Bridging the theory-practice gap in corporate finance: A survey of chief financial officers
TL;DR: In this paper, the authors assess general research opinions, barriers to using sophisticated financial management decision-making techniques, and the understanding, utilization, and research preferences of practicing financial managers.
About: This article is published in The Quarterly Review of Economics and Finance.The article was published on 1995-03-01. It has received 271 citations till now. The article focuses on the topics: Financial engineering & Financial management.
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TL;DR: This paper found that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings, and more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings.
4,341 citations
TL;DR: The authors survey 392 CFOs about the cost of capital, capital budgeting, and capital structure and find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
4,138 citations
TL;DR: The authors survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions, finding that maintaining the dividend level is on par with investment decisions while repurchases are made out of the residual cash flow after investment spending.
1,577 citations
TL;DR: The authors survey 392 CFOs about the cost of capital, capital budgeting, and capital structure and find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
Abstract: We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on net present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. Older executives without an MBA are more likely to rely on payback than are younger executives with an MBA. Surprisingly, most companies use a single company-wide discount rate to evaluate a project in a new industry and country. In addition to market risk, firms also frequently adjust cash flows or discount rates for interest rate risk, exchange rate risk, business cycle risk, and inflation risk. Few firms adjust discount rates or cash flows for book-to-market, distress, or momentum risks. A majority of large firms have a tight or somewhat tight target debt ratio, in contrast to only one-third of small firms. Executives rely heavily on informal rules when choosing capital structure. The most important factors affecting debt policy are maintaining financial flexibility and having a good credit rating. When issuing equity, respondents are concerned about earnings per share dilution and recent stock price appreciation. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. If CFOs behave according to these deeper hypotheses, they apparently do so unknowingly.
1,380 citations
Cites background from "Bridging the theory-practice gap in..."
...The first experiment, suggested by Wallace and Mellor (1988), compares the responses for firms that returned the survey on time (i....
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TL;DR: This paper found that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings, and more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings.
Abstract: We survey 401 financial executives, and conduct in-depth interviews with an additional 20, to determine the key factors that drive decisions related to performance measurement and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for an external audience, more so than cash flows. We find that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings. Similarly, more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings. Managers believe that missing an earnings target or reporting volatile earnings reduces the predictability of earnings, which in turn reduces stock price because investors and analysts dislike uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but at the same time, try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management's views support stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence consistent with other theories of these phenomena (such as debt, political cost and bonus plan based hypotheses).
1,144 citations
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TL;DR: In this article, a profile of needed research in corporate finance is developed based on a survey of financial managers, which indicates a particularly strong need for research in two distinctive areas: the effects of globalization and the use of hedging tools to reduce financial risk.
Abstract: A profile of needed research in corporate finance is developed based on a survey of financial managers. Research needs are perceived to be the greatest in the areas of regulation and ownership. The area of long-term financing represents the third most important category. Alternatively, financial managers consider operational financing to be the least important area in terms of research needs. Write-in comments, in general, indicate a particularly strong need for research in two distinctive areas: the effects of globalization and the use of hedging tools to reduce financial risk.
22 citations
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01 Jan 1990
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