Article Summary: The theory and practice of corporate finance Introduction In this article, the authors conducted a comprehensive

survey that describes the current practice of corporate finance. They sampled about 4440 firms and got the responses from 392 chief financial officers. Methodology In their survey, the authors analyzed the responses conditional on the firm characteristics, which includes firm size, P/E ratio, leverage, credit rating, dividend policy, industry, management ownership, CEO age, CEO tenure and the education of CEO. According to their analyzed, they found these kinds of characteristics are variant, which can help them get a rich description of the practice and can conclude that the sample is representative. Content Summary By using these related characteristics, the authors study capital budgeting and had some findings: CAPM and NPV rule are widely used and the result suggest increased prominence of net present value as an evaluation technique. Also, the likelihood of using specific evaluation techniques is linked to firm size, firm leverage and CEO characteristics. For the small firms, they found that they prefer to use supplementary sensitivity and VaR analyses rather than use net present value. Next, the authors took this analysis further by detailing the specific methods

firms use to obtain the cost of capital and some other important risk factors. They found that large firms and public corporations are much more like to use the CAPM and risk-matched discount rate than are small firms. Also, the firms with high growth, foreign exposure are more likely to use the company-wide discount rate. So they conclude that the practice of corporate finance differs based on firm size could be an underlying cause of size-related asset pricing anomalies. According to analysis the capital structure, the authors also had some findings: some informal criteria such as financial flexibility and credit ratings are the most important debt policy factors. Also, the EPS dilution and recent stock price appreciation are the most important factors as well as the degree of stock undervaluation. They found some support for the pecking-order and trade-off capital structure hypotheses. Conclusion Large firms rely on present value techniques and capital asset pricing model, but small firms use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investment. Firms are concerned about financial flexibility, credit ratings, earnings per share dilution and stock price.