53 Pages Posted: 30 Aug 2011
Date Written: August 2011
We survey more than 1,000 CEOs and CFOs to understand how capital is allocated, and decision-making authority is delegated, within firms. We find that CEOs are least likely to share or delegate decision-making authority in mergers and acquisitions, relative to delegation of capital structure, payout, investment, and capital allocation decisions. We also find that CEOs are more likely to delegate decision authority when the firm is large or complex. Delegation is less likely when the CEO is particularly knowledgeable about a project, when the CEO has an MBA degree or long tenure, and when the CEO's pay is tilted towards incentive compensation. We study capital allocation in detail and learn that most companies allocate funds across divisions using the net present value rule, the reputation of the divisional manager, the timing of a project‟s cash flows, and senior management's "gut feel." Corporate politics and corporate socialism are more important allocation criteria in foreign countries than in the U.S.
Suggested Citation: Suggested Citation
Graham, John R. and Harvey, Campbell R. and Puri, Manju, Capital Allocation and Delegation of Decision-Making Authority within Firms (August 2011). NBER Working Paper No. w17370. Available at SSRN: https://ssrn.com/abstract=1919444
By J.b. Heaton
By Dirk Jenter