Narratives in managers’ corporate finance decisions

Abstract

This article uses the extended case method to explore senior executives' corporate finance decisions. We quantified firm's finance practices using a mail survey, and then -to resolve puzzles in managers' decision processes -conducted faceto-face interviews with chief finance officers of large listed firms. The interviews identified six themes as consistent influences on finance decisions: pressures imposed by clienteles; constraints on resources; risk management; heuristics; real options; and sustainability. We conclude that managers are logical and rational in their decisions, but employ a wider range of criteria than assumed in conventional finance theories.

Heuristics as adaptive decision strategies in management

“…These include, among others, “start small, grow big organically,” “minimize initial investments,” “repeat successes to take full advantage of them,” and “sharing is the way to loyalty and prosperity. Give everyone his due.” Coleman, Maheswaran, and Pinder (), who have worked on narratives for decisions in corporate finance, listed a number of similar verbal heuristics, such as “focus on keeping it simple and understand what are the fundamental things you have got to get right.” Verbal approaches such as these can provide valuable insights into how heuristics are part of everyday managerial decision making. However, these approaches share the problem of producing a large unstructured body of very specific heuristics without stating when and why they perform well.…”

“…Give everyone his due. " Coleman, Maheswaran, and Pinder (2010), who have worked on narratives for decisions in corporate finance, listed a number of similar verbal heuristics, such as "focus on keeping it simple and understand what are the fundamental things you have got to get right." Verbal approaches such as these can provide valuable insights into how heuristics are part of everyday managerial decision making.…”

The Dividend Substitution Hypothesis: Australian Evidence

“…Coleman et al . () use management surveys and interviews to show that Australian CFOs are impacted in their financial decisions by pressure from expectations of different stakeholder groups. AuYong et al .…”

“…In support of this, 54% of respondents in the survey conducted by Coleman et al . () indicated that the level of franking credits available to be paid out to shareholders was considered important in the decision to undertake a buyback.…”

“…In more recent Australian evidence, Coleman et al . () show that managers do consider the ability to distribute imputation tax credits important when setting payout policy. We therefore use the Australian tax environment, where dividends are not as tax‐disadvantaged relative to capital gains, to further investigate the extent to which dividends and repurchases act as substitutes.…”