Influence Activity And Allocation Of Firms' Internal Capital: Evidence From Australia
AbstractThis paper analyzes how influence activities in the form of signal jamming affect the capital budgeting process of corporate organizations in Australia. First, the relationship between investment in the smallest division and its past performances is tested. The relationship is defined as investment sensitivity. Second, how the investment sensitivity varies as influence problems become more severe is examined. Finally, the relationship between compensation incentives for the large division manager and the investment sensitivity is reviewed. The findings suggest that investment sensitivity is positive for Australian firms. Mixed evidence is obtained between investment sensitivity and increase in the severity of influence problems when measures such as, relatedness and number of divisions are used. With increase in number of divisions, influence activity becomes more severe and headquarters relies more on public signal. However, with the increase in relatedness across divisions, influence problem increases and headquarters relies more on private information from manager of the large division. Evidence suggest that Australian firms provide high short term incentive payments to managers of large divisions to mitigate the influence activity problems and thus rely more on managerial recommendations for investing in smallest division as compared to noisy accounting measures.
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Bibliographic InfoPaper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 38-11.
Length: 28 pages
Date of creation: Dec 2011
Date of revision:
Contact details of provider:
Postal: Department of Economics, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/eco/
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Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-10 (All new papers)
- NEP-CFN-2012-01-10 (Corporate Finance)
- NEP-CSE-2012-01-10 (Economics of Strategic Management)
- NEP-CTA-2012-01-10 (Contract Theory & Applications)
- NEP-HRM-2012-01-10 (Human Capital & Human Resource Management)
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