In a traditional corporate finance framework, managers maximize shareholder value, form rational expectations, optimize corporate investment intertemporally, and invest in positive net present value projects, among other things. These principles only partially align with real-world decision-making. This gap between academic research and the practice of finance is reflected in the modest statistical fit of traditional corporate finance models and the even more modest ability to predict outcomes out-of-sample or provide quantitative guidance for specific companies. In a capital structure context, for example, Graham and Leary (2011) show that standard academic models explain about 10% of within-firm variation in leverage; analysis in this paper shows explanatory power is even worse out-of-sample.
To address the research-practice gap, it is important to start by understanding in detail what real-world companies do. In a corporate finance setting, we can use surveys to directly gather this information from the expert practitioners who choose actual corporate outcomes. A clear understanding of practice helps researchers understand whether the gap between research and practice might be caused by practitioner mistakes, deficiencies in academic models, or both. And when research and academic models do align, a clear understanding of practice helps us understand the mechanisms behind the corporate outcomes we usually study.
