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

61 Pages Posted: 21 Oct 2022 Last revised: 17 Nov 2022

See all articles by Paul H. Décaire

Paul H. Décaire

Arizona State University (ASU) - Finance Department

Denis Sosyura

Arizona State University

Date Written: November 7, 2022

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 and erode investment efficiency. Managers with a budget surplus increase investment sharply before budget deadlines, and such investments yield lower sales, weaker margins, and more negative NPV projects. Managers who reach a budget constraint early in the fiscal cycle halt further 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. Overall, simplifying budgeting rules engender strategic behavior and wasteful spending.

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 7, 2022). 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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