A Review of Research on the Practices of Corporate Finance

Abstract

This paper surveys corporate finance practices in the areas of capital budgeting, cost of capital, capital structure and the value of firm. For each area, a brief overview of the papers surveyed and their relation to each other is discussed. Suggestions for future research have been made.

In theory and in practice, it is now widely accepted that the primary objective of the firm is to maximize the shareholders wealth with good governance. Off late the discounted cash flows methodology is being widely used. The internal rate of return method is more popular amongst the managers, though net present value method is more consistent with the shareholder wealth maximization objective. The CAPM is most widely used in the practice to estimate the cost of equity capital.

Many real-world firms take their capital structure decisions based on industry averages. The firms have stable dividend on a growth path policy despite costs associated with it. The market also regards dividends positively. The worry in case of share buyback is that it may be used as a vehicle to transfer wealth from minority shareholders to shareholders holding controlling stake.

Keywords: Capital Budgeting, Cost of Capital, Capital Structure, Dividend Policy

JEL Classification: G31, G32, G35