Empire-Building or Bridge-Building? Evidence from New CEOs’ Internal Capital Allocation Decisions

Posted: 24 Nov 2009

See all articles by Yuhai Xuan

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: December 2009

Abstract

This article investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multidivisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.

Keywords: G30, G31

Suggested Citation

Xuan, Yuhai, Empire-Building or Bridge-Building? Evidence from New CEOs’ Internal Capital Allocation Decisions (December 2009). The Review of Financial Studies, Vol. 22, Issue 12, pp. 4919-4948, 2009, Available at SSRN: https://ssrn.com/abstract=1509897 or http://dx.doi.org/hhp030

Yuhai Xuan (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

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