Working Paper: NBER ID: w29841
Authors: John Graham
Abstract: This paper conducts surveys that document CFO perspectives on corporate planning, corporate investment, capital structure, payout, and the goal of the firm. Current policy choices are compared to CFO survey data from two decades prior, which allows me to identify decision-making themes that are common across policies and through time. These common elements of real-world corporate finance indicate that companies make decisions based on internal forecasts that are miscalibrated and thought to be reliable only two years ahead; use decision rules that are conservative, sticky, simple, and that attempt to market time; and, emphasize corporate objectives that increasingly focus on stakeholders and revenues. These themes can guide and discipline academic models and tests, with the aim of better explaining outcomes. A model of satisficing decision-making aligns with many of these practice-of-finance characteristics: optimization is difficult in a complex fast-changing world, so managers use simple rules to make incremental improvements and they stick with rules that have worked well enough in the past. Non-behavioral models with costly biases can also account for some of the themes. Implications and avenues for future research are discussed
Keywords: No keywords provided
JEL Codes: A0; G30; G31; G32; G35; G40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| miscalibrated internal forecasts (C53) | reliance on conservative and simple decision rules (D91) |
| CFOs perceive their planning horizon as only reliable for two years ahead (D25) | focus on short-term investment projects (G31) |
| miscalibrated internal forecasts (C53) | positive and negative surprises in outcomes (D80) |
| positive and negative surprises in outcomes (D80) | managers are disproportionately penalized for downside misses compared to upside successes (L25) |
| conservative policies (E65) | provide slack during downside surprises (D84) |
| high investment hurdle rates and financial flexibility (G31) | conservative policies (E65) |
| satisficing approach to decision-making (D91) | reliance on familiar rules that have previously yielded satisfactory results (D81) |