Managerial Career Concerns and Project Cycle Time in Capital Budgeting

Abstract

We study a situation in which a manager, whose ability to select good projects is unknown a priori, proposes a project for funding. The manager's superior can observe the information about project quality generated by the manager, but cannot observe the resources devoted by the manager to generate that information. We show that a reputation-conscious manager will overinvest in information about the project, relative what the firm's shareholders would like, and that this leads to an excessively long product-development cycle time. Possible organizational responses to this distortion are discussed and empirical implications drawn out.

JEL Classification: G3, D2, J3