How Does Influence Activity Affect the Allocation of Firms’ Internal Capital? Evidence from Australia
Date
2014
Authors
Mishra, V.
Banerjee, R.
Dey, T.
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Journal article
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Economic Papers, 2014; 33(3):243-262
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Abstract
This paper analyzes how influence activities in the form of signal jamming affect the capital budgeting process of corporate organizations in Australia. Empirical results suggest that investment sensitivity (the relationship between investment in the smallest division and its past performances) is positive for Australian firms. However, when influence problems within a firm become more severe, mixed evidence is obtained for different measures of influence activity. With an increase in the number of divisions, influence activity becomes more severe and headquarters relies more on a public signal. In contrast, with the increase in relatedness across divisions, the influence problem increases and headquarters relies more on private information from the manager of the large division. Evidence suggests that Australian firms provide high short-term incentive payments to managers of large divisions to mitigate the influence activity problems, and thus rely more on managerial recommendations for investing in the smallest division.
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Copyright [2012] Vinod Mishra, Rajabrata Banerjee, Tania Dey. Not for distribution without permission of author.