Working Paper: NBER ID: w17370
Authors: John R. Graham; Campbell R. Harvey; Manju Puri
Abstract: We survey more than 1,000 CEOs and CFOs to understand how capital is allocated, and decision-making authority is delegated, within firms. We find that CEOs are least likely to share or delegate decision-making authority in mergers and acquisitions, relative to delegation of capital structure, payout, investment, and capital allocation decisions. We also find that CEOs are more likely to delegate decision authority when the firm is large or complex. Delegation is less likely when the CEO is particularly knowledgeable about a project, when the CEO has an MBA degree or long tenure, and when the CEO's pay is tilted towards incentive compensation. We study capital allocation in detail and learn that most companies allocate funds across divisions using the net present value rule, the reputation of the divisional manager, the timing of a project‟s cash flows, and senior management's "gut feel." Corporate politics and corporate socialism are more important allocation criteria in foreign countries than in the U.S.
Keywords: Capital Allocation; Decision-Making Authority; Corporate Governance
JEL Codes: G30; G32; G34; L20; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm Size (L25) | CEO Delegation of Decision-Making Authority (M12) |
| Complexity of Firm (D21) | CEO Delegation of Decision-Making Authority (M12) |
| CEO Workload (M12) | CEO Delegation of Decision-Making Authority (M12) |
| CEO Knowledge (M12) | CEO Delegation of Decision-Making Authority (M12) |
| Incentive-Based Compensation (M52) | CEO Delegation of Decision-Making Authority (M12) |
| CEO Dominance in M&A Decisions (G34) | CEO Delegation of Decision-Making Authority (M12) |