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Percent of CFOs who always or almost always use a given technique Fig. 2. Survey evidence on the popularity of different capital budgeting methods. We report the percentage of CFOs who always or almost always use a particular technique. IRR represents internal rate of return, NPV is net present value, P/E is the price-to-earnings ratio, and APV is adjusted present value. The survey is based on the responses of 392 CFOs. Pee Ee Sanaa Se SA See Le See eee, Most respondents select net present value and internal rate of return as their nost frequently used capital budgeting techniques (see Table 2); 74.9% of CFOs ilways or almost always (responses of 4 and 3) use net present value (rating of 3.08); and 75.7% always or almost always use internal rate of return (rating of 3.09). The hurdle rate is also popular. These results are summarized in Fig. 2. The most interesting results come from examining the responses conditional yn firm and executive characteristics. Large firms are significantly more likely to ise NPV than small firms (rating of 3.42 versus 2.83). There is no difference in echniques used by growth and nongrowth firms. Highly levered firms are significantly more likely to use NPV and IRR than are firms with small debt

Figure 2 Percent of CFOs who always or almost always use a given technique Fig. 2. Survey evidence on the popularity of different capital budgeting methods. We report the percentage of CFOs who always or almost always use a particular technique. IRR represents internal rate of return, NPV is net present value, P/E is the price-to-earnings ratio, and APV is adjusted present value. The survey is based on the responses of 392 CFOs. Pee Ee Sanaa Se SA See Le See eee, Most respondents select net present value and internal rate of return as their nost frequently used capital budgeting techniques (see Table 2); 74.9% of CFOs ilways or almost always (responses of 4 and 3) use net present value (rating of 3.08); and 75.7% always or almost always use internal rate of return (rating of 3.09). The hurdle rate is also popular. These results are summarized in Fig. 2. The most interesting results come from examining the responses conditional yn firm and executive characteristics. Large firms are significantly more likely to ise NPV than small firms (rating of 3.42 versus 2.83). There is no difference in echniques used by growth and nongrowth firms. Highly levered firms are significantly more likely to use NPV and IRR than are firms with small debt

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Fig. 1. Sample characterstics based on the survey respponses of 392 CFOs. The median price-earnings ratio is 15. Sixty percent of the respondents have price-earnings ratios of 15 or greater (Fig. 1D). We refer to these firms as growth
Fig. 1. Sample characterstics based on the survey respponses of 392 CFOs. The median price-earnings ratio is 15. Sixty percent of the respondents have price-earnings ratios of 15 or greater (Fig. 1D). We refer to these firms as growth
firms when we analyze how investment opportunities affect corporate behavior. We refer to the remaining 40% of the respondents as nongrowth firms. The distribution of debt levels is fairly uniform (Fig. 1E). Approximately one-third of the sample firms have debt-to-asset ratios below 20%, another third have debt ratios between 20% and 40%, and the remaining firms have debt ratios greater than 40%. We refer to firms with debt ratios greater than 30% as
firms when we analyze how investment opportunities affect corporate behavior. We refer to the remaining 40% of the respondents as nongrowth firms. The distribution of debt levels is fairly uniform (Fig. 1E). Approximately one-third of the sample firms have debt-to-asset ratios below 20%, another third have debt ratios between 20% and 40%, and the remaining firms have debt ratios greater than 40%. We refer to firms with debt ratios greater than 30% as
J.R. Graham, C.R. Harvey / Journal of Financial Economics 60 (2001) 187-243
J.R. Graham, C.R. Harvey / Journal of Financial Economics 60 (2001) 187-243
Survey responses to the question: how frequently does your firm use the following techniques when deciding which projects or acquisitions to pursue?*
Survey responses to the question: how frequently does your firm use the following techniques when deciding which projects or acquisitions to pursue?*
*Respondents are asked to rate on a scale of 0 (never) to 4 (always). We report the overall mean as well as the % of respondents that answered 3 (almost always) or 4 (always). ***, **, * denotes a significant differenc: at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
*Respondents are asked to rate on a scale of 0 (never) to 4 (always). We report the overall mean as well as the % of respondents that answered 3 (almost always) or 4 (always). ***, **, * denotes a significant differenc: at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: does your firm estimate the cost of equity capital? (If “no”, please go to next question). If “yes”, how do you determine your firm’s cost of equity capital?*
Survey responses to the question: does your firm estimate the cost of equity capital? (If “no”, please go to next question). If “yes”, how do you determine your firm’s cost of equity capital?*
Fig. 3. Survey evidence on the popularity of different methods of calculat the cost of equity capital. We report the percentage of CFOs who always or almost always use a particular technique. CAPM represents the capital asset pricing model. The survey is based on the responses of 392 CFOs.
Fig. 3. Survey evidence on the popularity of different methods of calculat the cost of equity capital. We report the percentage of CFOs who always or almost always use a particular technique. CAPM represents the capital asset pricing model. The survey is based on the responses of 392 CFOs.
Percent of CFOs who always or almost always adjust for a given risk Fig. 4. Survey evidence on types of multibeta risk that are important for adjusting cash flows or discount rates. We report the percentage of CFOs who always or almost always adjust for a particular type of risk. The survey is based on the responses of 392 CFOs.
Percent of CFOs who always or almost always adjust for a given risk Fig. 4. Survey evidence on types of multibeta risk that are important for adjusting cash flows or discount rates. We report the percentage of CFOs who always or almost always adjust for a particular type of risk. The survey is based on the responses of 392 CFOs.
Survey responses to the question: when valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor). Percentage of respondents choosing each category is reported*
Survey responses to the question: when valuing a project, do you adjust either the discount rate or cash flows for the following risk factors? (Check the most appropriate box for each factor). Percentage of respondents choosing each category is reported*
*Percentage of respondents choosing each category is reported. The percentages for discount rate, cash flow, both and neither should sum to 100. ***, **, * denotes a significant difference at the 1%, 5%, and 10% level respectively. All table columns are defined in Table 1.
*Percentage of respondents choosing each category is reported. The percentages for discount rate, cash flow, both and neither should sum to 100. ***, **, * denotes a significant difference at the 1%, 5%, and 10% level respectively. All table columns are defined in Table 1.
Survey responses to the question: How frequently would your company use the following discount rates when evaluating a new project in an overseas market? To evaluate this project we would use* *Respondents are asked to rate on a scale of 0 (never) to 4 (always). We report the overall mean as well as the % of respondents that answered 3 (almost always) and 4 (always). ***, **, * denotes a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: How frequently would your company use the following discount rates when evaluating a new project in an overseas market? To evaluate this project we would use* *Respondents are asked to rate on a scale of 0 (never) to 4 (always). We report the overall mean as well as the % of respondents that answered 3 (almost always) and 4 (always). ***, **, * denotes a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Debt policy factors Percent of CFOs identifying factor as important or very important
Debt policy factors Percent of CFOs identifying factor as important or very important
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denot a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denot a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: has your firm seriously considered issuing debt in foreign countries? If “‘yes:, what factors affect your firm’s decisions about issuing foreign debt?* Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significan| ference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: has your firm seriously considered issuing debt in foreign countries? If “‘yes:, what factors affect your firm’s decisions about issuing foreign debt?* Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significan| ference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: has your firm seriously considered issuing common stock? If “yes”, what factors affect your firm’s decisions about issuing common stock?*
Survey responses to the question: has your firm seriously considered issuing common stock? If “yes”, what factors affect your firm’s decisions about issuing common stock?*
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a signifi difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a signifi difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Fig. 6. Survey evidence on whether firms have optimal or target debt-equity ratios. The survey is based on the responses of 392 CFOs.
Fig. 6. Survey evidence on whether firms have optimal or target debt-equity ratios. The survey is based on the responses of 392 CFOs.
Survey responses to the question: what other factors affect your firm’s debt policy?* *Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significan ifference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: what other factors affect your firm’s debt policy?* *Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significan ifference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: has your firm seriously considered issuing convertible debt? If “yes”, what factors affect your firm’s decisions about issuing convertible debt?* *Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significa difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: has your firm seriously considered issuing convertible debt? If “yes”, what factors affect your firm’s decisions about issuing convertible debt?* *Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significa difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
Survey responses to the question: what factors affect your firm’s choice between short- and long-term debt?’
Survey responses to the question: what factors affect your firm’s choice between short- and long-term debt?’
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
*Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents that answered 3 and 4 (very important). ***, **, * denotes a significant difference at the 1%, 5%, and 10% level, respectively. All table columns are defined in Table 1.
either indicates that executives focus more than they should on earnings dilution (if the standard textbook view is correct), or that the standard textbook treat- ment misses an important aspect of earnings dilution. EPS dilution is a big concern among regulated companies (3.60), even though in many cases the regulatory process ensures that utilities earn their required cost of capital, implying that EPS dilution should not affect share price. Concern about EPS dilution is strong among large (3.12), dividend-paying firms (3.06). EPS dilution is less important when the CEO has an MBA (2.62) than when he or she does not (2.95), perhaps because the executive has read Brealey and Myers! We inquire whether common stock is a firm’s least risky or cheapest source of fee PO, Gy ci fy ec (1 0AQOO\ Qn wewee nr Pe, a e ! a, ee i : ne: Tne... c, a
either indicates that executives focus more than they should on earnings dilution (if the standard textbook view is correct), or that the standard textbook treat- ment misses an important aspect of earnings dilution. EPS dilution is a big concern among regulated companies (3.60), even though in many cases the regulatory process ensures that utilities earn their required cost of capital, implying that EPS dilution should not affect share price. Concern about EPS dilution is strong among large (3.12), dividend-paying firms (3.06). EPS dilution is less important when the CEO has an MBA (2.62) than when he or she does not (2.95), perhaps because the executive has read Brealey and Myers! We inquire whether common stock is a firm’s least risky or cheapest source of fee PO, Gy ci fy ec (1 0AQOO\ Qn wewee nr Pe, a e ! a, ee i : ne: Tne... c, a
UPPaudowy vane 7 aiv Ibd00D et om tilail BELLE Behe MVUe Naot MT fe Billingsley and Smith (1996) also find that convertibles are favored as delayed equity and because management feels that common equity is undervalued. Contrary to our results, Billingsley and Smith find fairly strong evidence that firms are influenced by the convertible use of other firms in their industry. Also in contrast to our results, they find that the most important factor affecting the use of convertibles is the lower cash costs/coupon rate versus straight debt. One difference between our study and theirs is that they request a response relative to
UPPaudowy vane 7 aiv Ibd00D et om tilail BELLE Behe MVUe Naot MT fe Billingsley and Smith (1996) also find that convertibles are favored as delayed equity and because management feels that common equity is undervalued. Contrary to our results, Billingsley and Smith find fairly strong evidence that firms are influenced by the convertible use of other firms in their industry. Also in contrast to our results, they find that the most important factor affecting the use of convertibles is the lower cash costs/coupon rate versus straight debt. One difference between our study and theirs is that they request a response relative to
Related topics:
Financial EconomicsCorporate FinanceCredit RatingCapital BudgetingCost of equity capitalEarnings Per ShareFree Cash Flow
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