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

Nicole Bastian Johnson (), Thomas Pfeiffer () and Georg Schneider ()
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Nicole Bastian Johnson: 1208 University of Oregon
Thomas Pfeiffer: University of Vienna
Georg Schneider: University of Graz

Review of Accounting Studies, 2017, vol. 22, issue 2, No 13, 933-963

Abstract: 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.

Keywords: Multistage capital budgeting; Multidivisional capital budgeting; Capital charge rates (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2017
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