Question

Write a one page summary about the following paper:

The theory and practice of corporate finance: evidence from the fieldby John R. Grahamand Campbell R. Harvey

Answer 1

The paper ‘Theory and Practice of Corporate Finance’ was written in the year 1999 by John R. Graham and Campbell R. Harvey. Under the paper, both the researchers has surveyed more than 392 CFO’s and various questions were asked regarding cost of capital, capital budgeting as well as capital structure. Some of the conclusion they reached at were the fact that large firms were relying heavily on NPV techniques and CAPM model, on the other hand small firms and businesses were relying on payback criteria. Executives with older age rely more on traditional payback period criteria for judgement while younger executives have a slightly different mindset in this regard. One of the common factor which was seen is that most of the companies were using a single discount rate for the purpose of evaluation of the project.

            Firms are taking into count not only market risks but other external risks as well which may lead to adjustments in cash flows like interest risks, exchange rate risks etc.

            Most of the large firms were having tight debt ratio while on 33% of the small firms were having it. Executives do rely on informal rules for taking necessary decisions regarding capital structure, debt should be taken or not is chosen by taking care of issues like flexibility and good credit rating in an effective way. Dilution of equity due to issue of shares is one of the major concern.