What started as a simple interest in poker betting decisions has now turned into a national research project looking into reasons behind corporate financial decision making for Steve Swope, a Ph.D. student in the Brian Lamb School of Communication.
Swope’s current research project looks at why an organizational decision maker makes financial decisions that are not based upon the Net Present Value (NPV) analysis. Swope’s research shows that leading MBA programs overwhelmingly recommend NPV over alternative methods.
Given a prediction of future cash flows, NPV is a means of converting a future value to a present value, enabling meaningful comparisons between competing investments which may have cash flows that occur at different times. Citing a Duke University study, Swope says the NPV method is being used regularly by only three-fourths of financial managers.
Swope reasons that the NPV method is the best because it focuses on actual dollar amounts. Other formulas (e.g., Internal Rate of Return, or IRR) may focus on percentages, which Swope says may mislead corporations.
Swope says the people a manager associates with can influence what method they use. If many of their peers use a different method, they will likely use that one too. Corporate incentives also affect the manager’s decision, possibly leading to decisions which benefit the manager but are detrimental to the corporation.
His current research project is looking at these reasons, which he calls the “dark side” of reasoning. Through the use of surveys and corporate ethnographies, he hopes to better understand how a manager’s social networks and corporate incentives affect their decisions.
“If a manager is acting irrationally from the corporation’s perspective, the answer may be to change the corporation’s incentives,” Swope said. “While the incentive may be financially rewarding for the manager, it may not be beneficial for the corporation.”
Swope hopes his research will allow him to show corporations why their incentives may not be benefitting their organization. He is also attempting to better understand the mechanics of social networks and their effects on a manager’s decisions.
Swope says he chose Purdue for his research because of its strong program in organizational communication. He anticipates completing his research by the end of the year and earning his doctorate in May 2013.
Written by Aurie Swartz
Senior, Public Relations