A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

Abstract

This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals. Abstract This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

What is the role of institutional investors in corporate capital structure decisions? A survey analysis

“…Maximizing the tax deductibility of interest receives the lowest score (2.43). This result is in line with previous survey evidence for Australian corporate treasurers by Faff et al (2016). It is likely driven by the Australian dividend imputation system.…”

“…11 Other surveys in the literature covering capital structure obtain findings similar to those of Graham and Harvey (2001) for other countries than the U.S., e.g. Bancel and Mittoo (2004) and Brounen et al (2004Brounen et al ( ), (2006 for European firms, and Faff et al (2016) for Australian firms. We do not separately refer to these surveys in the remainder of this section.…”

“…The seminal paper of Graham and Harvey (2001), in which they survey CFOs on various corporate finance topics including capital structure, paved the way for the acceptance of questionnaires as a well-respected research instrument in finance. The authors' U.S.-based survey was followed up by survey analyses of European CFOs (e.g., Brounen et al, 2004Brounen et al, , 2006Bancel and Mittoo, 2004) and Australian corporate treasurers (Faff et al, 2016). However, until now, nobody had asked institutional investors what they think about the capital structure decisions of the companies in which they invest or are at least contemplating investing, as well as their impact on these decisions.…”