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

Yuhai Xuan
2009 The Review of financial studies  
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
more » ... ower. 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. (JEL G30, G31) More than 70 years ago, Coase (1937) characterized firms as "systems of rela-I am grateful to Paul Gompers, Jeremy Stein, and Fritz Foley for their continuous support and help with this project. I also thank
doi:10.1093/rfs/hhp030 fatcat:7ixttqgkrvak3jof75x65gbxhe