However, the analysis of Belgian firms' financial structure with respect to the introduction of ACE over a relatively short period can be biased by exogenous factors such as
capital rationing, which followed the 2008 financial crisis.
Most Chinese firms (87 percent) indicated that debt is the largest source of their
capital rationing. A majority of Chinese firms (52 percent) have an internally imposed debt limit, 20 percent have a debt limit imposed by external managers and 15 percent have debt limits imposed by an external agreement.
In "The Effect of Financing Sources on the Usefulness of Financial Reporting Quality in Guiding Investments," Kevin Sun shows that ineffective monitoring and
capital rationing by shareholders and banks, due to information asymmetry, may result in a lack of management's investment responses to changes in growth opportunities.
Credit committees were often approving only 25 per cent of viable applications due to
capital rationing and taking a very selective stance."
The continued impact of that
capital rationing can be seen even now as some of the UK's biggest banks withdraw from parts of the SME lending market such as asset finance.
This is known as
capital rationing. An executive planning committee may emerge from a lengthy capital budgeting session to announce that only four billion pesos (US$84Million) may be spent on new capital projects for a specific year.
The case provides an opportunity to consider the effects of
capital rationing.
IRR has also been criticised because it doesn't always correctly evaluate mutually exclusive projects or ensure the best allocation of resources when
capital rationing occurs.
The impact of liability risk on the cost of capital can be significant and may lead to
capital rationing.
Finally, if paying too much in dividends leads to
capital rationing constraints where good projects are rejected, there will be a loss of value (captured by the net present value of the rejected projects).
While it is typically assumed that all value-generating projects should be accepted, Shapiro addresses the important issue of limited project choice due to
capital rationing or mutual exclusivity in the chapter's appendix.
They present the exercise in 12 chapters covering cash flow analysis; book rate of return and payback period; basics of discounting; evaluating projects and comparing alternatives; marginal cost, equivalent cost, and replacement analysis; after-tax analysis ; calculations in nominal and real terms--effects of inflation on profitability; impact of technological progress upon equivalent cost and replacement analysis; discount rate, cost of capital, and
capital rationing; alternative methods and special cases in financing mix and project evaluation; interdependent projects and the use of optimization methods; and decision theory and real option analysis in the context of investment under uncertainty.
