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
Article

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 

JEL Classification

M41 

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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

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