A paper titled “Corporate Capital Budgeting Decisions and Information Sharing” by Abigail Hornstein, assistant professor of economics, was published in the Journal of Economics and Management Strategy on Oct. 24.
In the paper, Hornstein explains how firms must overcome agency and information asymmetry problems to make efficient corporate capital budgeting decisions; this is particularly true for firms with multiple units dispersed across geographic locations. Internal communication and coordination may therefore be crucial in reducing information asymmetry and achieving efficient resource allocation. We examine the relationship between corporate capital budgeting decisions and the degree of internal information sharing using a data set of 342 U.S. firms from 1993 to 2002. Information sharing is measured by the internal linkages observed in firms’ research and development activities worldwide. The efficiency of a firm’s capital budgeting decisions is measured by the deviation of the firm’s estimated marginal q from the theoretical tax-adjusted benchmark. Hornstein observes a significant relationship between value-enhancing capital budgeting decisions and stronger internal linkages. Specifically, corporate overinvestment is significantly reduced with better information sharing across units. All results are robust to firm- and industry-level controls.
In addition, Hornstein discussed a paper on financial development and innovation at a recent Financial Management Association conference in Denver, Colo. She also chaired a session on firm value.