On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets

60 Pages Posted: 21 Oct 2022 Last revised: 30 Nov 2023

See all articles by Paul H. Décaire

Paul H. Décaire

Arizona State University (ASU) - Finance Department

Denis Sosyura

Arizona State University

Date Written: November 16, 2023

Abstract

Using micro data on managerial expenditures, we uncover heuristics in capital budgets, such as nominal rigidity, anchoring, and sharp reset deadlines. Such heuristics engender managerial opportunism. Managers with a budget surplus increase investment before budget deadlines, and such projects underperform. Managers who reach a budget constraint early in the fiscal cycle halt spending until their budget is reset, irrespective of investment options. These effects are stronger at firms with more hierarchical layers and a greater subordinates-to-executives ratio. Such firms become targets of private equity funds. After the buyout by strong principals, firms remove budgetary heuristics and switch to continuous capital allocations. Overall, simplifying budgeting rules engender strategic managerial behavior.

Keywords: capital budgeting, governance, fallacy, managerial heuristics

JEL Classification: D22, G30, G31, G34, G41

Suggested Citation

H. Décaire, Paul and Sosyura, Denis, On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets (November 16, 2023). Available at SSRN: https://ssrn.com/abstract=4242936 or http://dx.doi.org/10.2139/ssrn.4242936

Paul H. Décaire (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Denis Sosyura

Arizona State University ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.public.asu.edu/~dsosyura/

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