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Overconfidence and Resistance to Abandoning Unprofitable Capital Budgeting Projects: The Effects of Autonomy, Internal Audit, and Accountability

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  • Johnny Jermias
  • Billy Kin Hoi Hu

Abstract

The purpose of this study is to investigate the effects of managers' autonomy in choosing a capital budgeting project has on their confidence in managing the project. Furthermore, this study examines the role that internal audit reports and accountability play in mitigating the impact of autonomy on managers' resistance to abandoning unprofitable capital budgeting projects. Building on motivated reasoning theory, we hypothesize and find that managers who are given autonomy to choose their own projects are more confident that their projects will be successful than managers who are assigned the projects by their superiors. This study also shows that internal audit reports and accountability are effective mechanisms for reducing the influence of prior decisions on managers' resistance to abandoning unprofitable projects. Excès de confiance et réticence à abandonner des projets d'investissement non rentables : Effets de l'autonomie, des audits internes et de la responsabilisation Le but de cette étude est d'examiner les effets de l'autonomie des gestionnaires quant au choix des projets d'investissement sur leur confiance dans leur capacité à gérer ces projets. En outre, elle se penche sur le rôle des rapports d'audit interne et de la responsabilisation pour réduire l'impact de cette autonomie sur la réticence des gestionnaires à abandonner les projets d'investissement non rentables. En nous appuyant sur la théorie du raisonnement motivé, nous présumons et établissons que les gestionnaires qui disposent de l'autonomie nécessaire pour choisir leurs projets ont davantage confiance que ceux‐ci connaîtront du succès que les gestionnaires à qui les projets sont attribués par leurs supérieurs hiérarchiques. L'étude montre également que les rapports d'audit interne et la responsabilisation constituent des mécanismes efficaces pour réduire l'influence des décisions antérieures sur la réticence des gestionnaires à abandonner des projets non rentables.

Suggested Citation

  • Johnny Jermias & Billy Kin Hoi Hu, 2020. "Overconfidence and Resistance to Abandoning Unprofitable Capital Budgeting Projects: The Effects of Autonomy, Internal Audit, and Accountability," Accounting Perspectives, John Wiley & Sons, vol. 19(2), pages 49-71, June.
    • Handle: RePEc:wly:accper:v:19:y:2020:i:2:p:49-71
    DOI: 10.1111/1911-3838.12222
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    References listed on IDEAS

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