Accounting Performance and Capacity Investment Decisions: Evidence from California Hospitals

Decision Sciences, Vol. 45 (2), p. 309-339.

48 Pages Posted: 2 Dec 2013 Last revised: 10 Aug 2014

See all articles by Ge Bai

Ge Bai

Johns Hopkins University - Carey Business School

Sylvia Hsingwen Hsu

York University - Schulich School of Business

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Date Written: May 14, 2013

Abstract

Capacity decisions involve tradeoffs between the cost of capacity and the opportunity costs of lost sales. Accounting researchers posit that accounting performance provides sufficient information about these tradeoffs and thus can be used to formulate simple rules to assist capacity decisions. Empirical research has not examined the role of accounting information in capacity investment decisions at the department level in a multi-product firm in the presence of social costs. Empirical analyses using department-level data from California hospitals for the period 1998-2005 show that hospitals are more likely to make capacity investments in departments with high accounting performance. However, in the presence of demand variability, the association between accounting performance and capacity investment is attenuated because of the resulting increase in noise in accounting performance measures. Thus the weight on accounting performance as a decision tool for capital investments reduces when there is demand variability. Another factor that reduces the weight on accounting performance is capacity utilization. Higher capacity utilization can lead to turning away or rerouting of patients to other hospitals and negatively impacts reputation and quality of care, which increases the hospital’s social costs. Hence, hospitals do not require high accounting performance before investing in a department with high capacity utilization. This empirical evidence of the role of accounting performance in capacity investment decisions fills a gap in the capacity investment literature and furthers our understanding of the interactions between accounting performance and the operational determinants of firms’ capacity investment behavior.

Keywords: Accounting, Performance Measurement Systems, Capacity Management, Health Care

Suggested Citation

Bai, Ge and Hsu, Sylvia Hsingwen and Krishnan, Ranjani, Accounting Performance and Capacity Investment Decisions: Evidence from California Hospitals (May 14, 2013). Decision Sciences, Vol. 45 (2), p. 309-339., Available at SSRN: https://ssrn.com/abstract=2362070

Ge Bai (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Sylvia Hsingwen Hsu

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

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