Capital Allocation and Delegation of Decision-Making Authority within Firms

Abstract

We use a unique dataset of more than 1,000 Chief Executive Officers (CEOs) and Chief Financial Officers around the world to investigate the degree to which executives delegate financial decisions and the circumstances that drive variation in delegation. Delegation does not appear to be monolithic; instead, our results show that it varies across corporate policies and also varies with the personal characteristics of the CEO. We find that CEOs delegate decisions for which they need the most input and when they are overloaded. CEOs delegate financial decisions less when they are knowledgable (long-tenured or with a finance background). They delegate more when distracted by recent acquisitions, and they allocate capital based on “gut feel” and the personal reputation of the manager running a given division. Finally, corporate politics and corporate socialism affect capital allocation in European and Asian firms.

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

JEL Classification: L20, L22, G30, G32, G34, G35