We analyze a unique dataset from a survey of CFOs of diversified firms to examine four areas of diversification and internal capital markets: causes and financing effects of corporate diversification, capital budgeting processes, capital investment methods, and reallocation policies in internal...

The paper presents an adverse selection-based explanation of the fact that some entrepreneurs choose to finance multiple projects together by issuing a single security and other entrepreneurs decide to finance each project separately. We consider the financing problem of an entrepreneur who has...

Textbook theory assumes that firm managers maximize the net present value of future cash flows. But when you ask them, the people running large public corporations say that they are maximizing something else entirely: earnings per share (EPS). Perhaps this is a mistake. No matter. We take...

Using an NPV-based revealed-preference strategy, I find that idiosyncratic risk materially affects the discount rate that firms use in their capital budgeting decisions. I exploit quasi-exogenous within-region variation in project-specific idiosyncratic risk and find that, on average, firms...

When a firm has minimal agency and informational asymmetry problems it should make efficient capital budgeting decisions. Many firms over-invest prior to CEO turnover, halt investments in the period surrounding the turnover, and then greatly increase their level of expenditures. Empirical...

Textbook theory assumes that firm managers maximize the net present value of future cash flows. But when you ask them, real-world firm managers consistently say that they are maximizing something else entirely: earnings per share (EPS). Perhaps this is a mistake. No matter. We take firm managers...

A firm using a discount rate defined at the corporate scale as a Weighted Average Cost of Capital (WACC) may have to value projects subject to a different tax rate from the one used to calculate its discount rate. Moreover, to determine the economic value of a project, the WACC and Arditti-Levy...

In this paper, we conducted a survey about capital budgeting techniques and the cost of capital for Japanese firms. We find that Japanese firms use payback period method more frequently than NPV and IRR in capital budgeting. Multivariate analyses also show that more financially constrained firms...

We study a setting wherein a divisional manager undertakes personally costly effort to improve the profitability of an investment project. The manager's choice of innovation effort is subject to a holdup problem because of the ex post opportunism on the part of headquarters. We analyze and...