Journal Article

Multistage Capital Budgeting for Shared Investments

Schneider, Georg, Pfeiffer, Thomas, Johnson, Nicole Bastian

2013

Overview

This paper studies the performance of delegated decision-making schemes in a two-stage, multidivision capital budgeting problem for a shared investment with an inherent abandonment option. Applying both robust goal congruence and sequential adverse selection frameworks, we show that the optimal capital budgeting mechanism entails a capital charge rate above the firm's cost of capital in the first stage but below the cost of capital in the second stage. Further, the first-stage asset cost-sharing rule depends only on the relative divisional growth profiles, and equal cost sharing can be optimal even when the divisions receive significantly different benefits from the shared investment project. In the presence of an adverse selection problem, all agency costs are incorporated into the second-stage budgeting mechanism, leaving the first-stage capital charge rate and asset-sharing rule unaffected even though the agency problem induces capital rationing at both stages. This paper was accepted by Mary Barth, accounting.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: abandonment options / Adverse selection / Assets / Budgets / Capital / Capital budgeting / Capital budgets / Capital costs / Capital investments / Cash flow / Congruence / cooperative investments / Cost allocation / Cost efficiency / Cost sharing / Costs / Debt management / Decision making / Economic aspects / Economic capital / Experimental methods / Fees & charges / Financial investments / Firm budgets / Investment / Investment decision / Investment decisions / Investment strategies / Investments / Management science / Rationing / Sharing / Studies / two-stage investment decisions