Moral Hazard in Corporate Investment and the Disciplinary Role of Voluntary Capital Rationing

Guochang Zhang
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Guochang Zhang: Department of Accounting, Hong Kong University of Science & Technology, Clear Water Bay, Kowloon, Hong Kong

Management Science, 1997, vol. 43, issue 6, 737-750

Abstract: This paper compares three capital-budgeting rules, the NPV rule, a high hurdle rate and capital rationing, and explains why some firms may voluntarily impose capital rationing. Under both capital rationing and a high hurdle, a restrictive investment criterion is used to control managerial shirking. However, implementation of these budgeting rules requires a mechanism to prevent the firm from expanding the investment scale ex post. Capital rationing, in the form of a predetermined, fixed budget, differs from the high-hurdle-rate rule in that the former requires the firm to overcome the cost of raising additional capital before making further investment.

Keywords: capital rationing; principal-agent; high hurdle rate; NPV; renegotiation-proof (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:43:y:1997:i:6:p:737-750

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