Yuhai Xuan
Business Economics PhD
Dissertation Chair: Profs. J. Stein and
P. Gompers
Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions
A large literature in corporate finance focuses on understanding the internal capital allocation process within conglomerates, yet few empirical studies directly examine the impact of CEO characteristics on investment outcomes inside such firms. This paper investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multidivisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. This pattern of reverse-favoritism is more pronounced if the new CEO has less authority (as proxied by her position prior to the CEO appointment), and if the unaffiliated divisions have more bargaining power (as proxied by their industry relatedness to the affiliated divisions). In addition, I find evidence that having a specialist CEO negatively affects investment efficiency. Taken together, the results suggest that new CEOs are influenced by political concerns in the capital allocation process. New specialist CEOs use the capital budget as a tool to build a bridge to the previously unaffiliated divisions: to create a perception of organizational justice and induce cooperation from powerful divisional managers. (JEL classification: G31)
