Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

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462 Answers to Chapter Discussion Questions

CHAPTER 13 SURVEY EVIDENCE ON FINANCING

DECISIONS AND COST OF CAPITAL

1. The survey method has several limitations. First, surveys measure beliefs and

not necessarily actions of managers. Second, the respondents may not represent

the population because of nonresponse bias. Third, managers may misunder-

stand some questions, give wrong or “politically correct” answers, or make

decisions on different criteria than asked in survey questions.

Researchers can address some of these issues using several techniques. For

example, they can examine sample representativeness by comparing population

and respondent firm characteristics such as firm size and industry. Researchers

could also ask both structured (closed-ended) and open-ended questions on the

same topic to minimize the risk that respondents may not properly understand

some questions. They can check the robustness of survey findings through one-

on-one interviews with a sample of managers and with the results of other

survey and empirical studies in different time periods and samples. Despite

these potential limitations, surveys are a valuable tool and a complementary

method to other types of empirical studies that rely on secondary data in linking

theory and practice of finance.

2. The evidence shows that large firms use different criteria in their cost of capital

and financing decisions and adhere more closely to textbook ...