working paper the practice of corporate finance in an emerging
TRANSCRIPT
Working Paper
The Practice of Corporate Finance in an Emerging Market: Preliminary Evidence from the Brazilian Survey
Abstract: We report preliminary results of the Brazilian administration of the well-known Graham and Harvey (2001) survey. We rigorously translated and validated the questionnaire before administering it over the Internet. We delivered the questionnaire to 1,699 Brazilian private and public firms and received 160 responses for a return rate of 9.4%. We compare the responses of Brazilian CFOs to those of North American CFOs made available by John R. Graham and Campbell R. Harvey. We identify several contrasts in the answers between the two groups of CFOs, and hypothesize that differences in the economic environment such as the role of the legal, institutional, and macroeconomic frameworks might explain the contrasts in financial managers’ decisions. We also suggest directions for further analyses of the data.
Cristiane Benetti Faculdade de Tecnologia SENAC/RS
Roberto Frota Decourt Universidade Federal do Rio Grande do Sul
Paulo Renato Soares Terra* Universidade Federal do Rio Grande do Sul
[email protected] [email protected]
* Corresponding author. Universidade Federal do Rio Grande do Sul
Rua Washington Luís, 855 – Office 321 Porto Alegre – RS – 90010-460 – BRAZIL
Tel: +55 (51) 3316-3536; Fax +55 (51) 3316-3991
Keywords: Survey, Corporate Finance, Emerging Markets, Brazil.
JEL Classification Codes: G31, G32, G34, C42.
Acknowledgements: The authors would like to express their gratitude for the generous contributions provided by Marcos A. A. Balbinotti, Leonildo Bernardon, Dirk Brounen, Newton C. A. da Costa Jr., Abe de Jong, Carlos Alberto Diehl, William Eid Jr., John R. Graham, Campbell R. Harvey, Ricardo Hingel, Gilberto de O. Kloeckner, Kees Koedijk, Werner Kuchenbacker, Ricardo P. C. Leal, Wilson T. Nakamura, Walter L. Ness, Wladimir Omiechuk, Ernani Ott, Sandro Rigo, Antônio Z. Sanvicente, Eduardo Schiehll, Osvaldo B. Schirmer, Rodrigo O. Soares, Fernando C. Zanella, and João Zani. The authors would also like to thank Ms. Melícia S. Ferri, Flávia W. Nestrovski, and Mr. Eduardo L. Matzenbacher for the general research assistance. Any remaining errors are our responsibility.
First Version: January 15th 2007.
2
The Practice of Corporate Finance in an Emerging Market: Preliminary Evidence from the Brazilian Survey
This paper reports preliminary results from the Brazilian administration of the well-
known Duke Special Survey on Corporate Policy (Graham and Harvey, 2001), which
has been previously used in North America and Europe. Our goal is to explore the
practice of finance in an emerging market as a means to shed light on aspects that have
been previously neglected by financial theory. This is of utmost importance given the
need for cross-country comparative studies to better understand the financial decision-
making process in different economic environments.
This study follows a recent wave of field studies in finance (e.g., Graham and
Harvey, 2001; Brounen, de Jong, and Koedijk, 2004; Bancel and Mittoo, 2004; Brav et
al., 2005) that aim at narrowing the gap between academics and practitioners. In
particular, here we focus on a cross-country comparative study. This is of particular
importance given that, in contrast to the literature based on ex-post data, the practice of
finance in emerging markets has been largely ignored in the finance literature.
Emerging markets like Brazil may serve as convenient laboratories for
understanding problems in finance relevant to developed markets as well. Volatile
economic conditions, less liquid capital markets, highly concentrated firm ownership, a
non-negligible share of state-owned firms, inefficient and weak institutions, poor
monitoring practices, financing restrictions, and large amounts of information asymmetry
are among the many distinct features of such markets. Such imperfections exacerbate
issues that are thought to be important for financial decision-making and, as such,
highlight the difficulties that may lie in the financial executive’s path.
Rather than producing yet another survey, we make use of the same
questionnaire previously administered to North American and European financial
executives, in order to allow for direct comparisons across countries. Such comparisons
3
will allow us to infer how the distinct economic environment of emerging markets helps
shape the practice of finance in these countries.
In order to achieve such comparability, it is necessary to ensure that the survey
questions have the same meaning for respondents despite differences in language,
culture, and institutional setting. Graham and Harvey (2001) draw attention to the
potential problems inherent in a survey approach: “Surveys measure beliefs and not
necessarily actions. Survey analysis faces the risk that the respondents are not
representative of the population of firms, or that the survey questions are
misunderstood.” (p.189). It is therefore imperative that the survey researcher takes all
possible steps to minimize individual subjectivity interference in the translation,
administration, and interpretation of the survey. Therefore, in this paper we borrow and
benefit from the vast experience of the field of psychology with the aim of ensuring that
the translated instrument indeed measures the same variables as the original. In
particular, we followed the methods proposed by Vallerand (1989) and Hernández-Nieto
(2002). In this manner, we seek to ensure that the survey instrument has the same
meaning as the one that has been employed in research in North America and Europe.
Survey studies in finance have a long tradition in the literature. Although most
studies focused on the United States (e.g., Lintner, 1956; Gitman and Forrester, 1977;
Gitman and Mercurio, 1982; Stanley and Block, 1984; Epps and Mitchem, 1994; Poterba
and Summers, 1995; Billingsley and Smith, 1996; Bruner, Eades, Harris, and Higgins,
1998; Block, 1999; Graham and Harvey, 2001; Brav, Graham, Harvey, and Michaely,
2005), international surveys have been documented as well. Most studies focused on
the United Kingdom (Sangster, 1993; Pike, 1996; Arnold and Hatzopoulos, 2000;
Dhanani, 2005; Beatty, Goodacre, and Thomson, 2006). Interestingly, cross-country
comparative studies have been relatively rare. Notable exceptions are Bancel and
Mittoo (2004) and Brounen, de Jong, and Koedijk (2004). To the best of our knowledge,
4
no financial survey focusing on emerging markets’ firms in general and in Latin America
in particular has been published in English so far.
The topics usually investigated in the finance survey literature are concentrated in
capital budgeting decisions, cost of capital calculation, dividend policy, and capital
structure decisions. A couple of studies implemented comprehensive financial policy
surveys, the best-known being Graham and Harvey (2001) and Brounen, de Jong, and
Koedijk (2004).
In Brazil, the literature records a few survey studies in finance. Fensterseifer,
Galesne, and Ziegelmann (1987) investigate the capital budgeting techniques of 153
Brazilian firms. Saul and Fensterseifer (1992) update the previous paper by also
studying the cost of capital and the sensitivity of investment to the short term business
cycle in 132 firms. Eid (1996) surveys 161 firms regarding their capital structure
decisions. Finally, Saul (1999) implements the most comprehensive finance survey in
Brazil by updating all the previous surveys, studying issues of capital budgeting, cost of
capital, and capital structure decisions of more than 150 Brazilian CFOs. Table 1
summarizes some of the main surveys in finance.
INSERT TABLE 1 ABOUT HERE
This paper contributes to the literature in several ways. First, it explores the field
study method in finance, which to date remains a relatively rare approach in this
discipline. Second, it focuses on an emerging market context, which is even rarer in this
field. Third, it borrows from the vast experience of psychology research in the rigorous
translation and validation of survey instruments; something that, to the best of our
knowledge, has never been attempted before in finance. Finally, by employing exactly
the same questionnaire used in previous research in North America and Europe, this
study highlights the similarities and differences between emerging and developed
markets.
5
The remainder of the paper is presented in three parts. The first section details
the research method and procedures used. The second section presents and discusses
the results. The last section concludes the paper and indicates further analyses to be
conducted in future research.
1. RESEARCH DESIGN: TRANSLATION, VALIDATION, AND
ADMINISTRATION OF A FOREIGN LANGUAGE SURVEY IN BRAZIL
This section presents the questionnaire’s translation and validation procedures,
the sampling and data collection procedures, the descriptive statistics of the sample
firms, and compares them to those in the sample of Graham and Harvey (2001).
1.1. Translation and Validation Procedures1
The first step taken to translate the Duke Special Survey on Corporate Policy
from the original English into Portuguese was to obtain the permission of the authors of
the North American (Graham and Harvey, 2001) and European (Brounen, de Jong, and
Koedijk, 2004) studies. We then chose to administer the extended European version in
Brazil because it includes two additional questions on corporate governance.2
The translation procedures employed are similar to those used by Vallerand
(1989) in his research. According to this author, the cross-cultural use of questionnaires
incorporates important methodological aspects of research and the translation of
instruments must be carried out in a systematic manner. It must be taken into account
that the instrument will be administered in a different setting, which includes differences
1 A detailed description of the translation and validation procedures is laid out in a research note available from the authors. We are thankful to the research guidance provided by Dr. Marcos A. A. Balbinotti. 2 In this paper, however, we report only those questions that can be compared to the results obtained in North America by John Graham and Campbell Harvey, available at http://faculty.fuqua.duke.edu/~charvey/Research/GHSurvey/GH_JFE2001.XLS
6
in language, values, culture, customs, and social context. We validate the original
instrument in the alternative language (in this case, Portuguese) in the population of
interest (in this case, Brazilian), according to its metric properties.
In this study we use the technique called backtranslation. This technique relies on
multiple translators working individually and an independent committee that evaluates
their work. The original English version was independently translated into Portuguese by
two bilingual finance academics residing in Brazil. These two translated versions were
then combined into a single translated version that was sent to three other bilingual
finance faculty who backtranslated the instrument into English. One of the
backtranslators is a native English speaker and resident of Brazil while the other two are
native Brazilians residing in English-speaking countries. All of them hold doctoral
degrees from English-speaking universities.3 It is imperative that the backtranslators do
not have access to the original instrument or even knowledge of it. If the backtranslated
version is similar to the original version in wording and meaning, then the translation
process has been successful. If differences exist between the backtranslated version
and the original, the committee must provide changes in the translated version or even
require new translations of the same instrument for comparison and consolidation into a
new version. Given the systematic procedure and controls involved, this technique
assures that individual biases are removed from the translated version.
In this study, an independent committee of three people evaluated the three
backtranslated versions against the original version of the instrument, and made
adjustments to the Portuguese translation where they thought necessary. The
3 We have relied mostly on academics throughout this research. We aggressively tried to obtain the cooperation of financial executives in the implementation of this research, but we were not as successful as we would have liked. One reason is that academics are more likely to comprehend the importance of academic research. We realize that this may induce a bias in the analyses that follow. In order to minimize this bias, we engaged several academics whose previous professional experience included executive and consulting positions.
7
committee consisted of two finance faculty members (one of whom has extensive
executive experience) and a finance graduate student. One of the original translators
stood by in order to clarify any questions of the committee. All perceived differences in
wording and meaning were discussed by the committee, which then suggested
modifications in the Portuguese version of the questionnaire. A sample page of the final
version of the questionnaire is provided in Appendix I.
Content validity is subjective and non-quantitative in the strictest sense of the
term and verifies whether the instrument indeed measures the content it sets out to
measure (Vallerand, 1989). With the objective of making the instrument as clear as
possible, we choose to evaluate content validity of the instrument by employing a panel
of 5 judges.4 Instructions to the judges included a five point Likert scale5 for rating clarity
of language and practical pertinence and a coded letter system (A, B, C, and D) for
classifying the four theoretical dimensions of each question. The questionnaire also
allowed the judges to provide additional comments on any specific question. The judges
consisted of three academics and two Chief Financial Officers (CFOs), none of whom
had participated in the previous parts of the process. The selection criteria for these
judges were experience in academic or executive positions, and diversity in terms of
educational background and industry experience.
In order to evaluate the content validity of clarity of language and practical
pertinence, we employed the Content Validity Coefficient (CVC) proposed by
Hernández-Nieto (2002). This coefficient measures the degree of concordance among
the judges regarding each question, as well as for the survey instrument as a whole.
4 Despite our preference for a panel of judges, we also pre-tested the questionnaire on a small sample of finance MBA students along the lines of Graham and Harvey (2001) and Brounen, de Jong, and Koedijk (2004). The results are qualitatively similar to those obtained from the panel of judges. 5 A scale commonly used in psychometric questionnaires, the Likert (1932) scale measures the respondent’s degree of agreement with a given statement. The relationship between the elements of the scale is ordinal and not necessarily cardinal. Traditionally, a five point scale is the most widely used in survey research, although seven and nine point scales are also found in the literature.
8
This coefficient also evaluates the validity of content that is lacking in other methods
such as Cohen’s Kappa.6 Hernández-Nieto (2002) recommends a minimum of three and
a maximum of five judges, and use of a five point Likert scale.7 If a given question is
deemed unsatisfactory in terms of clarity of language, it must be adjusted before the
questionnaire is administered to the population. If a given question is deemed
unsatisfactory in terms of practical pertinence, it must be disregarded in the analysis of
the results of the survey. Considering such technique, the content validity of the
translated version of the Duke Special Survey on Corporate Policy for use in Brazil is
generally satisfactory.
1.2. Sampling and Data Collection Procedures
The target population was comprised of 1,699 firms. Of these firms, 256 are
public corporations from the São Paulo Stock Exchange (Bovespa) directory and the
remaining 1,443 are private firms from the SEBRAE8 directory in the states of São Paulo
(704 firms) and Rio Grande do Sul (739 firms). Only private firms classified as “medium”
and “large” in the SEBRAE directory were selected.
First, each firm received an email directed to its Chief Financial Officer (CFO) or
equivalent explaining the purposes of the survey and the link to the website. Next, the
CFO was contacted by telephone as a follow-up. Following Klassen and Jacobs (2001),
several ways to answer the questionnaire were offered to the CFOs: by post, by fax, by
6 Cohen's Kappa is a statistical measure of reliability between two judges that takes into account the agreement occurring by chance (Cohen, 1960). A multiple judge agreement measure is Fleiss's Kappa (Fleiss, 1971). 7 While the CVC indicates the equivalence of content, it does not provide the metric properties of the translated version (Vallerand, 1989, Hernández-Nieto, 2002). The metric properties of a survey concerns characteristics such as its validity, reliability, and consistency. 8 SEBRAE is a para-governamental organization funded by firm contributions that has the objective to promote the development of small businesses in Brazil. It operates a number of educational, research, and consulting programs directed towards such businesses and their entrepreneurs and managers.
9
email, and by a website constructed specifically to that end.9 The usual confidentiality
assurances were given in writing to all participants. CFOs were invited to participate in
two successive waves. The first one started in July 15th 2005 and the second one
started in August 15th 2005. The data collection was concluded in September 30th 2005.
In total, 160 questionnaires returned (9.4% return rate). This return rate is similar
to those of previous surveys: 392 firms for a 9% return rate (Graham and Harvey, 2001),
313 firms for a 5% return rate (Brounen, de Jong, and Koedijk, 2004), and 87 firms for a
12% return rate (Bancel and Mittoo, 2004). More than 80% of the questionnaires
received were filled out through the website, while only one questionnaire (0.6%) was
returned by e-mail, in line with the conclusions of the experiment of Dommeyer and
Moriarty (2000). The detailed breakdown of the returned questionnaires is presented in
Table 2.
INSERT TABLE 2 ABOUT HERE
The website alternated the order of the questions for each new respondent as a
way to avoid that the questions in the beginning of the questionnaire were more likely to
be answered. We find no evidence that some questions have been answered more
frequently than others for reason of the ordering. We also test for non-response bias
alongside the lines of Graham and Harvey (2001). We test whether the mean responses
of the firms in the first wave (i.e. those that answered our first invitation) differ from those
in the second wave (i.e. those firms that had to be contacted twice before answering the
survey). There are statistically significant differences in only 6 (9) out of 88 questions at
the 5% (10%) level. We conclude that non-response bias is likely small and therefore
should not affect the results reported here.
9 http://www.unisinos.br/pesquisa/survey2005
10
1.3. Firm and CEO Characteristics
As expected, the sample of firms from Brazil presents sharp differences to those
surveyed by Graham and Harvey. Brazilian firms are smaller and less internationalized.
For instance, only 1.4% of the Brazilian firms in the sample declare sales revenues
above US$ 1 billion, whereas 42.5% of the companies in Graham and Harvey (2001)
sample cross that threshold. A bigger share of the Brazilian firms is closely held,
regulates utilities, and presents larger share of managerial ownership, perhaps an
indication of a less developed capital market in Brazil. Also, Brazilian CEOs are on
average younger than North American ones. Summary statistics for both samples are
presented in Table 3.
INSERT TABLE 3 ABOUT HERE
On the other hand, the distribution of firms across industries is very much similar
between the Brazilian and the North American samples, both presenting a majority of
manufacturing firms. Also, Brazilian companies pay dividends just as often as their North
American counterparts. Brazilian CEOs are as educated on average as North American
ones, although some of them do not have an undergraduate degree (14.3%) and none
hold a non-MBA masters degree. Finally, although Brazilian CEOs have slightly more
years in the current job on average, the difference is not statistically significant from the
North American chief executives. Figure 1 presents these results in more visual detail.
INSERT FIGURE 1 ABOUT HERE
3. SURVEY RESULTS: A COMPARATIVE STUDY ON THE PRACTICE OF
FINANCE IN NORTH AMERICA AND IN BRAZIL
This section presents and discusses the main findings from the Brazilian survey,
and compares its results to those reported by Graham and Harvey (2001). The
11
discussion is structured in two topics: capital budgeting and cost of capital decisions,
and capital structure and debt policy decisions.
3.1. Capital Budgeting and Cost of Capital
The questionnaire devotes 5 questions to the issues of capital budgeting and cost
of capital. The results for this group of questions are presented in Tables 4 and 5. Also,
Figures 2 and 3 display the information visually. Regarding the techniques employed in
investment decisions, North American CFOs use relatively more often the traditional
Internal Rate of Return (IRR) and the Net Present Value (NPV) criteria, while Brazilian
CFOs favor accounting-based criteria such as the accounting rate of return and the
profitability index, as well as the discounted payback period. This finding might be an
indication that in less developed capital markets, where there is less liquidity and less
active secondary markets, accounting becomes a more important source of information
for valuation decisions. Curiously, Brazilian CFOs also claim to make relatively more
frequent use of less common techniques as the Value at Risk (VaR) and the Adjusted
Present Value (APV) than their North American colleagues, which may be interpreted as
a consequence of a more instable economic environment.
INSERT TABLE 4 ABOUT HERE
Regarding the use of different discount rates for overseas valuation, Brazilian
CFOs claim that they use divisional and multiple discount rates relatively more often
than North American CFOs. Considering that Brazilian firms are less internationalized in
terms of sources of revenues than American ones, these results should be taken with
care.
INSERT FIGURE 2 ABOUT HERE
12
The traditional one factor Capital Assets Pricing Model (CAPM) is relatively less
employed in Brazil than in North America. In Brazil, multi-factor CAPM are chosen
relatively more often by CFOs than in North America. Also, Brazilian CFOs claim to
listen more often to their investors and observe regulatory decisions in order to set their
cost of equity capital. This finding is consistent given that a substantial proportion of the
firms in the Brazilian sample is made up of private firms and regulated utilities.
Along the same lines, Brazilian firms have significantly smaller Price/Earnings
ratios than North American companies, also an indication of more mature industrial
sectors such as utilities.
INSERT TABLE 5 ABOUT HERE
Table 5 presents the results for the adjustment of discount rates and/or cash
flows to a set of risk factors. In Brazil, firms claim that they adjust both the discount rate
and the cash flows to a number of risk factors related to monetary policy (unexpected
inflation, interest rate, term structure, and foreign exchange). This is perhaps an
indication of the memory left by hyperinflationary and volatile periods in Brazil’s recent
economic history. Also interesting, there is statistically significant evidence that North
American CFOs adjust relatively less often the components of investment projects than
Brazilian ones for all risk factors.
INSERT FIGURE 3 ABOUT HERE
3.2. Capital Structure and Debt Policy
The questionnaire dedicates substantial attention to capital structure and debt
policy decisions. Indeed, it contains 9 out of 15 questions devoted to these subjects. In
order to present and discuss the results of these questions, we grouped them quite
13
arbitrarily in capital structure decisions (questions 8, 9, and 10) and debt policy
decisions (questions 5, 7, 11, 12, 13, and 14).
The three capital structure questions are “yes/no” questions regarding the CFO
plans to issue foreign debt, convertible debt, and common stock, followed up by the
factors that affect such decisions. It is remarkable how we obtained few answers from
Brazilian firms regarding those three decisions (around 28, 11 and 14 answers for each
question, respectively). This is possibly the result of our sample containing smaller,
closely held firms in contrast to the bigger, public corporations of Graham and Harvey
(2001). It may also be a consequence of a less developed capital market, where the
firms rely more heavily in banking credit for financing. Foreign debt, convertible debt,
and common stock are financing instruments used only by a minority among the biggest
firms in the country. Table 6 presents these results.
INSERT TABLE 6 ABOUT HERE
Among the factors that CFOs take into account when deciding on foreign debt
issues, North American firms are relatively more concerned with foreign exchange risk
(natural hedge and assets-liabilities matching) and tax treatment, while Brazilian CFOs
express their concerns with the cost of domestic debt relative to foreign debt. This
finding again is readily traceable to the high level of real interest rates practiced in Brazil
since the adoption of inflation targeting by the central bank in 1999 and the commitment
of the government to generate primary fiscal surpluses. The less competitive financial
system is also often suggested as a reason for the high cost of the domestic debt. The
three panels of Figure 4 display such results visually.
INSERT FIGURE 4 ABOUT HERE
Convertible debt is also a minor concern of the typical Brazilian CFO. Of those
that do think about issuing it, cost considerations are the main concern. Interestingly,
14
transaction costs also figure as the most important factor for the North American CFO,
who use convertibles especially as a means of issuing common stock cheaply. The
industry effect is significant for Brazilian firms, which claim that successful experiences
of other firms in the sector are an important factor in their own decision. Finally, risk
considerations and the attraction of outside investors is relatively more important for
North American than for Brazilian firms.
In terms of common stock offerings, North American firms are significantly more
concerned with corporate governance issues (earnings and holdings dilution, stock price
under/overvaluation and momentum, executive incentive plans, and debt-to-equity
targets) than Brazilian ones. In our interpretation, this is due to two reasons: (1) the
relative underdevelopment of the Brazilian stock market (high transaction costs, low
liquidity, concentrated trading) and (2) the shortcomings of the investor protection laws
and regulations, which make corporate governance concerns less stringent in Brazil
than in the U.S., for instance. It is worth noting that the most often cited factor in the
decision to issue common stock in the point of view of the Brazilian CFO is that they
consider it to be the cheapest source of funds available. Such belief is so plainly against
the prescriptions of financial theory and indicates that the CFOs are unaware of the real
costs involved in using equity financing. Of course, such findings raise concerns about
the way Brazilian firms calculate their cost of capital and how they choose among
investment opportunities. On the other hand, since the absolute number of answers to
this question is small, we cannot draw definite conclusions regarding these issues.
Debt policy is explored in a number of questions addressing debt maturity, the
rating of the firm’s debt, the strictness of target debt ratios, and the factors that affect the
amount of debt bore by the firm. The results are presented in Table 7.
INSERT TABLE 7 ABOUT HERE
15
North American CFOs list assets-liabilities maturity matching, refinancing risk,
relative cost of short versus long term debt, and market timing as relatively more
important factors for their debt maturity decisions. Brazilian CFOs are more concerned
with credit rating and risk taking mitigation instead. It is also important to notice that the
availability of long term debt financing in Brazil is restricted. As mentioned above, capital
markets instruments are extensively used only by a handful of large corporations and
the majority of private firms rely mostly on bank credit to finance their operations. Bank
credit is usually of shorter maturity than capital market instruments,10 so perhaps the
answers reflect this environment. Figure 5 presents the results for debt policy.
INSERT FIGURE 5 ABOUT HERE
Credit rating is a privilege of only 31.7% of the Brazilian respondents, in contrast
to 52.6% of the North American sample. This reflects the fact that the Brazilian sample
comprises smaller, private firms, to whom credit rating does not seem a top priority.
In terms of target debt ratios, North American firms set targets slightly more
strictly than their counterparts in Brazil, where more than 68% of the firms claim to have
no or loose target ratios. A visual representation of this result is presented in Figure 6.
INSERT FIGURE 6 ABOUT HERE
CFOs differ in the factors that determine the amount of debt of the firm. In the
perspective of the North American CFOs, personal tax rates and credit rating are
relatively more important, while for Brazilian CFOs concerns such as financial flexibility,
executive incentives, credibility in the goods, labor, and financial markets, and the
distribution of firm income among debtholders and stockholders are seen as more
10 There is an exception though. BNDES, a state-owned bank, finances industrial projects from Brazilian and foreign firms willing to invest in the country. This bank offers long term financing at subsidized cost, sometimes lower than short term credit instruments, which biases the term structure of interest rates as they are perceived by CFOs. Of course, the bank’s resources are limited and it cannot provide credit in the volume demanded by the private sector.
16
important. Interestingly, Brazilian CFOs are relatively more concerned with being an
unattractive takeover target than North American ones. This is puzzling given that
Brazilian firms are more closely held than North American ones,11 and that the
percentage of managerial ownership is larger in Brazil than in North America.
Among other factors that affect the debt policy of the firm, North American CFOs
declare their concerns with market timing (level of interest rates and stock prices), while
Brazilian ones are once more concerned with transaction costs, again an indication of a
less developed capital market. A larger share of Brazilian CFOs affirm that they issue
debt when they accumulated enough earnings, which contrasts with the usual view that
financial restrictions are binding in emerging markets.
Finally, the long term debt-to-assets ratio is not significantly different between the
two samples, although North American firms are on average more levered than Brazilian
ones, a finding also related to the availability of long term financing in a more
sophisticated capital market.
3.3. Summary
In sum, there are several issues in which North American and Brazilian CFOs
share opposite points of view and some in which they agree. In order to make sense of
the results and provide a useful synthesis, we arranged the main findings in Table 8.
INSERT TABLE 8 ABOUT HERE
In our point of view, differences in the responses of North American and Brazilian
CFOs can be traced back to the institutional characteristics of the economic
environment in which their firms operate. Capital restrictions, illiquid and concentrated
capital markets, poor corporate governance regulation, less competitive financial
11 Even most public corporations in Brazil have a well-defined controlling shareholder.
17
markets, and more restrictive fiscal and monetary policies may explain the differences in
opinions between the two samples. This is an interesting hypothesis that we raise, which
remains to be tested in a future study.
4. CONCLUDING REMARKS
This study presents preliminary evidence on the practice of finance in an
emerging market. After rigorously translating and validating the survey instrument, we
administered it to 1,699 Brazilian firms in two waves. We received 160 responses (9.4%
return rate) which we compare to the sample gathered by Graham and Harvey (2001).
Brazilian firms are smaller, less internationalized, more closely held, and operate more
in the utilities sector than North American firms, and Brazilian CFOs are younger than
North American ones. Regarding financial policies, several contrasts are documented
between the two groups of CFOs. A preliminary analysis of the results raises the
hypothesis that differences in the practice of finance emerge from the institutional
environment specific to Brazil.
Field research in corporate finance enables a better understanding of the
decision-making process of financial managers. Cross-cultural field research such as
this one may help highlight the role of the legal, institutional, and macroeconomic
frameworks in the financial manager’s decisions. Therefore, cross-country comparative
field studies are a promising path for the furthering of financial theory.
Of course, the analyses presented in this study are only preliminary. More in
depth analyses are forthcoming. For instance, in this study we concentrated on
unconditional answers. It is important to verify whether the conclusions presented here
hold for answers conditional on firm and CEO characteristics such as size,
18
Price/Earnings ratio, leverage, industry, rating, CEO age, tenure and education, and
others. These shall be our next steps.
Disclaimer
This paper is a work in progress and it is being updated on a regular basis.
Before citing any of its findings, please contact the authors for the more current version
available.
19
REFERENCES
1. ARNOLD, G. C. and HATZOPOULOS, P. D. (2000). “The Theory-Practice Gap in
Capital Budgeting: Evidence from the United Kingdom”, Journal of Business
Finance & Accounting 25, pp.603-626.
2. BANCEL, F. and MITTOO, U. R. (2004). “Cross-Country Determinants of Capital
Structure Choice: a Survey of European Firms”. Financial Management 33:
pp.103-132.
3. BEATTIE, V., GOODACRE, A., and THOMSON, S. J. (2006). “Corporate
Financing Decisions: UK Survey Evidence”, Journal of Business Finance &
Accounting 33, pp.1402-1434.
4. BIERMAN, H. J. (1993). “Capital Budgeting in 1992: A Survey”. Financial
Management 22, p.1-24.
5. BLOCK, S. B. (1999). “A Study of Financial Analysts: Practice and Theory”.
Financial Analysts Journal 55, n. 4, jul-ago, 1999, pp.86-95.
6. BRAV, A., GRAHAM, J. R., HARVEY, C. R., and MICHAELY, R. (2005). “Payout
Policy in the 21st Century”. Journal of Financial Economics 77: pp.483-527.
7. BROUNEN, D., de JONG, A. and KOEDIJK, K. (2004). “Corporate Finance in
Europe: Confronting Theory with Practice”. Financial Management 34: pp.71-
101.
8. BRUNER, R. F., EADES, K. M., HARRIS, Robert S., and HIGGINS, Robert C.
(1998). “Best Practices in Estimating the Cost of Capital: Survey and
Synthesis”, Financial Management 27, pp.13-28.
20
9. COHEN, J. (1960). “A Coefficient of Agreement for Nominal Scales”. Educational
and Psychological Measurement 20: pp.37-46.
10. DHANANI, A. (2005). “Corporate Dividend Policy: The Views of British Financial
Managers”, Journal of Business Finance & Accounting 32, pp.1625-1671.
11. DOMMEYER, C. J. and MORIARTY, E. (2000). “Comparing Two Forms of an E-
Mail Survey: Embedded vs. Attached”. International Journal of Market
Research 42, pp.39-50.
12. EID Jr, W. (1996). “Custo e Estrutura de Capital: O Comportamento das Empresas
Brasileiras”. RAE Revista de Administração de Empresas 36, n. 4, pp.51-59.
13. EPPS, R. W. and MITCHEM, C. E. (1994) “A Comparison of Capital Budgeting
Techniques Used in the United States with Those Used in Japan and Korea”.
Advances in International Accounting 7, pp.205-214.
14. FENSTERSEIFER, J. E., GALESNE, A., and ZIEGELMANN, J. (1987). “A
Utilização de Técnicas Analíticas nas Decisões de Investimento de Capital das
Grandes Empresas no Brasil”. Revista de Administração 22, n. 4, pp.70-78.
15. FLEISS, J. L. (1971). “Measuring Nominal Scale Agreement among Many Raters”.
Psychological Bulletin 76: pp.378-382.
16. GITMAN, L. J. and FORRESTER Jr., J. R. (1977). “A Survey of Capital Budgeting
Techniques Used by Major U.S. Firms”. Financial Management 6, pp.66-71.
17. GITMAN, L. J. and MERCURIO, V. (1982). “Cost of Capital Techniques Used by
Major U.S. Firms: Survey and Analysis of Fortune’s 1000”. Financial
Management 14, pp.21-29.
21
18. GRAHAM, J. R. and HARVEY, C. R. (2001). “The Theory and Practice of
Corporate Finance: Evidence from the Field”. Journal of Financial Economics
60: pp.187-243.
19. HERNÁNDEZ-NIETO, R. A. (2002). Contributions to Statistical Analysis.
Universidad de Los Andes, Mérida, Venezuela.
20. KLASSEN, R. D. and JACOBS, J. (2001). “Experimental Comparison of Web,
Electronic and Mail Survey Technologies in Operations Management”. Journal
of Operations Management 19: pp.713-728.
21. LIKERT, R. (1932). “A Technique for the Measurement of Attitudes”. Archives of
Psychology 140, New York: Johnson Associates, pp.1-55.
22. LINTNER, J. (1956). “Distribution of Incomes of Corporations among Dividends,
Retained Earnings, and Taxes”. American Economic Review 46, n. 2, pp.97-
113.
23. PIKE, R. (1996). “A Longitudinal Survey on Capital Budgeting Practices”, Journal
of Business Finance & Accounting 23, pp.79-92.
24. POTERBA, J. M. and SUMMERS, L. H. (1995). “A CEO Survey of U.S.
Companies’ Time Horizons and Hurdle Rates”. Sloan Management Review 37,
n.1, pp.43-53.
25. SANGSTER, A. (1993). “Capital Investment Appraisal Techniques: a Survey of
Current Usage”. Journal of Business Finance & Accounting 20, n. 3, pp.307-
332.
26. SAUL, N. and FENSTERSEIFER, J. E. (1992). “Critérios de Avaliação e Seleção
de Investimentos de Capital nas Grandes Empresas Brasileiras: o ‘Timing’ dos
22
Projetos e o Desempenho dos Investimentos”. XVI ENANPAD, vol. 2, Canela,
September, Annals... pp.25-38.
27. SAUL, N. (1999). “Critérios de Decisão e Avaliação de Investimento nas Grandes
Empresas do Brasil”. XIII Congreso Latinoamericano de Estrategia SLADE,
Buenos Aires, May. Annals... 16p.
28. STANLEY, M. T. and BLOCK, S. B. (1984). “A Survey of Multinational Capital
Budgeting”. The Financial Review 19. pp.36-54.
29. VALLERAND, R. J. (1989). “Vers une Méthodologie de Validation Trans-Culturelle
de Questionnaires Psychologiques: Implications pour la Recherche en Langue
Française”. Psychologie Canadienne 30: pp.662-680.
23
TABLE 1: Summary of Finance Survey Studies in the Literature
Authors Firms Return Country(ies) Topics Covered
Lintner (1956) 28 4.7% United States Dividend Policy
Gitman and Forrester (1977) 103 38.4% United States Capital Budgeting
Gitman and Mercurio (1982) 87 25.7% United States Cost of Capital
Stanley and Block (1984) 121 35.7% United States Capital Budgeting
Fensterseifer, Galesne, Ziegelmann (1987) 153 32.2% Brazil Capital Budgeting
Saul and Fensterseifer (1992) 132 23.3% Brazil Capital Budgeting
Cost of Capital
Sangster (1993) 94 19.15% United Kingdom Capital Budgeting
Epps and Mitchem (1994) 111 27.8% United States Capital Budgeting
Cost of Capital
Poterba and Summers (1995) 160 16% United States Capital Budgeting
Capital Structure
Billingsley and Smith (1996) 88 36.2% United States Cost of Capital
Eid (1996) 161 14.3% Brazil Capital Budgeting
Capital Structure
Pike (1996) 99 78.1% United Kingdom Capital Budgeting
Bruner, Eades, Harris, and Higgins (1998) 135 32% United States Cost of Capital
Block (1999) 297 33.75% United States Capital Budgeting
Cost of Capital
Saul (1999) 150 N/A Brazil
Capital Budgeting
Cost of Capital
Capital Structure
Arnold and Hatzopoulos (2000) 149 49% United Kingdom Capital Budgeting
Graham and Harvey (2001) 392 9% United States
Canada
Capital Budgeting
Cost of Capital
Capital Structure
Bancel and Mittoo (2004) 87 12%
European Union
Norway
Switzerland
Capital Structure
Brounen, de Jong, and Koedijk (2004) 313 5%
France
Germany
Netherlands
United Kingdom
Capital Budgeting
Cost of Capital
Capital Structure
Corporate Governance
Brav, Graham, Harvey, and Michaely (2005) 384 16% United States Dividend Policy
Dhanani (2005) 164 16.4% United Kingdom Dividend Policy
Beatty, Goodacre, and Thomson (2006) 192 23% United Kingdom Capital Structure
24
TABLE 2: Questionnaire Return Breakdown.
Media Firms
Contacted
First Wave
July 15th
2005
Second Wave
August 15th
2005 Total
Return
Rate
E-mail 0 0.0% 1 0.6% 1 0.6%
Website 80 50.0% 53 33.1% 133 83.1%
Fax 3 1.9% 2 1.3% 5 3.1%
Post 8 5.0% 13 8.1% 21 13.1%
Total 1,699 91 56.9% 69 43.1% 160 100.0% 9.42%
TABLE 3: Firm and CEO Characteristics in North America and in Brazil.
N Mean % N Mean % Z
a. Sales revenue 378 3.79 74.3% 71 2.56 56.3% 3.346 0.001 ***
b. Foreign sales 374 2.08 71.1% 69 1.87 55.1% 2.856 0.004 ***
c. Industry 351 3.81 84.9% 68 3.65 80.9% 0.845 0.398
d. Public or Private 373 1.36 63.8% 70 1.51 48.6% 2.616 0.009 ***
e. Pay Dividends? 371 1.46 53.9% 70 1.37 62.9% -1.308 0.191
f. Regulated Utility? 348 1.94 93.7% 70 1.40 38.6% 12.316 0.000 ***
g. If all options were exercised, what
percent of common stock would be
owned by the top three officers?
318 1.91 26.7% 54 2.54 51.9% -2.912 0.004 ***
h. CEO education 354 1.95 21.8% 21 1.43 14.3% 0.976 0.330
i. Age of CEO 368 2.93 73.1% 68 2.65 57.4% 2.821 0.005 ***
j. CEO tenure (time in current job) 366 1.98 36.1% 68 2.15 44.1% -1.175 0.241
BRAZILNORTH AMERICA
P-ValueFirm and CEO Characteristics
DIFFERENCE
The table presents summary statistics from the North American (Graham and Harvey, 2001) and Brazilian surveys. Source data for the North American survey is obtained from http://faculty.fuqua.duke.edu/~charvey/Research/GHSurvey/GH_JFE2001.XLS. N is the number of valid responses for each question; Mean is the average score for each question (0-4 for Likert scale questions, 0-1 for “yes/no” questions; % is the percentage of scores above 2 for Likert Scale questions (“Always” and “Almost Always”/”Important” and “Very Important”) and the percentage of “yes” in the “yes/no” questions; Z is the statistic for the difference of proportions between the North American and the Brazilian samples; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
25
TABLE 4: Capital Budgeting and Cost of Capital.
N Mean % N Mean % Z
1. How frequently does your firm use the following techniques when
deciding which projects or acquisitions to pursue?
b. Internal Rate of Return (IRR) 369 3.09 75.6% 93 2.60 60.2% 3.146 0.002 ***
a. Net Present Value (NPV) 367 3.08 74.9% 94 2.71 62.8% 2.466 0.014 **
c. Hurdle Rate 360 2.48 56.9% 91 2.16 48.4% 1.542 0.124
f. Payback Period 356 2.53 56.7% 86 2.45 53.5% 0.555 0.579
j. Sensitivity analysis (e.g.: “good” vs. “fair” vs. “bad”) 357 2.31 51.5% 88 2.33 48.9% 0.457 0.648
d. Earnings multiple approach 352 1.89 38.9% 87 1.78 36.8% 0.373 0.709
g. Discounted payback period 343 1.56 29.4% 85 2.06 42.4% -2.038 0.042 **
l. We incorporate the “real options” of a project when evaluating it 331 1.47 26.6% 81 1.26 18.5% 1.670 0.096 *
i. Accounting Rate of Return (or Book rate of return on assets) 345 1.34 20.3% 83 2.06 41.0% -3.160 0.002 ***
k. Value at risk (VaR) or other simulation analysis 344 0.95 13.7% 82 1.67 31.7% -3.003 0.003 ***
h. Profitability index 337 0.83 11.9% 82 1.89 41.5% -4.334 0.000 ***
e. Adjusted Present Value (APV) 334 0.85 10.8% 83 1.77 33.7% -3.704 0.000 ***
2. How frequently would your company use the following discount rates
when evaluating a new project in an overseas market? To evaluate this
project we would use...
a. The discount rate for our entire company 313 2.50 58.8% 86 2.63 61.6% -0.469 0.639
d. A risk-matched discount rate for this particular project (considering both
country and industry) 316 2.09 50.9% 81 2.52 54.3% -0.531 0.595
b. The discount rate for the overseas market (country discount rate) 310 1.65 34.5% 78 1.83 39.7% -0.826 0.409
c. A divisional discount rate (if the project line of business matches a domestic
division) 301 0.95 15.6% 79 1.72 35.4% -3.089 0.002 ***
e. A different discount rate for each component cashflow that has a different risk
characteristic (e.g.: depreciation vs. operating cash flows) 304 0.66 9.9% 80 1.50 28.8% -3.205 0.001 ***
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
Source data and columns defined as in Table 3; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
26
TABLE 4: Capital Budgeting and Cost of Capital (Continued).
N Mean % N Mean % Z
3. Does your firm estimate the cost of equity capital? If “yes”, how do you
determine your firm’s cost of equity capital?359 0.65 64.6% 86 0.57 57.0% 1.369 0.172
b. Using the Capital Asset Pricing Model (CAPM, the beta approach) 232 2.81 71.1% 46 1.78 37.0% 5.239 0.000 ***
a. With average historical returns on common stock 220 1.70 39.5% 42 1.45 33.3% 0.802 0.423
c. Using the CAPM but including some extra “risk factors” 226 1.52 34.1% 45 1.91 48.9% -1.664 0.097 *
f. Back out from discounted dividend/earnings model, e.g.: price
=dividend/(cost of capital growth) 213 0.87 15.5% 42 1.19 26.2% -1.404 0.162
d. Whatever our investors tell us they require 217 0.86 14.3% 45 1.80 33.3% -2.312 0.022 **
e. By regulatory decisions 215 0.42 7.0% 43 1.58 34.9% -3.168 0.002 ***
6. What was your firm’s approximate (trailing) Price/Earnings ratio over
the past 3 years?... (e.g.: 18) 222 16.61 58.1% 39 5.25 9.6% 8.318 0.000 ***
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
27
TABLE 5: Risk Factors and Project Valuation.
N.
Am.BRA Z
N.
Am.BRA Z
N.
Am.BRA Z
N.
Am.BRA Z
a. Risk of unexpected inflation 11.9% 13.8% -0.160 0.874 14.4% 27.5% -1.156 0.252 11.9% 42.5% -2.722 0.008 ** 61.8% 16.3% 5.381 0.000 ***
b. Interest rate risk (change in
general level of interest rates) 15.3% 16.0% -0.066 0.947 8.8% 21.0% -1.051 0.299 24.6% 46.9% -2.142 0.034 ** 51.3% 16.0% 3.845 0.000 ***
c. Term structure risk (change
in the long-term vs. short term
interest rate)
8.6% 16.9% -0.696 0.490 3.7% 16.9% -1.080 0.291 12.6% 37.7% -2.189 0.032 ** 75.1% 28.6% 6.416 0.000 ***
d. GDP or business cycle risk 6.8% 16.9% -0.835 0.409 18.8% 20.8% -0.175 0.862 18.8% 33.8% -1.342 0.183 55.6% 28.6% 3.054 0.003 **
e. Commodity price risk 2.9% 13.3% -0.843 0.410 18.9% 30.7% -1.044 0.299 10.9% 22.7% -0.995 0.324 67.4% 33.3% 4.314 0.000 ***
f. Foreign exchange risk 10.8% 10.4% 0.034 0.973 15.3% 20.8% -0.473 0.638 18.8% 45.5% -2.428 0.017 ** 55.1% 23.4% 3.547 0.000 ***
g. Distress risk (probability of
bankruptcy) 7.4% 23.3% -1.304 0.199 6.3% 17.8% -0.938 0.355 4.8% 24.7% -1.609 0.117 81.3% 34.2% 7.057 0.000 ***
h. Size (small firms being
riskier) 14.5% 17.8% -0.280 0.780 6.0% 20.5% -1.185 0.244 13.4% 27.4% -1.190 0.238 65.6% 34.2% 3.869 0.000 ***
i. “Market-to-book” ratio (ratio
of market value of firm to book
value assets)
4.0% 18.2% -1.168 0.253 2.0% 11.7% -0.786 0.445 7.1% 22.1% -1.253 0.217 86.9% 48.1% 6.902 0.000 ***
j. Momentum (recent stock
price performance) 3.4% 21.3% -1.456 0.157 2.9% 10.7% -0.627 0.539 4.9% 16.0% -0.907 0.372 88.9% 52.0% 6.895 0.000 ***
Cash Flow Both Neither
P-Value P-Value P-Value P-Value
4. When valuing a project, do
you adjust either the discount
rate or cash flows for the
following risk factors?
Discount Rate
The table presents the frequency of responses of each risk factor to each item (Discount Rate, Cash Flows, Both, Neither). Source data and columns defined as in Table 3; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
28
TABLE 6: Capital Structure.
N Mean % N Mean % Z
8. Has your firm seriously considered issuing debt in foreign countries? If
“yes”, what factors affect your firm’s decisions about issuing foreign debt?368 0.32 32.1% 76 0.37 36.8% -0.771 0.441
c. Providing a “natural hedge” (e.g.: if the foreign currency devalues, we are not
obligated to pay interest in domestic currency) 123 3.09 84.6% 28 1.46 25.0% 7.367 0.000 ***
b. Keeping the “source of funds” close to the “use of funds” 121 2.58 60.3% 26 1.35 30.8% 3.275 0.001 ***
a. Favorable tax treatment relative to the U.S./Brazil (e.g.: different corporate
tax rates) 120 2.18 50.0% 28 1.82 32.1% 1.929 0.056 *
e. Foreign interest rates may be lower than domestic interest rates 123 2.16 44.7% 26 2.73 69.2% -1.948 0.053 *
d. Foreign regulations require us to issue debt abroad 118 0.64 5.9% 28 0.71 14.3% -1.155 0.250
9. Has your firm seriously considered issuing convertible debt? If “yes”,
what factors affect your firm’s decisions about issuing convertible debt? 372 0.20 20.4% 73 0.16 16.4% 0.841 0.401
a. Convertibles are an inexpensive way to issue “delayed” common stock 79 2.52 59.5% 11 2.36 36.4% 1.715 0.090 *
f. Our stock is currently undervalued 77 2.29 49.4% 11 1.73 36.4% 0.900 0.371
g. Ability to “call” or force conversion of convertible debt if/when we need to 78 2.22 47.4% 12 2.83 66.7% -1.088 0.279
e. Avoiding short-term equity dilution 77 2.13 44.2% 11 2.18 45.5% -0.080 0.936
c. Convertibles are less expensive than straight debt 77 1.83 41.6% 11 3.09 81.8% -1.910 0.060 *
h. To attract investors unsure about the riskiness of our company 78 2.03 41.0% 11 1.27 18.2% 1.927 0.057 *
d. Other firms in our industry successfully use convertibles 77 1.03 11.7% 11 2.27 54.5% -2.032 0.045 **
b. Protecting bondholders against unfavorable actions by managers or
stockholders 76 0.63 1.3% 11 1.36 9.1% -0.853 0.396
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
Source data and columns defined as in Table 3; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
29
TABLE 6: Capital Structure (Continued).
N Mean % N Mean % Z
10. Has your firm seriously considered issuing common stock? If “yes”,
what factors affect your firm’s decisions about issuing common stock?369 0.36 35.5% 76 0.25 25.0% 1.969 0.050 **
l. Earnings per share dilution 131 2.81 67.2% 12 1.17 8.3% 7.043 0.000 ***
j. The amount by which our stock is undervalued or overvalued by the market 129 2.65 65.1% 14 1.64 28.6% 3.529 0.001 ***
a. If our stock price has recently risen, the price at which we can issue is “high” 132 2.52 62.9% 15 2.07 40.0% 2.026 0.045 **
c. Providing shares to employee bonus/stock option plans 131 2.34 52.7% 13 0.69 7.7% 5.574 0.000 ***
e. Maintaining target debt-to-equity ratio 134 2.28 52.2% 14 1.79 28.6% 2.114 0.036 **
i. Diluting the holdings of certain shareholders 131 2.11 48.1% 14 1.43 21.4% 2.562 0.011 **
b. Stock is our “least risky” source of funds 129 1.73 29.5% 15 2.00 20.0% 0.892 0.374
g. Whether our recent profits have been sufficient to fund our activities 133 1.72 29.3% 14 1.43 21.4% 0.705 0.482
f. Using a similar amount of equity as is used by other firms in our industry 130 1.45 23.1% 14 1.50 28.6% -0.422 0.674
h. Issuing stock gives investors a better impression of our firm’s prospects than
using debt 129 1.32 21.7% 3 2.00 33.3% -0.392 0.696
k. Inability to obtain funds using debt, convertibles, or other sources 130 1.21 17.7% 13 1.15 23.1% -0.430 0.668
d. Common stock is our cheapest source of funds 129 1.16 17.1% 17 2.29 41.2% -1.670 0.097 *
i. The capital gains tax rates faced by our investors (relative to tax rates on
dividends) 128 0.80 4.7% 13 1.38 30.8% -1.727 0.086 *
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
30
TABLE 7: Debt Policy.
N Mean % N Mean % Z
5. What factors affect your firm’s choice between short-and long-term
debt?
b. Matching the maturity of our debt with the life of our assets 351 2.60 63.2% 72 2.00 40.3% 4.104 0.000 ***
g. We issue long-term debt to minimize the risk of having to refinance in “bad
times” 342 2.15 48.8% 71 1.80 35.2% 2.314 0.021 **
a. We issue short term when short term interest rates are low compared to long
term rates 345 1.89 35.9% 73 1.66 26.0% 1.794 0.074 *
c. We issue short-term when we are waiting for long-term market interest rates
so decline 345 1.78 28.7% 71 1.18 19.7% 1.745 0.082 *
d. We borrow short-term so that returns from new projects can be captured more
fully by shareholders, rather than committing to pay long-term profits as interest
to debtholders
348 0.94 9.5% 70 0.97 17.1% -1.550 0.122
e. We expect our credit rating to improve, so we borrow short-term until it does 345 0.85 9.0% 71 0.94 18.3% -1.843 0.066 *
f. Borrowing short-term reduces the chance that our firm will want to take on
risky projects 348 0.53 4.0% 70 1.03 15.7% -2.464 0.014 **
7. What is the credit rating for your firm’s debt? Write NONE if debt not
rated... (e.g.: AA-, B+) 352 52.6% 56 31.7% 3.417 0.001 ***
11. Does your firm have a target range for your debt ratio? 1=no target;
2=flexible target range; 3; somewhat tight target range; 4=strict target
range;
361 2.35 44.0% 19 2.21 31.6% 1.238 0.216
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
Source data and columns defined as in Table 3; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
31
TABLE 7: Debt Policy (continued).
N Mean % N Mean % Z
12. What factors affect how you choose the appropriate amount of debt for
your firm?
g. The personal tax cost our investors face when they receive interest income 357 2.59 59.4% 65 2.22 47.7% 1.884 0.060 *
d. Our credit rating (as assigned by rating agencies) 359 2.46 57.1% 66 1.61 31.8% 4.503 0.000 ***
h. The volatility of our earnings and cash flows 364 2.32 48.1% 65 2.20 49.2% -0.170 0.865
a. The tax advantage of interest deductibility 359 2.07 44.8% 68 1.94 39.7% 0.816 0.415
e. The transactions costs and fees for issuing debt 358 1.95 33.5% 68 2.07 47.1% -1.897 0.059 *
c. The debt levels of other firms in our industry 359 1.49 23.4% 65 1.35 23.1% 0.057 0.955
b. The potential costs of bankruptcy, near-bankruptcy, or financial distress 356 1.24 21.3% 62 1.45 32.3% -1.627 0.105
i. We limit debt so our customers/suppliers are not worried about our firm going
out of business 358 1.24 18.7% 65 1.80 35.4% -2.415 0.016 **
n. We restrict our borrowing so that profits from new/future projects can be
captured fully by shareholders and do not have to be paid out as interest to
debtholders
358 1.01 12.6% 66 1.42 28.8% -2.544 0.011 **
f. Financial flexibility (we restrict debt so we have enough internal funds
available to pursue new projects when they come along) 355 0.68 4.8% 63 0.95 12.7% -1.753 0.080 *
j. We try to have enough debt that we are not an attractive takeover target 358 0.73 4.7% 65 1.14 20.0% -2.768 0.006 ***
k. If we issue debt our competitors know that we are very unlikely to reduce our
output/sales 356 0.40 2.2% 65 0.85 12.3% -2.304 0.022 **
m. To ensure that upper management works hard and efficiently, we issue
sufficient debt to make sure that a large portion of our cash flow is committed to
interest payments
356 0.33 1.7% 64 0.64 7.8% -1.737 0.083 *
l. A high debt ratio helps us bargain for concessions from our employees 357 0.16 0.0% 65 0.52 7.7% -2.236 0.026 **
13. What other factors affect your firm’s debt policy?
a. We issue debt when our recent profits (internal funds) are not sufficient to
fund our activities 357 2.13 46.8% 68 2.06 45.6% 0.182 0.856
c. We issue debt when interest rates are particularly low 356 2.22 46.3% 66 1.80 27.3% 3.391 0.001 ***
d. We use debt when our equity is undervalued by the market 354 1.56 30.8% 63 0.57 3.2% 8.002 0.000 ***
g. Changes in the price of our common stock 348 1.08 16.4% 64 0.66 7.8% 2.246 0.025 **
f. We delay retiring debt because of recapitalization costs and fees 354 1.04 12.4% 66 1.11 13.6% -0.263 0.793
e. We delay issuing debt because of transactions costs and fees 354 1.06 10.2% 66 1.39 22.7% -2.181 0.030 **
b. Using debt gives investors a better impression of our firm’s prospects than
issuing stock 356 0.96 9.8% 63 0.67 6.3% 1.019 0.309
h. We issue debt when we have accumulated substantial profits 351 0.53 1.1% 64 0.66 9.4% -2.142 0.033 **
14. What is your firm’s approximate long-term debt/total assets ratio?...%
(e.g.: 40%) 331 0.30 13.8% 54 0.20 9.3% 1.048 0.295
BRAZILNORTH AMERICA
P-ValueAnswers to the Questions...
DIFFERENCE
32
TABLE 8: Summary of the Results.
Opinions Converge… Opinions Contrast…
Capital Budgeting • Use of intuitive, rule of thumb criteria (hurdle rate, payback)
• North Americans use more IRR and NPV • Brazilians use more accounting-based and simulation criteria (accounting rate of return, value at risk)
Cost of Capital
• Widespread use of a single discount rate for the whole company • Historical returns • Dividend discount model
• Brazilians use more multiple discount rates • North Americans use more a single beta • Brazilians are more prone to use multiple betas and to listen to investors and regulators about discount rates • Brazilians claim to adjust both the discount rate and the cash flows of a project to several risk factors
Capital Structure • Use of convertible debt as a flexible instrument
• Brazilians are more concerned with transaction costs of debt and equity issues • North Americans are more concerned with corporate governance issues • Brazilians believe relatively more that common stock is the cheapest source of funds
Debt Policy • The setting of flexible or rigid debt target ranges
• North Americans list market timing, personal taxes and credit rating as important factors • Brazilians are concerned with flexibility, credibility, incentives, and the distribution of firm income • Brazilians claim to use debt policy to avoid takeovers (in a market where takeovers are rare events)
33
a. Sales revenue
8.2%
17.5%
23.0%
8.7%
23.5%
19.0%
26.8%
16.9%
31.0%
23.9%
1.4%
0%
5%
10%
15%
20%
25%
30%
35%
<25million
25-99million
100-499million
500-999million
1-5 billion >5 billion
NORTH AMERICA BRAZIL
b. Foreign sales
28.9%
44.1%
17.1%
9.9%
44.9%
33.3%
11.6% 10.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0% 1-24% 25-49% >50%
NORTH AMERICA BRAZIL c. Industry
11.1%4.0%
41.9%
12.5%5.7%
15.4%9.4%
13.2%5.9%
38.2%
16.2%
5.9%13.2%
7.4%
0%5%
10%15%20%25%30%35%40%45%
Ret
ail a
ndW
hole
sale
Min
ing,
Con
stru
ctio
n
Man
ufac
turin
g
rans
port
/Ene
rgy
Com
mun
icat
ions
/Med
ia
Ban
k/F
inan
ce/In
sur
ance
Tec
h(s
oftw
are/
biot
ech/
etc)
NORTH AMERICA BRAZIL
d. Public or Private
63.8%
36.2%
48.6%51.4%
0%
10%
20%
30%
40%
50%
60%
70%
Public Private
NORTH AMERICA BRAZIL e. Pay Dividends?
53.9%
46.1%
62.9%
37.1%
0%
10%
20%
30%
40%
50%
60%
70%
Yes No
NORTH AMERICA BRAZIL
f. Regulated Utility?
6.3%
93.7%
61.4%
37.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
NORTH AMERICA BRAZIL g. If all options were exercised, what percent of common
stock would be owned by the top three officers?
56.6%
16.7%
5.7%
21.1%
42.6%
5.6% 7.4%
44.4%
0%
10%
20%
30%
40%
50%
60%
<5% 5-10% 10-20% >20%
NORTH AMERICA BRAZIL
h. CEO education
40.1% 38.1%
8.5%13.3%
0.0%
57.1%
14.3%
0.0%
14.3% 14.3%
0%
10%
20%
30%
40%
50%
60%
Und
ergr
adua
te
MB
A
non-
MB
Am
aste
rs
>M
aste
rsde
gree
Oth
er
NORTH AMERICA BRAZIL i. Age of CEO
2.7%
24.2%
50.3%
22.8%
14.7%
27.9%
35.3%
22.1%
0%
10%
20%
30%
40%
50%
60%
<40 40-49 50-59 >60
NORTH AMERICA BRAZIL
j. CEO tenure (time in current job)
37.7%
26.2%
36.1%32.4%
23.5%
44.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
<4 years 4-9 years >9 years
NORTH AMERICA BRAZIL FIGURE 1: Sample Characteristics
34
Survey Answers to the Question "How frequently does your firm use the following techniques
when deciding which projects or acquisitions to pursue?"
75.6%
74.9%
56.9%
56.7%
51.5%
38.9%
29.4%
26.6%
20.3%
13.7%
11.9%
10.8%
60.2%
62.8%
48.4%
53.5%
48.9%
36.8%
42.4%
18.5%
41.0%
31.7%
41.5%
33.7%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
b. Internal Rate of Return (IRR)
a. Net Present Value (NPV)
c. Hurdle Rate
f. Payback Period
j. Sensitivity analysis (e.g.: “good” vs. “fair” vs. “bad”)
d. Earnings multiple approach
g. Discounted payback period
l. We incorporate the “real options” of a project when evaluating it
i. Accounting Rate of Return (or Book rate of return on assets)
k. Value at risk (VaR) or other simulation analysis
h. Profitability index
e. Adjusted Present Value (APV)
NORTH AMERICA BRAZIL Survey Answers to the Question "How frequently would your company use the following
discount rates when evaluating a new project in an overseas market? To evaluate this project
we would use..."
58.8%
50.9%
34.5%
15.6%
9.9%
61.6%
54.3%
39.7%
35.4%
28.8%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
a. The discount rate for our entirecompany
d. A risk-matched discount rate forthis particular project (considering
both country and industry)
b. The discount rate for theoverseas market (country discount
rate)
c. A divisional discount rate (if theproject line of business matches a
domestic division)
e. A different discount rate for eachcomponent cashflow that has adifferent risk characteristic (e.g.:depreciation vs. operating cash
flows)
NORTH AMERICA BRAZIL Survey Answers to the Question "Does your firm estimate the cost of equity capital? If “yes”,
how do you determine your firm’s cost of equity capital?"
71.1%
39.5%
34.1%
15.5%
14.3%
7.0%
37.0%
33.3%
48.9%
26.2%
33.3%
34.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
b. Using the Capital Asset PricingModel (CAPM, the beta approach)
a. With average historical returns oncommon stock
c. Using the CAPM but includingsome extra “risk factors”
f. Back out from discounteddividend/earnings model, e.g.: price=dividend/(cost of capital growth)
d. Whatever our investors tell usthey require
e. By regulatory decisions
NORTH AMERICA BRAZIL
FIGURE 2: Capital Budgeting and Cost of Capital
35
Survey Answers to the Question "When valuing a project, do you adjust either the discount
rate or cash flows for the following risk factors?"
DISCOUNT RATE
13.3%
21.3%
18.2%
16.9%
23.3%
16.9%
10.4%
13.8%
17.8%
16.0%
2.9%
3.4%
4.0%
6.8%
7.4%
8.6%
10.8%
11.9%
14.5%
15.3%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
e. Commodity price risk
j. Momentum (recent stock price performance)
i. “Market-to-book” ratio (ratio of market value of firm to book valueassets)
d. GDP or business cycle risk
g. Distress risk (probability of bankruptcy)
c. Term structure risk (change in the long-term vs. short term interestrate)
f. Foreign exchange risk
a. Risk of unexpected inflation
h. Size (small firms being riskier)
b. Interest rate risk (change in general level of interest rates)
BRAZIL NORTH AMERICA
Survey Answers to the Question "When valuing a project, do you adjust either the discount
rate or cash flows for the following risk factors?"
CASH FLOWS
11.7%
10.7%
16.9%
20.5%
17.8%
21.0%
27.5%
20.8%
20.8%
30.7%
2.0%
2.9%
3.7%
6.0%
6.3%
8.8%
14.4%
15.3%
18.8%
18.9%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
i. “Market-to-book” ratio (ratio of market value of firm to book valueassets)
j. Momentum (recent stock price performance)
c. Term structure risk (change in the long-term vs. short term interestrate)
h. Size (small firms being riskier)
g. Distress risk (probability of bankruptcy)
b. Interest rate risk (change in general level of interest rates)
a. Risk of unexpected inflation
f. Foreign exchange risk
d. GDP or business cycle risk
e. Commodity price risk
BRAZIL NORTH AMERICA Survey Answers to the Question "When valuing a project, do you adjust either the discount
rate or cash flows for the following risk factors?"
BOTH
24.7%
16.0%
22.1%
22.7%
42.5%
37.7%
27.4%
45.5%
33.8%
46.9%
4.8%
4.9%
7.1%
10.9%
11.9%
12.6%
13.4%
18.8%
18.8%
24.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
g. Distress risk (probability of bankruptcy)
j. Momentum (recent stock price performance)
i. “Market-to-book” ratio (ratio of market value of firm to book valueassets)
e. Commodity price risk
a. Risk of unexpected inflation
c. Term structure risk (change in the long-term vs. short term interestrate)
h. Size (small firms being riskier)
f. Foreign exchange risk
d. GDP or business cycle risk
b. Interest rate risk (change in general level of interest rates)
BRAZIL NORTH AMERICA
Survey Answers to the Question "When valuing a project, do you adjust either the discount
rate or cash flows for the following risk factors?"
NEITHER
16.0%
23.4%
28.6%
16.3%
34.2%
33.3%
28.6%
34.2%
48.1%
52.0%
51.3%
55.1%
55.6%
61.8%
65.6%
67.4%
75.1%
81.3%
86.9%
88.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
b. Interest rate risk (change in general level of interest rates)
f. Foreign exchange risk
d. GDP or business cycle risk
a. Risk of unexpected inflation
h. Size (small firms being riskier)
e. Commodity price risk
c. Term structure risk (change in the long-term vs. short term interestrate)
g. Distress risk (probability of bankruptcy)
i. “Market-to-book” ratio (ratio of market value of firm to book valueassets)
j. Momentum (recent stock price performance)
BRAZIL NORTH AMERICA
FIGURE 3: Risk Adjustment Factors
36
Survey Answers to the Question "Has your firm seriously considered issuing debt in foreign
countries? If “yes”, what factors affect your firm’s decisions about issuing foreign debt?"
84.6%
60.3%
50.0%
44.7%
5.9%
25.0%
30.8%
32.1%
69.2%
14.3%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
c. Providing a “natural hedge” (e.g.:if the foreign currency devalues, weare not obligated to pay interest in
domestic currency)
b. Keeping the “source of funds”close to the “use of funds”
a. Favorable tax treatment relativeto the U.S./Brazil (e.g.: different
corporate tax rates)
e. Foreign interest rates may belower than domestic interest rates
d. Foreign regulations require us toissue debt abroad
NORTH AMERICA BRAZIL Survey Answers to the Question "Has your firm seriously considered issuing convertible
debt? If “yes”, what factors affect your firm’s decisions about issuing convertible debt?"
59.5%
49.4%
47.4%
44.2%
41.6%
41.0%
11.7%
1.3%
36.4%
36.4%
66.7%
45.5%
81.8%
18.2%
54.5%
9.1%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
a. Convertibles are an inexpensiveway to issue “delayed” common
stock
f. Our stock is currently undervalued
g. Ability to “call” or force conversionof convertible debt if/when we need
to
e. Avoiding short-term equity dilution
c. Convertibles are less expensivethan straight debt
h. To attract investors unsure aboutthe riskiness of our company
d. Other firms in our industrysuccessfully use convertibles
b. Protecting bondholders againstunfavorable actions by managers or
stockholders
NORTH AMERICA BRAZIL Survey Answers to the Question "Has your firm seriously considered issuing common stock?
If “yes”, what factors affect your firm’s decisions about issuing common stock?"
67.2%
65.1%
62.9%
52.7%
52.2%
48.1%
29.5%
29.3%
23.1%
21.7%
17.7%
17.1%
4.7%
8.3%
28.6%
40.0%
7.7%
28.6%
21.4%
20.0%
21.4%
28.6%
33.3%
23.1%
41.2%
30.8%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
l. Earnings per share dilution
j. The amount by which our stock is undervalued or overvalued by themarket
a. If our stock price has recently risen, the price at which we can issue is“high”
c. Providing shares to employee bonus/stock option plans
e. Maintaining target debt-to-equity ratio
i. Diluting the holdings of certain shareholders
b. Stock is our “least risky” source of funds
g. Whether our recent profits have been sufficient to fund our activities
f. Using a similar amount of equity as is used by other firms in our industry
h. Issuing stock gives investors a better impression of our firm’s prospectsthan using debt
k. Inability to obtain funds using debt, convertibles, or other sources
d. Common stock is our cheapest source of funds
i. The capital gains tax rates faced by our investors (relative to tax rateson dividends)
NORTH AMERICA BRAZIL
FIGURE 4: Capital Structure
37
Survey Answers to the Question "What factors affect your firm’s choice between short-and
long-term debt?"
63.2%
48.8%
35.9%
28.7%
9.5%
9.0%
4.0%
40.3%
35.2%
26.0%
19.7%
17.1%
18.3%
15.7%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
b. Matching the maturity of our debt with the life of our assets
g. We issue long-term debt to minimize the risk of having to refinance in“bad times”
a. We issue short term when short term interest rates are low comparedto long term rates
c. We issue short-term when we are waiting for long-term market interestrates so decline
d. We borrow short-term so that returns from new projects can becaptured more fully by shareholders, rather than committing to pay long-
term profits as interest to debtholders
e. We expect our credit rating to improve, so we borrow short-term until itdoes
f. Borrowing short-term reduces the chance that our firm will want to takeon risky projects
NORTH AMERICA BRAZIL Survey Answers to the Question "What factors affect how you choose the appropriate amount
of debt for your firm?"
59.4%
57.1%
48.1%
44.8%
33.5%
23.4%
21.3%
18.7%
12.6%
4.8%
4.7%
2.2%
1.7%
0.0%
47.7%
31.8%
49.2%
39.7%
47.1%
23.1%
32.3%
35.4%
28.8%
12.7%
20.0%
12.3%
7.8%
7.7%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
g. The personal tax cost our investors face when they receive interestincome
d. Our credit rating (as assigned by rating agencies)
h. The volatility of our earnings and cash flows
a. The tax advantage of interest deductibility
e. The transactions costs and fees for issuing debt
c. The debt levels of other firms in our industry
b. The potential costs of bankruptcy, near-bankruptcy, or financial distress
i. We limit debt so our customers/suppliers are not worried about our firmgoing out of business
n. We restrict our borrowing so that profits from new/future projects canbe captured fully by shareholders and do not have to be paid out as
f. Financial flexibility (we restrict debt so we have enough internal fundsavailable to pursue new projects when they come along)
j. We try to have enough debt that we are not an attractive takeover target
k. If we issue debt our competitors know that we are very unlikely toreduce our output/sales
m. To ensure that upper management works hard and efficiently, weissue sufficient debt to make sure that a large portion of our cash flow is
l. A high debt ratio helps us bargain for concessions from our employees
NORTH AMERICA BRAZIL Survey Answers to the Question "What other factors affect your firm’s debt policy?"
46.8%
46.3%
30.8%
16.4%
12.4%
10.2%
9.8%
1.1%
45.6%
27.3%
3.2%
7.8%
13.6%
22.7%
6.3%
9.4%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
a. We issue debt when our recentprofits (internal funds) are notsufficient to fund our activities
c. We issue debt when interest ratesare particularly low
d. We use debt when our equity isundervalued by the market
g. Changes in the price of ourcommon stock
f. We delay retiring debt because ofrecapitalization costs and fees
e. We delay issuing debt because oftransactions costs and fees
b. Using debt gives investors abetter impression of our firm’sprospects than issuing stock
h. We issue debt when we haveaccumulated substantial profits
NORTH AMERICA BRAZIL
FIGURE 5: Debt Policy
38
NORTH AMERICA
No Target18.8%
Flexible Target37.1%
Somewhat Tight Target34.3%
Strict Target9.7%
BRAZIL
No Target26.3%
Flexible Target42.1%
Somewhat Tight Target15.8%
Strict Target15.8%
FIGURE 6: Target Debt Ratios