
significant, b = -.25, t = -2.0307, p = 0.0437 indicating that the relationship between
advanced capital budgeting practices and Tobin_q is moderated by social uncertainty i.e.,
social uncertainty weakens the positive relationship between advanced capital budgeting
practices and Tobin_q. Furthermore, the results of the slope analysis and the nature of
moderating effect are depicted in Figure 2.

Figure 2. Graphical presentation of social uncertainty as a moderator between advanced

capita budgeting practices and Tobin_q

The result of the conditional effect of advanced capital budgeting practices on effectiveness
for the different levels of the social uncertainty is presented at the bottom of figure 2.
According to the figure, there are three different regressions: the regression for advanced
capital budgeting practices as a predictor of Tobin_q (1) when social uncertainty is low
(value of social uncertainty is -1.000); (2) at the mean value of social uncertainty (the value is
zero because of centred traits), and (3) when the value of social uncertainty is high (value of
traits is .5405). When social uncertainty is low, there is a significant positive relationship
between advanced capital budgeting practices and Tobin_q, b = .52, 95 % CI (.20, .83), t =
3.2182, p < 0.05 whilst at the mean value of social uncertainty, the relationship between
advanced capital budgeting practices and Tobin_q is significantly positive. However, this
relationship is weaker than at a low level of social uncertainty, b = .27, 95 % CI (.15, .39), t =
4.2831 p < 0.05. Similarly, when social uncertainty is high there is still a significant positive
relationship between advanced capital budgeting practices and Tobin_q. However, this
relationship is weaker than at the mean level of social uncertainty, b = .14, 95 % CI
(.002, .27), t = 2.0140, p < 0.05. Overall, the results reveal that there is a significant positive

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relationship between advanced capital budgeting practices and Tobin_q at all three levels of
social uncertainty; nonetheless, this positive relationship is weakened when the level of social
uncertainty increases. It is shown in figure 2 that the positive relationship between advanced
capital budgeting practice and Tobin_q is stronger at a low level of social uncertainty than at
the average or a high level of social uncertainty.
4.4.3 Social Uncertainty as a Moderator Of the Relationship between Naive Capital Budgeting
Practices and Tobin_q
There was no any statistically significant moderating effect of social uncertainty between
naive capital budgeting practices and Tobin_q. That's why result was not reported here.
Therefore, hypothesis (H1) that uncertainties moderate the relationship between capital
budgeting practices and firms‟ performance i.e., the relationship between capital budgeting
practices and firms‟ performance will be weakened for firms that experience higher levels of
social uncertainty than those that experience low levels of uncertainty was supported in the
following ways:
- Social uncertainty moderates the relationship between sophisticated capital budgeting
practices and Tobin_q. That is, an increased level of social uncertainty weakens the
positive relationship between sophisticated capital budgeting practices and Tobin_q
and vice versa.
- Social uncertainty moderates the relationship between advanced capital budgeting
practices and Tobin_q. That is, an increased level of social uncertainty weakens the
positive relationship between advanced capital budgeting practices and Tobin_q and
vice versa.
Therefore, hypothesis supported in this study and also naive capital budgeting practices were
not considered in hypothesis testing as sophisticated and advanced capital budgeting practices
are mostly influence to performances.
5. Conclusion
Aim of this study was to evaluate the interacting effect of uncertainty between capital
budgeting practices and performance based on Sri Lankan emerging market. The data for this
study were garnered from primary data and secondary data sourcesa. The primary data were
collected from 186 CFOs working in companies listed on the Colombo Stock Exchange using
self-administered questionnaires. The questionnaire was piloted with a sample of five CFOs.
The secondary data were mainly collected from CSE via the Bloomberg website/annual
reports for the 5 years period. Performance was measured by Tobin_q After the data were
collected, they were analysed using statistical tools.
Social uncertainty such as policy (regulations affecting the business sector, tax policy),
political issues (terrorism, war, changes in government, political instability) and social factors
(social unrest, shift in social concerns, beliefs, values and attitudes reflected in current
government policy or business practice) were considered in this study. It does moderate
firms‟ performance together with their capital budgeting practices in two ways: 1) Social

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2017, Vol. 7, No. 2

uncertainty moderates the relationship between sophisticated capital budgeting practices and
Tobin_q. That is, an increased level of social uncertainty weakens the positive relationship
between sophisticated capital budgeting practices and Tobin_q and vice versa.)Social
uncertainty moderates the relationship between advanced capital budgeting practices and
Tobin_q. That is, an increased level of social uncertainty weakens the positive relationship
between advanced capital budgeting practices and Tobin_q and vice versa. Overall, this study
has made contribution as identified the interacting effect of uncertainty between the
relationship of capital budgeting practices and performances. There was no previous evidence
to see moderating effect of uncertainty between the capital budgeting and performance. In a
nutshell, beyond its valuable contribution, this study serves as a springboard for future
research.
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