Capital Allocation in Mult-Division Firms: Hurdle Rates vs. Budgets

Robert A. Taggart, Jr.

No 1213, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is common practice for firms to ration capital funds to their divisions, rather than set a price and let the divisions use as much as they want. This appears to be true even when the overall firm faces no rationing in the capital market. This paper offers an interpretation of this phenomenon based on Martin Weitzman's "Prices vs. Quantities" model. It is found that a rationing systemis advantageous when division managers do not perceive the full consequences of their investment decisions for the firm as a whole. By contrast, a pricing system for allocating capital among divisions would be favored when the division managers possess valuable information that cannot be costlessly communicated to headquarters. It is then argued that actual capital budgeting practice in many firms reflects a mixture of these two systems and can thus be interpreted as an attempt to reap both kinds of benefits at once.

Date: 1983-10
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published as Taggart, Robert A., Jr. "Capital Allocation in Multi-Division Firms: Hurdle Rates vs. Budgets," Journal of Financial Research, Vol. 10, No. 3, Fall 1987, pp. 177-189.

Downloads: (external link)
http://www.nber.org/papers/w1213.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:1213

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1213

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().