The theory and practice of corporate finance: evidence from the field

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Abstract

We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.

JEL classification

G31
G32
G12

Keywords

Capital structure
Cost of capital
Cost of equity
Capital budgeting
Discount rates
Project valuation
Survey

Cited by (0)

We thank Franklin Allen for his detailed comments on the survey instrument and the overall project. We appreciate the input of Chris Allen, J.B. Heaton, Craig Lewis, Cliff Smith, Jeremy Stein, Robert Taggart, and Sheridan Titman on the survey questions and design. We received expert survey advice from Lisa Abendroth, John Lynch, and Greg Stewart. We thank Carol Bass, Frank Ryan, and Fuqua MBA students for help in gathering the data, and Kathy Benton, Steve Fink, Anne Higgs, Ken Rona, and Ge Zhang for computer assistance. The paper has benefited from comments made by an anonymous referee, the editor (Bill Schwert), as well as Michael Bradley, Alon Brav, Susan Chaplinsky, Magnus Dahlquist, Gene Fama, Paul Gompers, Ravi Jagannathan, Tim Opler, Todd Pulvino, Nathalie Rossiensky, Rick Ruback, David Smith, René Stulz, and seminar participants at the Harvard Business School/Journal of Financial Economics Conference on the interplay between theoretical, empirical, and field research in finance, the 2000 Utah Winter Finance Conference, the University of Wisconsin and the 2001 American Finance Association Meetings. Finally, we thank the executives who took the time to fill out the survey. This research is partially sponsored by the Financial Executives Institute (FEI). The opinions expressed in the paper do not necessarily represent the views of FEI. Graham acknowledges financial support from the Alfred P. Sloan Research Foundation. Some supplementary research results are available at http://www.duke.edu/∼charvey/Research/indexr.htm.

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