“THE THEORY AND PRACTICE OF CORPORATE FINANCE: EVIDENCE FROM THE FIELD"

The document is a summary of a survey conducted by John Graham and Campbell Harvey of
Duke University, focusing on the current practices of corporate finance, particularly in the areas
of capital budgeting and capital structure decisions. The survey received 392 completed
responses from a wide variety of firms, shedding light on the interrelation between corporate
financial choices and managerial factors. The results revealed that most companies follow
academic theory and use discounted cash flow (DCF) and net present value (NPV) techniques
for capital budgeting, while capital structure decisions were influenced by factors such as
financial flexibility, credit ratings, and earnings volatility.
The survey also provided clear evidence that firm size significantly affects the practice of
corporate finance. For example, large companies were much more likely to use net present
value techniques, while small firms tended to rely on the payback criterion. The survey also
highlighted that the capital asset pricing model (CAPM) was the most popular method for
estimating the cost of equity capital, with large companies being significantly more likely to use
CAPM. Additionally, the survey indicated that companies consider factors such as financial
flexibility, credit ratings, and earnings volatility when making debt policy decisions.
The survey also provided insights into the factors influencing the decision to issue convertible
debt, indicating that companies consider factors such as providing a natural hedge to foreign
operations and obtaining favorable foreign tax treatment. Furthermore, the survey revealed
that companies would issue equity to dilute the stock holdings of certain shareholders,
especially among speculative-grade companies. However, there was limited support for the idea
that short-term debt is used to address the underinvestment problem.
The survey results provided a comprehensive understanding of the various factors influencing
corporate financial decisions and shed light on the discrepancies between finance theory and
corporate practice. The findings illustrated how corporate financial decisions are influenced by
factors such as financial flexibility, credit ratings, earnings volatility, and market interest rates,
providing a nuanced understanding of the intricacies of corporate finance practices.
In conclusion, the survey conducted by Graham and Harvey offered valuable insights into the
decision-making processes of CFOs regarding capital budgeting, capital structure, cost of capital
estimation, debt issuance, and underinvestment concerns. The findings highlighted the
discrepancies between finance theory and corporate practice, offering opportunities for
practitioners and academics to reconsider and potentially modify their own practices and
theories.