How do CFOs make capital budgeting and capital structure

decisions?

1. Introduction

A large body of academic research describes the optimal decisions that

corporations should make, given certain assumptions and conditions.
Anecdotal evidence, however, suggests that the way that corporations
actually make decisions is not always consistent with the academic decision
rules. In this paper, we analyze a comprehensive survey that describes the
current practice of corporate finance. This allows us to identify areas where
the theory and practice of corporate finance are consistent and areas where
they are not.

SURVEY METHODOLOGY

Perhaps the most important aspect to survey research is designing a survey

instrument that asks clear and pertinent questions. We took numerous steps
in our attempt to achieve this end. We started by developing, over a periods
of several months, a draft survey. We circulated this draft to a group of
academics and practitioners for feedback. We incorporated their suggestions
and revised the survey. We then sought the advice of marketing research
experts on the survey design and execution. We made changes to the format
of the questions and overall survey design with the goal of minimizing biases
induced by the questionnaire and maximizing the response rate.

CONCLUSION

Our survey of the practice of corporate finance is both reassuring and

puzzling. For example, it is reassuring that NPV is dramatically more
important now as a project evaluation method than, as indicated in past
surveys, it was ten or 20 years ago. In contrast, our analysis of capital
structure yields some puzzling results. We find that informal criteria such as
financial flexibility and credit ratings are the most important debt policy
factors. Other informal criteria such as EPS dilution.