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The Influence of Affect on Managers' Capital†Budgeting Decisions

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  • Thomas E. Kida
  • Kimberly K. Moreno
  • James F. Smith

Abstract

In this paper, we propose that affective reactions are integral to accounting decision contexts like capital budgeting, and that researchers must jointly consider affect and cognition to better understand accounting decision makers' behavior. We argue that interpersonal relationships are characteristic of many capital†budgeting contexts, and that these relationships can lead to emotional affective reactions. For example, reactions such as frustration and anger may result if a manager is treated unfairly by another individual involved in a capital project. Drawing on relevant work in neurobiology and psychology, we then predict that these affective reactions can influence managers' capital†budgeting decisions. We report on four experimental scenarios that demonstrate the impact of affective reactions on capital†budgeting decisions. Consistent with our predictions, the results indicate that managers consider both financial data and affective reactions when evaluating the utility of an investment alternative. Our results suggest that researchers should consider both affect and cognition to more fully understand decision making in accounting contexts.

Suggested Citation

  • Thomas E. Kida & Kimberly K. Moreno & James F. Smith, 2001. "The Influence of Affect on Managers' Capital†Budgeting Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 18(3), pages 477-494, September.
    • Handle: RePEc:wly:coacre:v:18:y:2001:i:3:p:477-494
    DOI: 10.1506/CPKU-R1DW-VW7M-U158
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    Cited by:

    1. Staci A. Kenno & Michelle C. Lau & Barbara J. Sainty, 2018. "In Search of a Theory of Budgeting: A Literature Review," Accounting Perspectives, John Wiley & Sons, vol. 17(4), pages 507-553, December.
    2. Nan Hu & Xingnan Xue & Ling Liu, 2022. "The impact of air pollution on financial reporting quality: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3609-3644, September.
    3. Shujun Ding & Philip Beaulieu, 2011. "The Role of Financial Incentives in Balanced Scorecard‐Based Performance Evaluations: Correcting Mood Congruency Biases," Journal of Accounting Research, Wiley Blackwell, vol. 49(5), pages 1223-1247, December.
    4. Lisa-Marie Wibbeke & Maik Lachmann, 2020. "Psychology in management accounting and control research: an overview of the recent literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 275-328, September.
    5. Sureka, Riya & Kumar, Satish & Colombage, Sisira & Abedin, Mohammad Zoynul, 2022. "Five decades of research on capital budgeting – A systematic review and future research agenda," Research in International Business and Finance, Elsevier, vol. 60(C).
    6. Umar Farooq & Mosab I. Tabash & Ahmad A. Al-Naimi & Linda Nalini Daniel & Mohammad Ahmad Al-Omari, 2023. "Herding Trend in Working Capital Management Practices: Evidence from the Non-Financial Sector of Pakistan," JRFM, MDPI, vol. 16(2), pages 1-14, February.
    7. Mary B. Curtis & Jesse C. Robertson & R. Cameron Cockrell & L. Dutch Fayard, 2021. "Peer Ostracism as a Sanction Against Wrongdoers and Whistleblowers," Journal of Business Ethics, Springer, vol. 174(2), pages 333-354, November.
    8. Mandy M Cheng & Habib Mahama, 2011. "The impact of capital proposal guidelines and perceived preparer biases on reviewers’ investment evaluation decisions," Australian Journal of Management, Australian School of Business, vol. 36(3), pages 349-370, December.
    9. Narayanan, Venkateshwaran & Baird, Kevin & Tay, Richard, 2021. "Investment decisions: The trade-off between economic and environmental objectives," The British Accounting Review, Elsevier, vol. 53(3).
    10. Michele Franco & Cida Sanches, 2016. "Influence of Emotions on Decision-Making," International Journal of Business and Social Research, LAR Center Press, vol. 6(1), pages 40-62, January.

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