Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates

90 Pages Posted: 19 Apr 2023

See all articles by John W. Barry

John W. Barry

Duke University

Bruce Carlin

Rice University

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Date Written: April 7, 2023

Abstract

During project development, investment costs are endogenously determined through delegated bargaining with counterparties. In surveys, nearly 80% of CFOs report using an elevated hurdle rate, the implications of which we build a model to explore. We show that elevated hurdle rates can convey a bargaining advantage that exceeds the opportunity cost of forgone projects, whether these hurdle rate buffers arise for strategic or non-strategic reasons. Using CFO survey data, we find buffer use is negatively related to the cost of capital and to bargaining power, consistent with our model’s predictions, and that realized returns are associated with “beat the hurdle rate benchmark” behavior.

Keywords: hurdle rates, cost of capital, buffers, capital budgeting, bargaining, project development, project selection, corporate investment

JEL Classification: G30, G31, G32

Suggested Citation

Barry, John W. and Carlin, Bruce and Crane, Alan D. and Graham, John Robert, Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates (April 7, 2023). Available at SSRN: https://ssrn.com/abstract=4412436 or http://dx.doi.org/10.2139/ssrn.4412436

John W. Barry (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Bruce Carlin

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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