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How Does Influence Activity Affect the Allocation of Firms’ Internal Capital? Evidence from A ustralia
Author(s) -
Mishra Vinod,
Banerjee Rajabrata,
Dey Tania
Publication year - 2014
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12079
Subject(s) - affect (linguistics) , incentive , business , empirical evidence , investment (military) , payment , capital (architecture) , industrial organization , monetary economics , microeconomics , economics , finance , philosophy , linguistics , archaeology , epistemology , politics , political science , law , history
This paper analyses how influence activities in the form of signal jamming affect the capital budgeting process of corporate organisations in A ustralia. Empirical results suggest that investment sensitivity (the relationship between investment in the smallest segment and its past performances) is positive for A ustralian 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 A ustralian 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.