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Influence Activity And Allocation Of Firms' Internal Capital: Evidence From Australia

Author

Listed:
  • Vinod Mishra
  • Rajabrata Banerjee
  • Tania Dey

Abstract

This 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.

Suggested Citation

  • Vinod Mishra & Rajabrata Banerjee & Tania Dey, 2011. "Influence Activity And Allocation Of Firms' Internal Capital: Evidence From Australia," Monash Economics Working Papers 38-11, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2011-38
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2011/3811influenceactivitymishrabanerjeedey.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Influence activity; capital budgeting; compensation incentives;
    All these keywords.

    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 - - 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

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