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Intertemporal capital budgeting

Author

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  • Roper, Andrew H.
  • Ruckes, Martin E.

Abstract

This paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects. Consistent with field study evidence, an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal. The model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms.

Suggested Citation

  • Roper, Andrew H. & Ruckes, Martin E., 2012. "Intertemporal capital budgeting," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2543-2551.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:9:p:2543-2551
    DOI: 10.1016/j.jbankfin.2012.05.012
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    References listed on IDEAS

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    1. Bernardo, Antonio E. & Cai, Hongbin & Luo, Jiang, 2001. "Capital budgeting and compensation with asymmetric information and moral hazard," Journal of Financial Economics, Elsevier, vol. 61(3), pages 311-344, September.
    2. Milton Harris & Artur Raviv, 2005. "Allocation of Decision-making Authority," Review of Finance, European Finance Association, vol. 9(3), pages 353-383.
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    8. Milton Harris & Artur Raviv, 2005. "Allocation of Decision-making Authority," Review of Finance, Springer, vol. 9(3), pages 353-383, September.
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    10. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
    11. Elazar Berkovitch, 2004. "Why the NPV Criterion does not Maximize NPV," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 239-255.
    12. Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers 2344, C.E.P.R. Discussion Papers.
    13. Guochang Zhang, 1997. "Moral Hazard in Corporate Investment and the Disciplinary Role of Voluntary Capital Rationing," Management Science, INFORMS, vol. 43(6), pages 737-750, June.
    14. Stoughton, Neal M. & Zechner, Josef, 2007. "Optimal capital allocation using RAROC(TM) and EVA(R)," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 312-342, July.
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    Cited by:

    1. Hornstein, Abigail S., 2013. "Corporate capital budgeting and CEO turnover," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 41-58.
    2. Najah Attig, 2024. "Relaxed Financial Constraints and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 189(1), pages 111-131, January.

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    More about this item

    Keywords

    Capital budgeting; Investment policy; Incentives;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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