This article written by Graham and Harvey reveals a research done through a survey with the intent of addressing the current practice involving finance among corporates. Capital budgeting and structure are some of the main areas which the study focused on. The intent was to find the corporate practice aspects, which occurred consistently with the finance theory and unraveled the ideas which were difficult to reconcile with business school concepts. The research aimed at giving practitioners knowledge, equipping them with the understanding of how other companies operate for the sake of staging a comparison.
The research design, which involved a survey, gave room for understanding the aspects of corporate decision-making. The authors anchored on analyzing the CFO’s responses in revealing the characteristics of the company under study in terms of P/E ratio, size, credit rating, the industry, leverages, and dividend policy, among others. Besides, the aspects of organizational factors and their relationship with corporate financial choices were determined.
The results were varying as follows: for capital budgeting concerns, the majority of the companies showed they mind using a discounted cash flow. Understanding of this mechanism is through academic theory, which reveals the aspects of net present value (NPV) for new project evaluation. On the contrary, the UAE corporates were noted to pay less attention to embracing finance theory, as they relied on informal thumb rules and what was practical for them. Therefore, the primary concern of the CFOs was to learn the application of financial flexibility preservation instead of minimizing the company’s weighted average cost.
The survey revealed the reality of wide utilization of the NPV approach to evaluate projects today more than it was used to approximately 29 years ago. The report shows surprising results explaining the applicability of informal criteria in project assessment to be more flexible for capital structure, while the most critical factors were credit settings in terms of debt policy scenario. The survey explains that some companies became reluctant to the issues of equity at times, but the undervaluing stock degree was significant for impartiality insurance.