How Does Influence Activity Affect the Allocation of Firms’ Internal Capital? Evidence from Australia

Abstract

This paper analyses how influence activities in the form of signal jamming affect the capital budgeting process of corporate organisations in Australia. Empirical results suggest that investment sensitivity (the relationship between investment in the smallest segment 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 segments, influence activity becomes more severe and headquarters relies more on a public signal. In contrast, with the increase in relatedness across segments, the influence problem increases and headquarters relies more on private information from the manager of the large segment. Evidence suggests that Australian firms provide high short‐term incentive payments to managers of large segments to mitigate the influence activity problems, and thus rely more on managerial recommendations for investing in the smallest segment.