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RFS Advance Access originally published online on May 1, 2009
Review of Financial Studies 2009 22(12):4919-4948; doi:10.1093/rfs/hhp030
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Empire-Building or Bridge-Building? Evidence from New CEOs’ Internal Capital Allocation Decisions

Yuhai Xuan
Harvard Business School

Send correspondence to Yuhai Xuan, Harvard Business School, Soldiers Field, Boston, MA 02163; telephone: (617) 495-6538; fax: (617) 496-7357. E-mail: yxuan{at}hbs.edu

JEL Classification: G30, G31


  Abstract

This article 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. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.

I am grateful to Paul Gompers, Jeremy Stein, and Fritz Foley for their continuous support and help with this project. I also thank Malcolm Baker, Efraim Benmelech, Daniel Bergstresser, John Campbell, Tiziana Casciaro, Benjamin Esty, Stuart Gilson, David Scharfstein, Antoinette Schoar, René Stulz, Belén Villalonga, and Luigi Zingales for helpful comments and discussions. This work benefited greatly from seminar participants at the University of Chicago (GSB), Dartmouth College (Tuck), Duke University (Fuqua), Harvard Business School, Harvard Finance Lunch, University of Illinois at Urbana-Champaign (College of Business), Massachusetts Institute of Technology (Sloan), University of Michigan (Ross), New York University (Stern), University of North Carolina at Chapel Hill (Kenan-Flagler), Ohio State University (Fisher), University of Rochester (Simon), University of Texas at Austin (McCombs), and Washington University in St. Louis (Olin). I thank Michael Weisbach (the editor) and an anonymous referee for suggestions that greatly improved the article.


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