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Capital Allocation and Delegation of Decision-Making Authority within Firms

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17370.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17370

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Cited by:
  1. Oriana Bandiera & Andrea Prat & Raffaella Sadun, 2013. "Managing the Family Firm: Evidence from CEOs at Work," NBER Working Papers 19722, National Bureau of Economic Research, Inc.
  2. Markus Glaser & Florencio Lopez-De-Silanes & Zacharias Sautner, 2013. "Opening the Black Box: Internal Capital Markets and Managerial Power," Journal of Finance, American Finance Association, vol. 68(4), pages 1577-1631, 08.
  3. William Mullins & Antoinette Schoar, 2013. "How do CEOs see their Role? Management Philosophy and Styles in Family and Non-Family Firms," NBER Working Papers 19395, National Bureau of Economic Research, Inc.

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