This paper examines a multi-period agency model in which a manager makes investment decisions in each period. Performance measures based only on realized cash flows are essentially uninformative about value creation at any intermediate point in time. If the principal has access to additional...

This study identifies several interrelated reasons why firms' depreciation method choice is likely to influence managers' capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line...

Investment decisions frequently require coordination across multiple divisions of a firm. This paper explores a class of capital budgeting mechanisms in which the divisions issue reports regarding the anticipated profitability of proposed projects. To hold the divisions accountable for their...

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 (quot;empire benefitsquot;). I characterize the optimal required rate of return and show that a...

We study a model in which future financing constraints leas firms to have a preference for investments with sorter payback periods, investments with less risk, and investments that utilize more pledgeable assets. The model also shows how investment distortions towards more liquid, safer assets...

Variable costs need not be incurred unless a firm wants to produce goods or services; the opportunity to incur variable costs is therefore a real (European) option (McDonald and Siegel 1985). Moreover, fixed investments can usually be postponed; the ability to wait before investing is also a real...

A challenge faced by many firms is how to encourage managers to undertake risk levels that are compatible with overall firm performance goals. Incentive compensation that is tied to financial returns is a common control mechanism that is meant to induce managers to strive for higher returns...

This paper provides a descriptive and qualitative study of how capital budgeting practices at Caterpillar Inc. were redesigned to accommodate a shift from mass production technologies to modern manufacturing systems. We describe how the firm's capital budgeting practices shifted from considering...

Dissatisfaction with discounted cash flow techniques has lead to a growing literature focusing on the value of managerial flexibility in handling real asset investments, a subject are known as real options. This paper describes an exploratory survey of senior financial officers in industrial...