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
Date Written: March 6, 2019
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: Suggested Citation