Making Capital Budgeting and Capital Structure Decisions
Prepared for The Journal of Applied Corporate Finance Vol. 15, No. 1, 2002
How do CFOs make capital budgeting and capital structure decisions?1
John R. Graham
Associate Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA
Campbell R. Harvey
Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA
National Bureau of Economic Research, Cambridge, MA 02912 USA
March 8, 2002
1A longer and more detailed version of this paper is published as “The Theory and Practice of Corporate
Finance: Evidence from the Field” in the Journal of Financial Economics Vol. 60, 2001, pp. 187-243.
This research is partially sponsored by the Financial Executives International (FEI) but the opinions expressed herein do not necessarily represent the views of FEI. Graham acknowledges financial support from the Alfred P. Sloan Research Foundation.
How do CFOs make capital budgeting and capital structure decisions? 1
1. Introduction
A large body of academic research describes the optimal decisions that corporations should make, given certain assumptions and conditions. Anecdotal evidence, however, suggests that the way that corporations actually make decisions is not always consistent with the academic decision rules. In this paper, we analyze a comprehensive survey that describes the current practice of corporate finance. This allows us to identify areas where the theory and practice of corporate finance are consistent and areas where they are not.
Our survey is distinguished from previous surveys in several ways. First, we examine both capital budgeting and capital structure decisions in detail. This allows us to determine how these corporate policies are interrelated, which provides a rich context within which to understand corporate decision-making. For example, we investigate whether firms that consider financial flexibility a capital structure priority also are likely to value real options in capital
How do CFOs make capital budgeting and capital structure decisions?1
John R. Graham
Associate Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA
Campbell R. Harvey
Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA
National Bureau of Economic Research, Cambridge, MA 02912 USA
March 8, 2002
1A longer and more detailed version of this paper is published as “The Theory and Practice of Corporate
Finance: Evidence from the Field” in the Journal of Financial Economics Vol. 60, 2001, pp. 187-243.
This research is partially sponsored by the Financial Executives International (FEI) but the opinions expressed herein do not necessarily represent the views of FEI. Graham acknowledges financial support from the Alfred P. Sloan Research Foundation.
How do CFOs make capital budgeting and capital structure decisions? 1
1. Introduction
A large body of academic research describes the optimal decisions that corporations should make, given certain assumptions and conditions. Anecdotal evidence, however, suggests that the way that corporations actually make decisions is not always consistent with the academic decision rules. In this paper, we analyze a comprehensive survey that describes the current practice of corporate finance. This allows us to identify areas where the theory and practice of corporate finance are consistent and areas where they are not.
Our survey is distinguished from previous surveys in several ways. First, we examine both capital budgeting and capital structure decisions in detail. This allows us to determine how these corporate policies are interrelated, which provides a rich context within which to understand corporate decision-making. For example, we investigate whether firms that consider financial flexibility a capital structure priority also are likely to value real options in capital