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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.

Suggested Citation

  • John R. Graham & Campbell R. Harvey & Manju Puri, 2011. "Capital Allocation and Delegation of Decision-Making Authority within Firms," NBER Working Papers 17370, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17370 Note: CF
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    Cited by:

    1. Custódio, Cláudia & Metzger, Daniel, 2014. "Financial expert CEOs: CEO׳s work experience and firm׳s financial policies," Journal of Financial Economics, Elsevier, vol. 114(1), pages 125-154.
    2. Oriana Bandiera & Andrea Prat & Renata Lemos & Raffaella Sadun, 2013. "Managing the Family Firm: Evidence from CEOs at Work," Harvard Business School Working Papers 14-044, Harvard Business School, revised Jun 2017.
    3. 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, August.
    4. repec:cep:stieop:49 is not listed on IDEAS
    5. repec:bla:acctfi:v:57:y:2017:i:3:p:879-905 is not listed on IDEAS
    6. Tatyana Sokolyk, 2015. "Governance provisions and managerial entrenchment: evidence from CEO turnover of acquiring firms," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 305-335, August.
    7. Igor Gurkov, 2016. "Oriflame CIS: The Successful Evolution of a Regional Subsidiary’s Mandate," HSE Working papers WP BRP 50/MAN/2016, National Research University Higher School of Economics.
    8. de Haas, Ralph & Ferreira, Daniel & Kirchmaier, Tom, 2017. "The Inner Working of the Board : Evidence from the Emerging Markets," Discussion Paper 2017-016, Tilburg University, Center for Economic Research.
    9. Asuyama, Yoko, 2016. "Delegation to workers across countries and industries : social capital and coordination needs matter," IDE Discussion Papers 620, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    10. Cortés, Kristle & Duchin, Ran & Sosyura, Denis, 2016. "Clouded judgment: The role of sentiment in credit origination," Journal of Financial Economics, Elsevier, vol. 121(2), pages 392-413.
    11. Swarnodeep HomRoy, 2016. "Was Adam Smith Right? Evidence of Compensating Differential in CEO Pay," Manchester School, University of Manchester, vol. 84(1), pages 1-24, January.
    12. Cortes, Kristle Romero & Duchin, Ran & Sosyura, Denis, 2016. "Clouded Judgment: The Role of Sentiment in Credit Origination," Working Paper 1601, Federal Reserve Bank of Cleveland.
    13. Igor B. Gurkov & Michael J. Morley, 2017. "Contributions Towards a Renewed Debate on Multinational Headquarter-Subsidiary Relations:Subsidiary Mandates, Corporate Parenting Styles and Collective Psychological Contracts," HSE Working papers WP BRP 55/MAN/2017, National Research University Higher School of Economics.
    14. Mullins, William & Schoar, Antoinette, 2016. "How do CEOs see their roles? Management philosophies and styles in family and non-family firms," Journal of Financial Economics, Elsevier, vol. 119(1), pages 24-43.
    15. 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.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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