8 STERN STEWART JOURNAL OF APPLIED CORPORATE FINANCE
HOW DO CFOS MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?
by John Graham and Campbell Harvey, Duke University*
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 under- standing 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 manage- rial...