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The Theory and Practice of Corporate Finance - Book Report/Review Example

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Evidence from the field' of John R. Graham & Campbell R. Harvey, which was published in the Journal of Financial Economics. The aim of the survey was to find out the current practice of corporate finance. This survey project is a joint effort of the Fuqua School of Business of Duke University with the Financial Executives Institute (FEI)…
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The Theory and Practice of Corporate Finance
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Download file to see previous pages The authors claim that their survey differs from the earlier surveys conducted in no. of dimensions. The scope of the survey was broad. There were more than 100 questions to be answered making it exhaustive in all respect. They claim that their sample is representative of the population. They also claim that they analyzed responses conditional on firm characteristics. They examined the relations between executives' responses with firm size, P/E ratio, leverage, credit rating, dividend policy, type of industry, management and ownership, CEO age, CEO tenure and the education level of the CEOs. By doing this they shed light on the implications of various corporate finance theories related to firm size, risk, investment opportunities, transaction costs, information asymmetry and management incentives. They have also used a wide spectrum of firms chosen from small firms to fortune 500 listed companies. They found that their survey was both reassuring and surprising in nature. For instance, the survey indicates that the size of the firm affects the practice of corporate finance significantly, to evaluate new project most firms use present value technique, company wide discount rates than a project specific discount rates are used for evaluation of their projects by most o the firms.
The goal of the survey: The goal of the survey as stated by the authors are- 'Th...
They also set their goal as 'we also hope that practitioners will learn from our analysis by noting how other firms operate and by identifying areas where academic recommendations have not been fully implemented'.
The scope of survey: The survey was conducted with a broad scope. They have examined capital budgeting, cost of capital and capital structure.
Methodology used: As a first step they had developed a draft survey questionnaire based on review of existing literatures. That draft survey was circulated to a group of prominent academics for feedback. A revised survey was prepared incorporating the suggestions received. Advice was sought from marketing research experts on the survey design and execution. Final changes were made in wording of the questions and incorporating the suggestions received by conducting beta testing at FEI and Duke University. The main aim was to minimize the biases induced by the questionnaire and to maximize the response rate. The survey was for the CFOs, but there were no. of questions about the characteristics of the Chief Executive Officers; it was assumed that CFOs acted as agents of CEOs.
The final version contained 15 questions, most of which had subparts and it was three pages long. It was assumed that some respondents might only fill up first and second pages leaving the third page. To overcome this assumed problem, two versions of the questionnaire were prepared by interchanging the questions 1-4 and 11-14. However it was found that the response rate did not differ much. One section of the questionnaire contained the demographic information about the respondent firms.
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