Opening the Black Box of Capital Investment: The Roles of Capital Expenditure Budget and Execution

57 Pages Posted: 27 Mar 2019 Last revised: 14 Sep 2019

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

In spite of intensive research on capital expenditure efficiency, a firm’s internal investment decision process remains largely a black box. We analyze this process by decomposing it into two stages: budgeting of capital expenditures and execution of the budget. We find that these two stages have different effects on investment efficiency and that accounting quality and board independence affect them differently. Further, while opportunistic managers massively over-execute investment budgets, managers with high ability strategically find a level of execution errors that optimizes their compensation while remaining undetected by boards. These strategic execution deviations entail significant costs for their employers.

Keywords: Capital budget, Budget execution, Investment efficiency

JEL Classification: M41, G31, D81

Suggested Citation

Hilary, Gilles and Ma, Mark (Shuai) and Yan, Wenjia, Opening the Black Box of Capital Investment: The Roles of Capital Expenditure Budget and Execution (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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