Delegated Investment Decisions and Private Benefits of Control

38 Pages Posted: 12 May 2003

Multiple version iconThere are 2 versions of this paper

Date Written: April 28, 2003


This paper studies the capital budgeting process in a setting where a manager is privately informed about the profitability of an investment project and enjoys non-pecuniary benefits of control ("empire benefits"). I characterize the optimal required rate of return and show that a delegation scheme with residual income-based compensation can replicate the benchmark performance achieved under centralization. The main result of the paper is that the optimal capital charge rate for computing residual income always exceeds the required rate of return as a consequence of empire benefits. This highlights the necessity for future empirical studies on capital budgeting to distinguish between alternative forms of hurdle rates. Contrary to conventional wisdom, I further show that if compensation contracts are derived endogenously, then the shareholders will ultimately benefit from the manager's empire benefits even under asymmetric information.

Keywords: capital budgeting, empire-building, residual income, hurdle rates, decentralization

JEL Classification: D82, G31, G34, M40, M46

Suggested Citation

Baldenius, Tim, Delegated Investment Decisions and Private Benefits of Control (April 28, 2003). Available at SSRN: or

Tim Baldenius (Contact Author)

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

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