Structural Equation Modelling Approach to Evaluating Capital Budgeting Factors in Oman

Abstract

Objective – This study aims to critically evaluate capital budgeting factors in Oman’s manufacturing sector using the structural equation modelling (SEM) approach. Methodology – One hundred and twelve managers participated in the pilot survey conducted in different parts of Muscat, Oman, from September 2020 to January 2021. The managers responded to questions set on a 5-Likert scale bordering on aspects of managerial and organisational attributes, the rationale for selecting specific capital budgeting techniques, the impediments to the use of advanced capital budgeting techniques (ACBTs), and the traction of non-financial, environmental, social, and governmental (ESG) factors. IBM SPSS v.23 and analysis of moment structure (AMOS) v.20, descriptive analysis, correlation, and multiple regressions were used. SEM was applied to determine the strength of the relationship between the latent capital budgeting variables tested in the model. Findings – The results show that the model has an acceptable fit that meets the recommended values. Specifically, the use of advanced capital budgeting methods (ACBMs) relative to financial and non-financial factors in the capital investment decision model is the most influencing path in this SEM model; The rest of the observed relationships are insignificant at a 5% significance level. Novelty – Using relatively more advanced capital budgeting approaches such as real options could significantly impact financial and non-financial factors, thereby opening the prospects for more integrated project appraisal approaches. Cash flow, net present value (NPV), environmental, social, and governance (ESG) considerations, top management role, and clarity of business policy are among the determinants of sustainable capital budgeting. This is perhaps the first study that has applied the SEM approach to generating more insights into capital budgeting factors than previous studies emphasizing the Omani non-oil sector. Type of Paper: Empirical JEL Classification: G11, G31 Keywords: Advanced capital budgeting methods (ACBMs); Confirmatory factor analysis; Exploratory factor analysis; Investment decisions; Oman, Real options; Structural equation modelling. Reference to this paper should be made as follows: Gordon, S.A. (2022). Structural Equation Modelling Approach to Evaluating Capital Budgeting Factors in Oman, J. Fin. Bank. Review, 7(2), 107 – 121. https://doi.org/10.35609/jfbr.2022.7.2(2)