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Corporate Capital Budgeting Decisions and Information Sharing

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  • Abigail S. Hornstein

    ()
    (Department of Economics, Wesleyan University)

  • Minyuan Zhao

    ()
    (University of Michigan)

Abstract

Firms must overcome agency and information asymmetry problems to make efficient corporate capital budgeting decisions; this is particularly true for firms with multiple units dispersed across geographic locations. Internal communication and coordination may therefore be crucial in reducing information asymmetry and achieving efficient resource allocation. We examine the relationship between corporate capital budgeting decisions and the degree of internal information sharing using a dataset of 342 U.S. firms from 1993 to 2002. Information sharing is measured by the internal linkages observed in firms’ research and development (R&D) activities worldwide. The efficiency of a firm’s capital budgeting decisions is measured by the deviation of the firm’s estimated marginal q from the theoretical tax-adjusted benchmark. We observe a significant relationship between value-enhancing capital budgeting decisions and stronger internal linkages. Specifically, corporate over-investment is significantly reduced with better information sharing across units. All results are robust to firm- and industry–level controls.

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Bibliographic Info

Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2009-005.

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Length: 50 pages
Date of creation: May 2009
Date of revision:
Publication status: Forthcoming in Journal of Economics and Management Strategy
Handle: RePEc:wes:weswpa:2009-005

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