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Two-stage capital budgeting, capital charge rates, and resource constraints

Author

Listed:
  • Nicole Bastian Johnson

    (1208 University of Oregon)

  • Thomas Pfeiffer

    (University of Vienna)

  • Georg Schneider

    (University of Graz)

Abstract

We study two-stage, multi-division budgeting mechanisms that allocate scarce resources among divisions using capital charge rates. Each divisional manager observes private sequential project information and competes for scarce resources over two stages. The optimal capital charge rates in our two-stage setting can be quite different from those that arise in a single-stage setting. If the firm faces a resource constraint at only the second stage, a less severe constraint can imply more first-stage project initiation, which can lead to higher second-stage capital charge rates. If resources are constrained at both stages, a decrease in the severity of the constraint at just one stage decreases the capital charge rate at that stage but increases the capital charge rate at the other stage because each constraint affects the intensity of competition at both stages. This result holds regardless of whether the scarce resources are fungible or non-fungible across stages.

Suggested Citation

  • Nicole Bastian Johnson & Thomas Pfeiffer & Georg Schneider, 2017. "Two-stage capital budgeting, capital charge rates, and resource constraints," Review of Accounting Studies, Springer, vol. 22(2), pages 933-963, June.
  • Handle: RePEc:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9405-3
    DOI: 10.1007/s11142-017-9405-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Multistage capital budgeting; Multidivisional capital budgeting; Capital charge rates;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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