Essay About Comprehensive Survey And Survey Results

Stern Stewart Journal of Applied Corporate Finance
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STERN STEWART JOURNAL OF APPLIED CORPORATE FINANCE
e recently conducted a comprehensive survey that analyzed the
current practice of corporate finance, with particular focus on the
areas of capital budgeting and capital structure. The survey results
enabled us to identify aspects of corporate practice that are
*This paper is a compressed version of our paper that was first published as “The Theory and Practice of Corporate Finance:
Evidence from the Field” in the Journal of Financial Economics, Vol. 60 (2001), and which won the Jensen prize for the best
JFE paper in corporate finance in 2001. This research is partially sponsored by the Financial Executives International (FEI)
but the opinions expressed herein do not necessarily represent the views of FEI. We thank the FEI executives who responded
to the survey. Graham acknowledges financial support from the Alfred P. Sloan Research Foundation.
1. In the original JFE version of this paper, we show that our sample of respondents is representative of the overall
population of 4,400 firms, is fairly representative of Compustat firms, and is not adversely affected by nonresponse bias. The
next largest survey that we know of studies 298 large firms and is presented in J. Moore and A. Reichert, “An Analysis of the
Financial Management Techniques Currently Employed by Large U.S. Corporations,” Journal of Business Finance and
Accounting, Vol. 10 (1983), pp. 623-645.
consistent with finance theory, as well as aspects that are hard to reconcile with
what we teach in our business schools today. In presenting these results, we
hope that some practitioners will find it worthwhile to observe how other
companies operate and perhaps modify their own practices. It may also be useful
for finance academics to consider differences between theory and practice as
a reason to revisit the theory.
We solicited responses from approximately 4,440 companies and received
392 completed surveys, representing a wide variety of firms and industries.1 The
survey contained nearly 100 questions and explored both capital budgeting and
capital structure decisions in depth. The responses to these questions enabled
us to explore whether and how these corporate policies are interrelated. For
example, we investigated whether companies that made more aggressive use
of debt financing also tended to use more sophisticated capital budgeting
techniques, perhaps because of their greater need for discipline and precision
in the corporate investment process.
More generally, the design of our survey allowed for a richer understanding
of corporate decision-making by analyzing the CFOs responses in
the context of various company characteristics, such as size, P/E ratio,
leverage, credit rating, dividend policy, and industry. We also looked for
systematic relationships between corporate financial choices and managerial
factors, such as the extent of top managements stock ownership, and
the age, tenure, and education of the CEO. By testing whether the responses
VOLUME 15 NUMBER 1 SPRING 2002
varied systematically with these characteristics,
we were able to shed light on the implications of
various corporate finance theories that focus on
variables such as a companys size, risk, investment
opportunities, and managerial incentives.
The results of our survey were reassuring in
some respects and surprising in others. With respect
to capital budgeting, most companies follow academic
theory and use discounted cash flow (DCF)
and net present value (NPV) techniques to evaluate
new projects. But when it comes to making capital
structure decisions, corporations appear to pay less
attention to finance theory and rely instead on
practical, informal rules of thumb. According to our
survey, the main objective of CFOs in setting debt
policy was not to minimize the firms weighted
average cost of capital, but rather to preserve “financial
flexibility”–a goal that tended to be associated
with maintaining a targeted credit rating. And consistent
with the emphasis on flexibility, most CFOs
also expressed considerable reluctance to issue
common equity unless their stock prices were at
“high” levels, mainly because of their concern about
dilution of EPS. (As we shall argue later, although
such reluctance to issue equity is likely to be
consistent with finance theorys emphasis on the
costs associated with “information asymmetry,” the
extent