Capital Rationing and Managerial Retention: The Role of External Capital

2011 ◽  
Vol 23 (1) ◽  
pp. 285-304 ◽  
Author(s):  
Ying-Ju Chen ◽  
Mingcherng Deng
Keyword(s):  
Capital Budgeting ◽  
Capital Allocation ◽  
Investment Projects ◽  
Capital Productivity ◽  
External Capital ◽  
Capital Rationing ◽  
New Challenges ◽  
Budgeting Process

ABSTRACT In modern businesses, firms face new challenges of managerial retention in a capital budgeting process. We consider a model in which a manager privately observes the capital productivity of a project and has access to multiple outside financing options. We show that if the manager can obtain funding from either internal or external capital (but not both), the firm may exclude highly profitable investment projects but fund those projects that have moderate capital productivity, even when there is no limit on capital allocation. Furthermore, the firm may voluntarily impose capital rationing in order to keep the projects within the firm, even though it has sufficient capital to fund such profitable projects. However, if the firm can utilize both the internal and external capital, highly profitable projects are always retained and the voluntary capital rationing is not optimal. Our analysis identifies testable empirical predictions on the association between capital budgeting and external capital.

Does Financial Reporting Conservatism Mitigate Underinvestment?

2017 ◽  
Vol 34 (2) ◽  
pp. 258-283 ◽  
Author(s):  
Hyun A. Hong ◽  
Yongtae Kim ◽  
Gerald J. Lobo
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Financial Reporting ◽  
Cash Flows ◽  
Agency Conflicts ◽  
Negative Relation ◽  
Investment Projects ◽  
External Capital ◽  
Cash Flow Volatility

This study examines the role of financial reporting conservatism in mitigating underinvestment problems. Recognizing that volatile cash flows increase the need to access external capital markets and that agency conflicts and information asymmetry make external capital costlier than internal capital, which leads managers to forgo valuable investment projects, Minton and Schrand document a negative relation between cash flow volatility and investment. We draw on Minton and Schrand’s framework to isolate underinvestment problems and hypothesize and document that conservatism mitigates the negative relation between cash flow volatility and investment and that this mitigative effect is more pronounced for firms with ex ante more severe agency conflicts. We also document that conservatism mitigates the sensitivity of investment to cash flow volatility by facilitating access to external capital.

scholarly journals Optimal Dynamic Capital Budgeting

2018 ◽  
Vol 86 (4) ◽  
pp. 1747-1778 ◽  
Author(s):  
Andrey Malenko
Keyword(s):  
Optimal Design ◽  
Capital Budgeting ◽  
Capital Allocation ◽  
Past Performance ◽  
Investment Projects ◽  
Empire Building ◽  
Allocation Process ◽  
Optimal Dynamic ◽  
Over Time

Abstract I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects.

scholarly journals Capital Budgeting and Risk Taking Under Credit Constraints

2020 ◽  
Vol 66 (9) ◽  
pp. 4292-4314
Author(s):  
Felipe S. Iachan
Keyword(s):  
Capital Budgeting ◽  
Capital Allocation ◽  
External Financing ◽  
Firm Level ◽  
Cross Sectional ◽  
Net Worth ◽  
Investment Projects ◽  
Collateral Constraints ◽  
Financial Hedging ◽  
Allocation Decisions

Limited external financing creates a hedging motive that distorts resource allocation for investment projects. I study these distortions through a dynamic model with endogenous collateral constraints. The hedging motive can be broken into three components: expected future productivity, leverage capacity, and current net worth. Although constrained firms behave as if averse to transitory fluctuations in net worth, they can endogenously pursue increased exposure to both persistent factors that predict future productivity and fluctuations in credit tightness. The most constrained firms abstain from financial hedging, while still distorting capital-allocation decisions, thereby influencing firm-level volatility. These distortions contribute to a potential explanation for the negative cross-sectional relationship between volatility and net worth. This paper was accepted by Gustavo Manso, Finance.

Reflective and cognitive perspectives on international capital budgeting

2016 ◽  
Vol 12 (2) ◽  
pp. 167-188 ◽  
Author(s):  
Avo Schönbohm ◽  
Anastasia Zahn
Keyword(s):  
Literature Review ◽  
Social Construction ◽  
International Business ◽  
Cognitive Biases ◽  
Capital Budgeting ◽  
International Capital ◽  
Content Type ◽  
Investment Projects ◽  
The Social ◽  
Budgeting Process

Purpose The purpose of this paper is to develop a framework for an enlightened management and governance praxis against a backdrop of cognitive and motivational biases promoting a reflected international capital budgeting decision process. Furthermore, societally relevant questions are raised whether these biases might have an effect on various stakeholders in public–private partnerships. Recurring failures of international business investments motivate reflective, cognitive and socio-constructivist perspectives on the international capital budgeting process. Design/methodology/approach Based on an interdisciplinary literature review and substantiated by empirical studies, the cognitive biases and flaws of the international capital budgeting process are discussed making use of a five-stage process scheme. The article applies the interpretative paradigm and regards the international capital budgeting process stages as a socio-political process of reality construction and critically assesses the motives of its actors. Consequently, the authors develop and discuss three principle-based behavioural rationalisation factors. Findings International capital budgeting is not a process of rational choice but of social construction of reality. Reflective prudence, critical communication and independence are three rationalisation factors which could, if applied along the five stages of the international capital budgeting process, systematically lead to de-biasing and thus enhance the performative praxis of international investment decisions. Research limitations/implications The international capital budgeting process deals with the construction of future scenarios under uncertainty and assessment of potential success and failure of future projects. The defined (or any other) rationalisation factors are subject to cultural biases and can naturally not guarantee successful investment projects. Although the success of the application of various de-biasing tactics was empirically confirmed, the aggregated rationalisation factors of the paper have not been tested. Practical implications The paper is aimed at enhancing the reflective understanding and the performative praxis of the international capital budgeting process. The practical recommendations aggregated in the rationalisation factors are explicitly elaborated for international business practitioners. Social implications Societally relevant questions are raised whether systematic biases have an effect on various stakeholders in international public–private partnerships. Especially in large investment projects, where capturing private value might be boosted by actively exploiting biases of the public decision makers, active stakeholder engagement could enhance the social and ecological value of investments. Originality/value The article provides a rare interdisciplinary literature review on cognitive biases in the international capital budgeting process. It critically reflects the social construction of it various stages and its social repercussions and develops practical rationalisation factors for an enhancement of the international capital budgeting process as a performative praxis.

Capital Budgeting, Infrastructure, and Capital Investment in the Republic of Uzbekistan

2019 ◽  
pp. 74-92 ◽  
Author(s):  
Tatyana Guzman
Keyword(s):  
United States ◽  
Soviet Union ◽  
Capital Investment ◽  
Capital Budgeting ◽  
The United States ◽  
Investment Projects ◽  
The Soviet Union ◽  
Capital Funding ◽  
The Republic ◽  
Budgeting Process

This chapter offers a macro-level review of the capital budgeting process and practices, capital investment projects, and capital funding in the post-Soviet Republic of Uzbekistan. The chapter discusses some of the major challenges related to capital investment and capital budgeting that Uzbekistan faced after the collapse of the Soviet Union, how the country has overcome some of these challenges in 27 years of independence, and what issues remain unresolved. The chapter additionally describes the most sizeable and impactful recent capital investment projects and the role government played in their financing. Finally, the chapter provides a comparison between capital budgeting practices in Uzbekistan, some post-Soviet republics, and the United States.

scholarly journals Investigating aspects of the capital budgeting process used in the evaluation of investment projects

2000 ◽  
Vol 3 (3) ◽  
pp. 353-368 ◽  
Author(s):  
J. H. Hall
Keyword(s):  
South African ◽  
Capital Investment ◽  
Financial Analysis ◽  
Capital Budgeting ◽  
Shareholder Wealth ◽  
Internal Rate Of Return ◽  
Investment Projects ◽  
Flow Estimation ◽  
Capital Budget ◽  
Budgeting Process

Given the importance of capital investment, not only for the country as a whole but the creation of shareholder wealth by individual firms, it is vital to investigate the practices used to evaluate these projects. The findings of this study suggest that the most important stages in the capital budgeting process are project definition and cash flow estimation, not financial analysis. Further, in the evaluation of capital investment projects, South African companies seem to prefer Return on Investment and Internal Rate of Return as methods to determine the feasibility of a project. The use of these methods is influenced by the size of a company's annual capital budget, as there is a correlation between a company's annual capital budget and a preference for these methods.

scholarly journals Radial Water Barrier in Submarine Cables, Current Solutions and Innovative Development Directions

Energies ◽  
2021 ◽  
Vol 14 (10) ◽  
pp. 2761
Author(s):  
Leszek Resner ◽  
Sandra Paszkiewicz
Keyword(s):  
Moisture Absorption ◽  
Wind Farms ◽  
High Moisture ◽  
Water Barrier ◽  
Operational Factors ◽  
New Challenges ◽  
Submarine Cables ◽  
Further Development ◽  
Lead Aluminium

With wind turbines increasing in size, installed at greater distances from the mainland, and greater depths, submarine cables are facing new challenges. Materials and technologies used so far for the production of submarine cables with lead, aluminium, or copper sheaths make them unsuitable or even obsolete for modern solutions such as floating wind farms. The article discusses types of submarine cables, their construction, working conditions, and operational factors, with emphasis placed on the role of the radial water barrier. The focus has been placed on dry and semi-dry designs. The article is also devoted to a discussion regarding directions of further development, possible materials, and constructions that may appear in the future. Current research and results regarding the use of multi-layer coatings with the use of thermoplastic block copolymers for the layer with high moisture absorption are also presented.

scholarly journals Internal and External Resources of the Lifestyle Leaders

2020 ◽  
Vol 4 (Supplement_1) ◽  
pp. 612-612
Author(s):  
Martina Raue ◽  
Lisa D’Ambrosio ◽  
Taylor Patskanick ◽  
John Rudnik ◽  
Adam Felts ◽  
...  
Keyword(s):  
Physical Health ◽  
Significant Role ◽  
Oldest Old ◽  
Well Being ◽  
Self Esteem ◽  
Financial Resources ◽  
External Resources ◽  
Resource Decline ◽  
New Challenges

Abstract With older age, people experience declines in resources and face new challenges. The goal of this study was to understand how resource decline affects the oldest olds’ well-being, but also to learn who they trust and where they go for advice in areas such as health, finances, and technology. This sample of 30 participants between the ages of 85 and 95 was generally resource-rich, scoring highest on self-esteem and optimism and lowest on mastery. Self-esteem and optimism correlated with financial resources, indicating a significant role of finances in this rather wealthy sample. Well-being was predicted by self-esteem and physical health. Presumably, their high levels of self-esteem compensate for the loss of other resources among the oldest old. The majority of lifestyle leaders trust in other people, and while friends and family are very important sources of advice, searching online was equally often mentioned as a source when looking for advice.

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