Review of Accounting Studies

, Volume 22, Issue 2, pp 933–963 | Cite as

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

  • Nicole Bastian Johnson
  • Thomas Pfeiffer
  • Georg Schneider


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.


Multistage capital budgeting Multidivisional capital budgeting Capital charge rates 

JEL Classification



  1. Antle, R., Bogetoft, P., & Stark, A. (2001). Information systems, incentives and the timing of investments. Journal of Accounting and Public Policy, 20(4–5), 267–294.CrossRefGoogle Scholar
  2. Antle, R., Bogetoft, P., & Stark, A. (2007). Incentive problems and investment timing options In R. Antle, P.J. Liang, & F. Gjesdal (Eds.), Essays in accounting theory in honor of Joel S Demski (pp. 145–168). Berlin: Springer.Google Scholar
  3. Arya, A., & Glover, J. (2001). Option value to waiting created by a control problem. Journal of Accounting Research, 39(3), 405–415.Google Scholar
  4. Arya, A., & Glover, J (2003). Abandonment options and information system design. Review of Accounting Studies, 8(1), 29–45.Google Scholar
  5. Arya, A., Glover, J., & Young, R (1996). Capital budgeting in a multidivisional firm. Journal of Accounting, Auditing and Finance, 11(4), 519–533.CrossRefGoogle Scholar
  6. Baiman, S., Fischer, P., Rajan, M., & Saouma, R (2007). Resource allocation auctions within firms. Journal of Accounting Research, 45(5), 915–946.CrossRefGoogle Scholar
  7. Baiman, S., Heinle, M., & Saouma, R (2013). Multistage capital budgeting with delayed consumption of slack. Management Science, 59(4), 869–881.CrossRefGoogle Scholar
  8. Baiman, S., Heinle, M., & Saouma, R. (2016). Allocating non-monetary resources. Working Paper.Google Scholar
  9. Balakrishnan, R. (1995). Rationing resources among multiple divisions. Journal of Accounting, Auditing and Finance, 10(2), 263–290.Google Scholar
  10. Baldenius, T. (2003). Delegated investment decisions and private benefits of control. The Accounting Review, 78(4), 909–930.CrossRefGoogle Scholar
  11. Baldenius, T., Dutta, S., & Reichelstein, S. (2007). Cost allocation for capital budgeting decisions. The Accounting Review, 82(4), 837–867.CrossRefGoogle Scholar
  12. Baldenius, T., Nezlobin, A., & Vaysman, I (2016). Managerial performance evaluation and real options. The Accounting Review, 91(3), 741–766.CrossRefGoogle Scholar
  13. Bergemann, D., & Välimäki, J. (2010). The dynamic pivot mechanism. Econometrica, 78(2), 771–789.CrossRefGoogle Scholar
  14. Christensen, P., Feltham, G., & Wu, M. (2002). “Cost of capital” in residual income for performance evaluation. The Accounting Review, 77(1), 1–23.CrossRefGoogle Scholar
  15. Dutta, S. (2003). Capital budgeting and managerial compensation: incentive and retention effects. The Accounting Review, 78(1), 71–93.CrossRefGoogle Scholar
  16. Dutta, S., & Fan, Q (2009). Hurdle rates and project development efforts. The Accounting Review, 84(2), 405–432.CrossRefGoogle Scholar
  17. Dutta, S., & Reichelstein, S. (2005). Accrual accounting for performance evaluation. Review of Accounting Studies, 10(4), 527–552.CrossRefGoogle Scholar
  18. Green, J., & Laffont, J.-J. (1979). Incentives in public decision-making. Amsterdam: North-Holland.Google Scholar
  19. Groves, T. (1973). Incentives in teams. Econometrica, 41(4), 617–631.CrossRefGoogle Scholar
  20. Horngren, C., Datar, S., & Rajan, M. (2012). Cost accounting: a managerial emphasis, 14th edn. NJ: Pearson Prentice Hall.Google Scholar
  21. Johnson, N., & Pfeiffer, T (2016). Capital budgeting and divisional performance measurement. Foundations and Trends in Accounting, 10(1), 1–100.CrossRefGoogle Scholar
  22. Johnson, N., Pfeiffer, T., & Schneider, G (2013). Multistage capital budgeting for shared investments. Management Science, 59(5), 1213–1228.CrossRefGoogle Scholar
  23. Lu, J. (2009). Auction design with opportunity cost. Economic Theory, 38(1), 73–103.CrossRefGoogle Scholar
  24. Lu, J., & Ye, L. (2016). Optimal two-stage auctions with costly information acquisition. Working Paper.Google Scholar
  25. McAfee, R., & McMillan, J. (1987). Auctions and bidding. Journal of Economic Literature, 25(2), 699–738.Google Scholar
  26. Mukherjee, T., & Henderson, G. (1987). The capital budgeting process: theory and practice. Interfaces, 17(2), 78–90.CrossRefGoogle Scholar
  27. Mukherjee, T., & Hingorani, V (1999). Capital-rationing decisions of Fortune 500 firms: a survey. Financial Practice and Education, 9(1), 7–15.Google Scholar
  28. Ortner, J., Velthuis, L., & Wollscheid, D. (2016). Incentive systems for risky investment decisions under unknown preferences. Management Accounting Research, forthcoming.Google Scholar
  29. Pfeiffer, T., & Schneider, G (2007). Residual income-based compensation plans for controlling investment decisions under sequential private information. Management Science, 53(3), 495–507.CrossRefGoogle Scholar
  30. Poterba, J., & Summers, L (1995). A CEO survey of U.S. companies’ time horizons and hurdle rates. Sloan Management Review, 37(1), 43–53.Google Scholar
  31. Reichelstein, S. (1997). Investment decisions and managerial performance evaluation. Review of Accounting Studies, 2(2), 157–180.CrossRefGoogle Scholar
  32. Rogerson, W. (1997). Intertemporal cost allocation and managerial investment incentives: a theory explaining the use of economic value added as a performance measure. Journal of Political Economy, 105(4), 770–795.CrossRefGoogle Scholar
  33. Stoughton, N., & Zechner, J (2007). Optimal capital allocation using RAROC TM and EVA . Journal of Financial Intermediation, 16(3), 312–342.CrossRefGoogle Scholar
  34. Ye, L. (2004). Optimal auctions with endogenous entry. The B.E. Journals: Contributions to Theoretical Economics, 4(1), 1–27.Google Scholar
  35. Ye, L. (2007). Indicative bidding and a theory of two-stage auctions. Games and Economic Behavior, 58(1), 181–207.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Nicole Bastian Johnson
    • 1
  • Thomas Pfeiffer
    • 2
  • Georg Schneider
    • 3
  1. 1.Lundquist College of Business1208 University of OregonEugeneUSA
  2. 2.Department of Business StudiesUniversity of ViennaViennaAustria
  3. 3.School of Business, Economics and Social SciencesUniversity of GrazGrazAustria

Personalised recommendations