Capital Rationing, Accounting Quality and Investment Efficiency: Evidence from Capital-Intensive Industries

51 Pages Posted: 27 Mar 2019 Last revised: 13 Jan 2022

See all articles by Gilles Hilary

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Mark (Shuai) Ma

University of Pittsburgh - Accounting Group

Wenjia Yan

The University of Hong Kong

Date Written: March 6, 2019

Abstract

This study examines whether firms use capital rationing in budgets to counter managerial empire building and improve investment efficiency. Using manually collected data on capital budget, we find that boards restrict capital spending in investment budgets but allow managers to use additional capital for follow-up projects. While some managers use their discretion to incorporate economic news into their investment decisions, many others engage in empire building during the execution stage. We find more capital rationing and opportunistic execution behavior in firms with relatively low accounting quality. Together, these findings support the existence of capital rationing in the internal corporate investment process. We contribute to a better understanding of how firms make investment decisions internally and of the important role of accounting quality.

Keywords: Accounting Quality, Capital Budget, Capital Rationing, Budget Execution, Investment Efficiency

JEL Classification: M41, G31, D81

Suggested Citation

Hilary, Gilles and Ma, Mark (Shuai) and Yan, Wenjia, Capital Rationing, Accounting Quality and Investment Efficiency: Evidence from Capital-Intensive Industries (March 6, 2019). Georgetown McDonough School of Business Research Paper No. 3347421, Available at SSRN: https://ssrn.com/abstract=3347421 or http://dx.doi.org/10.2139/ssrn.3347421

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Mark (Shuai) Ma (Contact Author)

University of Pittsburgh - Accounting Group ( email )

United States

Wenjia Yan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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