The purpose of this paper is to examine corporate finance practices in the frontier market of Morocco and compare the practices used by Moroccan companies to those in other countries. It focuses primarily on capital budgeting and real options. The study also examines whether corporate finance practices used in Morocco are consistent with more theoretically superior techniques.
The study uses a mail questionnaire to gather data from chief financial officers and other senior executives of Casablanca Stock Exchange (CSE) listed companies.
Moroccan managers generally view the internal rate of return, accounting rate of return, and payback method as more important than the theoretically superior net present value. Few of the responding firms use real options when making capital budgeting decisions. They tend to use less sophisticated techniques to evaluate investment opportunities and calculate the cost of capital than their counterparts in developed countries. The most frequently used techniques by CSE-listed companies to estimate the cost of equity capital are the cost of debt plus an equity risk premium and the accounting return on equity. CSE-listed companies rely heavily on management’s subjective judgment to estimate cash flows.
Despite a 40 percent response rate, the number of responses did not permit examining whether differences in firm size, industry, educational background, and other characteristics affect the results. Although non-response bias is a potential limitation, test results show no statistically significant differences between the responding and non-responding companies on any of the five characteristics analyzed. These findings lessen concern about potential non-response bias. Given that the findings relate to a frontier market, they are most likely generalizable to similar countries in the Middle East and North Africa region.
The findings may be useful to various parties including corporate managers, boards of directors, and financial analysts. Given that investment decisions affect shareholder wealth, understanding the practices used by corporate managers is crucial in deciding what projects to undertake. This research raises awareness for management to review their corporate finance practices, compare them with their peers, and examine whether these techniques are aligned with proper allocation of resources and value maximization.
Overall, the findings imply that Moroccan firms have room to improve their corporate finance practices. Failing to do so could have serious implications ranging from the inefficient allocation of resources in the economy to the destruction of shareholder value.
To the authors’ knowledge, this is the most comprehensive study using survey methodology to investigate corporate finance practices in Morocco. It provides new insights on such topics as capital budgeting, capital structure, cost of capital estimation, and real option techniques.
The authors thank the Casablanca Stock Exchange (CSE) and the Moroccan Association of Professional Brokerage Firms (APBF) for their support and collaboration in this research.
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