Corporate Capital Budgeting Decisions and Information Sharing

36 Pages Posted: 25 Oct 2011

Multiple version iconThere are 2 versions of this paper

Date Written: Winter 2011

Abstract

Firms must overcome agency and information asymmetry problems to make efficient corporate capital budgeting decisions; this is particularly true for firms with multiple units dispersed across geographic locations. Internal communication and coordination may therefore be crucial in reducing information asymmetry and achieving efficient resource allocation. We examine the relationship between corporate capital budgeting decisions and the degree of internal information sharing using a dataset of 342 U.S. firms from 1993 to 2002. Information sharing is measured by the internal linkages observed in firms’ research and development activities worldwide. The efficiency of a firm's capital budgeting decisions is measured by the deviation of the firm's estimated marginal q from the theoretical tax‐adjusted benchmark. We observe a significant relationship between value‐enhancing capital budgeting decisions and stronger internal linkages. Specifically, corporate overinvestment is significantly reduced with better information sharing across units. All results are robust to firm‐ and industry‐level controls.

Suggested Citation

Hornstein, Abigail S. and Zhao, Minyuan, Corporate Capital Budgeting Decisions and Information Sharing (Winter 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 4, pp. 1135-1170, 2011. Available at SSRN: https://ssrn.com/abstract=1948959 or http://dx.doi.org/10.1111/j.1530-9134.2011.00312.x

Abigail S. Hornstein

Wesleyan University ( email )

Middletown, CT 06459
United States

Minyuan Zhao

University of Pennsylvania ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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