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Corporate Capital Budgeting Decisions and Information Sharing


  • We thank Bernard Yeung, Wilbur Chung, Masami Imai, Cristian Dezso, Artyom Durnev, and seminar participants at Wesleyan University, Western Economic Association, Academy of Management, the Financial Management Association, and the International Industrial Organization Conference for helpful comments. We also thank the journal editors and two anonymous reviewers for comments and suggestions. Hornstein thanks the Mellon Foundation for financial support and J.J. Feigenbaum for excellent research assistance. All errors remain our own.


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 dataset 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. We observe 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.

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