Are Projects Boosted to Get Approved? Evidence From Ex-ante Investment Appraisal

In theory, resources should be allocated to the best projects. But empirical challenges have forced researchers to focus their flashlights on measuring cost-of-capital, hurdle rates, or implications of projects. Thus, they usually leave the ex-ante process of project preparation and appraisal as a black box. This paper explores a unique database of more than 28,000 investment projects between 1997 and 2021, which were prepared and evaluated in multiple rounds, also quantifying their Internal Rate of Return (IRR). First, we find that the project's IRR distribution tends to have bunching just above the cutoff rate for investment. This excess mass of projects of barely positive Net Present Value was not an inherent property of the projects, because this bunching moves as the pre-announced hurdle rate changes. Second, these projects closer to the hurdle rate tend to have longer iteration processes before receiving a passing IRR. Under some circumstances, they also exhibit higher overrun costs and lower completion delays on the execution. Third, project preparation units that have more technical capacity tend to need fewer iterations to reach a passing IRR. Overall, our evidence is coherent strategic models of project preparation, either through "IRR management" (akin to earnings management), or to models of dynamic "revise and resubmit" until getting a passing IRR. We discuss implications for the design of project preparation processes