Capital Rationing, Accounting Quality and Investment Efficiency: Evidence from Capital-Intensive Industries
51 Pages Posted: 27 Mar 2019 Last revised: 13 Jan 2022
Date Written: March 6, 2019
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: Suggested Citation