Capital Allocation and Delegation of Decision-Making Authority within Firms

Abstract:     
How are decision-making authority and investment dollars delegated within firms? We study these issues using a quantitative measure of delegation derived by directly asking top executives how high-level decisions are made within their firms. Our survey of more than 1,000 Chief Executive Officers and Chief Financial Officers allows us to investigate how personal characteristics of the CEO, as well as unique firm characteristics, affect delegation. We find that CEOs are less likely to delegate decisions that are external to the firm (such as mergers) and about which the CEO is knowledgeable. We find that CEOs are more likely to delegate decision authority when the firm is complex. In terms of the internal allocation of capital, we find that companies allocate funds across divisions based on the reputation of the divisional manager, the timing of a project’s cash flows, senior management’s ‘gut feel’, and the net present value rule. Corporate politics and corporate socialism affect allocation outside of the U.S.

Number of Pages in PDF File: 53

Keywords: Delegation, CEOs, executives, capital structure, mergers and acquisitions, payout, corporate investment, capital allocation

JEL Classification: L20, L22, G30

working papers series