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

61 Pages Posted: 14 Jun 2007 Last revised: 10 Jun 2011

See all articles by Yuhai Xuan

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: 2008

Abstract

This paper investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multi-divisional 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: CEO, International capital markets, capital allocation, bargaining power

Suggested Citation

Xuan, Yuhai, Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions (2008). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=991951 or http://dx.doi.org/10.2139/ssrn.991951

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/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
329
Abstract Views
1,644
rank
99,182
PlumX Metrics