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

Author(s)

Nicole Bastian Johnson, Thomas Pfeiffer, Georg Schneider

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.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

University of Oregon, Universität Paderborn

Journal

Review of Accounting Studies

Volume

22

Pages

933-963

No. of pages

31

ISSN

1380-6653

DOI

https://doi.org/10.1007/s11142-017-9405-3

Publication date

06-2017

Peer reviewed

Yes

Austrian Fields of Science 2012

502052 Business administration

Keywords

ASJC Scopus subject areas

Accounting, Business, Management and Accounting(all)

Portal url

https://ucris.univie.ac.at/portal/en/publications/twostage-capital-budgeting-capital-charge-rates-and-resource-constraints(14b6109c-f7a1-48b8-ac94-908f6a1a9505).html