Project Development with Delegated Bargaining: The Role of Elevated Hurdle Rates
During project development, costs are endogenously determined through delegated bargaining with counterparties. In surveys, nearly 80% of CFOs report using an elevated hurdle rate, the implications of which we explore in a delegated bargaining model. We show that elevated hurdle rates can convey a bargaining advantage that exceeds the opportunity cost of forgone projects, whether hurdle rate buffers arise for strategic or non-strategic reasons. Using CFO survey data, we find buffer use is negatively related to the cost of capital and ex ante bargaining power, consistent with the model, and that realized returns exhibit “beat the hurdle rate benchmark” behavior.
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